Bubbles Americanus: Have We Learned Nothing?

by: Tim Iacono

Sometimes I’m embarrassed to call myself an American and, after reading these two stories, today is clearly one of those times as, despite all the “teachable moments” of the last two years, we again seem hellbent on inflating another bubble. The only question is whether the American public will fall for it again.

First, from Bloomberg comes a story headlined "Stocks' 17% Gain Since Bernanke Disclosed QE2 Disarms Critics," about how, since stock prices are rising, more and more Fed critics are becoming quieter and quieter:

Republican leaders in Congress say they have “deep concerns” about Ben S. Bernanke’s second round of quantitative easing. The U.S. stock and credit markets don’t share those reservations.

The Standard & Poor’s 500 Index has climbed 17 percent since the Federal Reserve chairman first indicated on Aug. 27 that the central bank might buy more securities to boost the economy ....

“It has been successful,” Peter Hooper, chief economist at Deutsche Bank Securities Inc. in New York, said of Bernanke’s policy of pumping money into the financial system, dubbed QE2. “It’s contributed to the rally in the stock market” and has “been important in reducing substantially the downside risk of deflation.”

As noted here on a few occasions previously, while Congress considers whether to remove the central bank’s “full employment” mandate, it should also consider adding a “higher stock prices” mandate, the most obvious reason for which is that, while struggling with the former, it's having much more success with the latter.

Of course, the missing ingredient for turning a 17% stock market rally into something a bit more bubbly is the American public and, as is usually the case, they’ve been noticeably absent in the early stages of what could be another stock market bubble in the making.

The question is, after pulling money out of stocks for years now, whether they’ll come back.

In this USA Today report, it seems that Wall Street is doing its best to try to make this happen, trotting out none other than Goldman Sachs’ (NYSE:GS) Abby Joseph Cohen of the internet stock glory days to try to get those “animal spirits” in Mom and Pop investors to stir.

Five Wall Street heavyweights say it’s time for investors to shun the perceived safety of bonds — and get over their fear of the U.S. stock market — so they can take advantage of what they predict will be a third straight year of solid gains for stocks in 2011.

The major theme from USA TODAY’s 15th annual Investment Roundtable is that the bond market is looking riskier amid signs the economy is gaining traction. The five panelists say stocks, which get a boost from stronger growth, will post better returns than bonds in 2011. They are advising investors, many still leery two years after the financial crisis, to start shifting some investment dollars out of bonds and back into stocks ....
With the odds of a double-dip recession fading, assets perceived as safe, such as bonds, may be riskier than investors think. And “risk assets” like stocks may be better priced than they appear, says Abby Joseph Cohen, senior investment strategist for Goldman Sachs’ Global Markets Institute.

Each panelist predicted double-digit gains in 2011. Dan Chung, CEO and chief investment officer at Alger Funds, was the most optimistic, saying stocks could rise more than 20% sometime in 2011. Earnings will surprise to the upside, he says.

Richard Bernstein, CEO and chief investment officer of Richard Bernstein Advisors, says U.S. stocks “sort of have the wind at their back right now.”

Perhaps a more accurate way for Mr. Bernstein to have put it would be to say that “U.S. stocks have Fed Chief Ben Bernanke printing up as much money as he possibly can” at the moment, some of which is bound to go into equity markets.