Bubble World Is Here

Scott Sumner profile picture
Scott Sumner
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Lance Roberts has a new post with a neat graph:

I like the term "everything bubble." For a number of years I've been claiming that the 21st century would be full of "bubbles" that were not actually bubbles. In other words, asset valuations would be higher than expected based on traditional valuation methods, but nonetheless justified. This is from the spring of 2015:

In the 21st century, pundits will be unable to see anything other than recessions and "bubbles." There will no longer be periods of stable growth without "bubbles," like the 1960s. Of course bubbles don't actually exist, but low interest rates as far as the eye can see means that asset prices will look bubble-like unless artificially depressed by a tight monetary policy that drives the economy into recession.

Of course, we were told back in 2015 that this was all an artificial bubble due to QE, which is now being withdrawn as the Fed raises rates. And yet asset prices keep rising.

Back in 2011, I challenged Robert Shiller's pessimistic take on stock prices:

But (seriously) are stocks now overvalued? Because I'm an efficient markets-type, the only answer I can give is no. So why does Robert Shiller say yes? Apparently because the P/E ratio is relatively high by historical standards. And he showed that for much of American history investors did better buying stocks when P/Es were low than when P/E ratios were high. Of course hindsight is 20-20.

I'd rather not get into the minutia of all the various ways of calculating P/E ratios. And I have no idea where stocks are going from here. Instead I'd like to focus on three arguments for relatively high P/E ratios in the 21st century American economy (however you'd like to measure them):

Of course, I was careful not to predict rising stock prices, as if I had been successful it would lower my reputation. I'm an EMH guy who claims it's impossible to forecast stock prices. But I did challenge Shiller's claim that P/E ratios were too high in 2011. That judgement may have been valid in the 20th century, but performance in past centuries is no guarantee of performance in the current century.

Again, the 21st century is the "bubble" century.

PS. I was amused by this exchange in a recent NPR interview of Jay Powell:

Ryssdal: Let me ask you then about inflation and about prices which are as you say starting to tick up to where the Federal Reserve wants it to be. I'll note here that we're talking at 8:24 in the morning on the day that consumer prices come out. They come out in six minutes. With the caveat that this is going to air now in five, six hours from now, whatever it is, you have the number in your back pocket, you know what the number is. Inflation CPI?

Powell: Well, let's just say that I do get a look in advance at these things. Yes.

Ryssdal: You're not going to tell me what it is even though we are not going to air this until -

Powell: Definitely not. Definitely not.

Ryssdal: Score one for the chairman's adherence to the rules.

Powell: Not going to say anything that would suggest what it might be.

Not even a tweet?

HT: Pat Horan.

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Scott Sumner profile picture
1.09K Followers
Bio My name is Scott Sumner and I have taught economics at Bentley University for the past 27 years. I earned a BA in economics at Wisconsin and a PhD at Chicago. My research has been in the field of monetary economics, particularly the role of the gold standard in the Great Depression. I had just begun research on the relationship between cultural values and neoliberal reforms, when I got pulled back into monetary economics by the current crisis.

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