We’re in the third biggest stock bubble in U.S. history

Market Watch ^ | July 17, 2014, 7:27 a.m. | Brett Arends's ROI

[RC one]

1853, 1906, 1929, 1969, 1999

Pass the question around your office. Call your money manager and ask him or her, too. Post it on your office notice board.

Give up?

Those were the peaks of the five massive, generational stock-market bubbles in U.S. history.

Investors who bought into stocks around those peaks ended up earning terrible returns over the subsequent 30 years. Forget “stocks for the long run.” They ended up with “stocks for a long face.” The bigger the bubble, the worse returns.

And, according to a new research report, we are back there again.

U.S. stocks are now about 80% overvalued on certain key long-term measures, according to research by financial consultant Andrew Smithers, the chairman of Smithers & Co. and one of the few to warn about the bubble of the late 1990s at the time.

The five dates listed at the start of this article, he says, are the only times since 1802, when data began being tracked, when stocks have been 50% or more overvalued according to these measures. And only two of those bubbles — 1929 and 1999, both of which were followed by disastrous crashes — were bigger than today.

[NautiNurse]

Buy high! Sell low.

[sefarkas]

“Today Smithers argues that stock prices are first likely to go even higher, because they are being driven upwards by two forces. The first is the Federal Reserve’s ‘quantitative easing’ program - the policy of flinging money at the banks in the hope some of it doesn’t stick, but finds its way into the wider economy. The second is corporate buying. Under-appreciated at the moment is that the top buyers of U.S. stocks these days are the companies themselves. U.S. companies have been borrowing aggressively and using the money to buy their own stock.”

[RC one]

what could possibly go wrong with that?

[sefarkas]

“As research by Smithers and others show, the stock market boom since 2009 has almost exactly tracked the rapid increase in the money supply.”

[Bogey78O]

The biggest thing the ma let has going for it is the players know even a hint of reality will lead to a severe global depression. So playing pretend is the best course of action.

[montag813]

It has a lot higher to go yet. I hope some of you bought my picks in February ‘09 and December ‘13.

[sefarkas]

Corporate buy-backs occur after the board of directors determines the value of their own shares relative to the cost of debt. Companies offer debt instruments to the market when they want to preserve their equity position because business prospects are good. Companies offer equity when they want to share the pain. Stock-buybacks are the kissing cousins of offering debt, but stock-buybacks are generally funded with free cash flows rather than debt. It is a stock pickers market; a general swoon takes a policy change affecting a significant fraction of businesses in the economy. The most typical prospect change affecting business is a tax policy change. As bad as it is, current tax policy is predictable. Tax reform has been effectively taken off the table as part of the broader conflict between the House and the White House because the White House cannot be trusted to implement legislated policy.

[boycott]

The Federal Reserve's position:

[pieceofthepuzzle]

I’m in, and thus vulnerable, but what are the options? Cash is 100$ susceptible to inflationary devaluation or a collapse of the dollar. Banks are talking about charging people for depositing their money - instead of paying interest. Precious metals are all over the map, and real estate is also a risky investment.

Having said that, the market doesn’t seem to have much to do with reality.

[pieceofthepuzzle]

100$ = 100%

[tumblindice]

Same here, almost all in.
Most of us here are pretty self-sufficient, if the SHTF.
My only rule, I won’t eat my dogs.

[RC one]

I think the lesson to take away is that now might not be the best time to jump in. Those already in will just have to keep playing the game.

[OrangeHoof]

It’s not going to crash until Obastard is out of office and some GOP-e schmuck is in that will get the full media blame for the crash.

[huldah1776]

I believe Bush did the first bailout for the same reason. I bet they didn’t think they could keep pumpin air in the bubble this long.

[RC one]

That’s possible. It assumes that the Obama holds a dangerous amount of sway over the actions of the Fed though does it not?

[Vince Ferrer]

but what are the options?

Which is exactly why the stock market should keep going up. Inside the matrix, it is still the best place to put money, so people are putting it there. It will fall when that is no longer true, but not before.

[Carbonsteel]

Actually, I’m betting on Sept. of next year.

[Leaning Right]

I’m in, and thus vulnerable, but what are the options?

That's the key point. There are no other options. Let's say, for the sake of argument, that during the other bubbles bonds were paying 5%. So there were real choices for those getting nervous.

But now it's either take stock risk or rotate into bonds paying 1 or 2%. That's not even keeping up with inflation. With no other option, people are going to stay put, giving this bubble a ways to go, IMHO.