Are the Markets in an Economic Bubble?

The markets are reaching a peak. People are screaming “China BUBBLE! Facebook BUBBLE! Stock market BUBBLE!” But the big question is, are the markets right now really in an economic bubble? How do we know if the markets are in a bubble? Right now, news is popping up everywhere about bubbles being blown sky high. Yet everyone is forgetting something: price anyone?

Tech company IPOs: Is tech bubble 2.0 really a bubble? Thousands of articles have sprung up saying that this is a bubble, and thousands of articles have also sprung up saying that this isn’t a bubble. To tell the truth, I don’t really know. My hunch is “yes, the likes of facebook and linkedin are way overvalued.” But how do we know if the tech markets are in an economic bubble? As investors have learned (hopefully) from the previous tech bubble, it’s not the number of pageviews or eyeballs that counts. Google generates around 6 cents per pageview, while facebook generates fractions of a penny per pageview. How fast are these companies growing? When will they turn profitable? You have to used traditional metrics to gauge how valuable a tech company is.

American stock market: Are American stocks in a bubble? Are they overvalued? I would say yes. Based on current earnings and the real fundamentals of the economy, stocks are pretty pricey. If you look at the fundamentals of the economy, stocks are experiencing unrealistic valuations. The Dow Jones is now at 12,672. Is the real economy actually that great? No. Is main street really feeling an economic improvement? No. Stocks are soaring because Uncle Sam is manipulating it that way. Companies are slightly increasing their profits by consistently cutting back on costs, while revenue is hardly going up at all.

Chinese real estate, and everything else Chinese: Is China in a bubble? Yes. Can it stay that way for a few more years? Maybe. But who knows. China’s policies are planned by the central government; unless you have big connections, good luck guessing the future Chinese policy changes. Real estate is definitely in a bubble, but it could stay that way for a long time. No offence, but unless you were Chinese, you wouldn’t really understand the psychology of the Chinese and Chinese investors.

American bonds: So how much do American bonds yield again? Next to nothing? Interest rates these days on bonds are hardly worth looking at, since you’re pretty much investing $1000 and hoping to get $1005 dollars back (assuming the government doesn’t default). American bond yields are at a historic low. I have no idea if this market is in a bubble.

Commodities: Legendary investor Jeremy Grantham said that commodities are in for a long term bull market. And when he says long term, he means the couple-of-decades kind of long term. But keep in mind that almost all commodities have doubled not once or twice but even three or more times. So how far can commodities go? Well, I believe that the secular bull market for commodities is almost over (note: almost). But I do agree with Jeremy’s view. As globalization continues and the world population increases, there will be a further strain on the supply of commodities. There are almost no more untapped resource banks available, unless you count the North and South Poles and the oceans (which is very expensive to extract commodities from).

Bonus: Bitcoins! Ever heard of them? Bitcoins is an online currency that this year went from near worthless to 1 Bitcoin = $30 USD.

As fund manager Doug Kass says, price is what you pay, value is what you get.

31 thoughts on “Are the Markets in an Economic Bubble?”

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  7. You can probably say that the American stocks are still in a bubble because of how high the Dow Jones is at now. The economy is still not that great and unemployment is still a big issue.
    Also, debt problems among European nations can easily drop the Dow Jones in a heartbeat.

  8. I think you make a great point about Tech being a tale of two stories. It’s hard to say that companies like Apple & Google are a bubble when they keep generating such huge earnings. On the other hand, LinkedIn @ $100/share is a bit scary.

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  15. China is having it hard right now but I remain bullish on it in the long term. There will be setbacks but that doesn’t undermine the fact that they continue to be the creditor nation of the world.
    As for bitcoins, judging from the recent hack I don’t believe they will have much more upside.
    What do you think of college education being in a bubble?

    1. Personally, I don’t think college education is in a bubble. Sure prices are more expensive than ever, but the value is all the same. Getting into a good university like Harvard gives you opportunities that you won’t find anywhere else. You’ll have connections with the big guys, land opportunities straight away at big firms, etc.

      I believe the value in universities isn’t the intrinsinc value (e.g. you land a $80,000 job), but in the connections you make.

    1. I just have a question. Are you still bullish on the energy sector? I mean cyclical wise, as in 1-2 years?

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