This is a Bull Market, Not a Bubble


Price is pondering the difference between bubbles and bull markets.

To a man with a hammer, everything looks like a nail. To a perennial bear,

all rising assets look like a bubble. In a widely reported commentary (“It’s

everywhere, in everything: the first truly global bubble”), GMO’s

Jeremy Grantham sees bubbles across the board, “From Indian antiquities

to modern Chinese art; from land in Panama to Mayfair; from forestry, infrastructure,

and the junkiest bonds to mundane blue chips; it’s bubble time!”

I’m inclined to believe that if everything is a bubble, nothing is a bubble.

Or, to put it another way, what we’re seeing is not global asset prices going

through the roof, so much as the cost of money continuing to fall – which

means that the value of art or land or stocks goes down, in money terms.

In turn, that means that the American consumer, complete with famously negative

savings rate, is being eminently sensible. Why save money if it’s going to buy

less tomorrow than it will buy today? This used to be a problem in the days

of price inflation; now it’s a problem in the days of asset-price inflation.

The thing is that even as assets have gone up in price, real consumer goods

have not. So spending $2,000 on a cheap flat-screen TV becomes, on a relative

basis, much more attractive than investing $2,000 in an expensive bond fund.

I also agree with Tim that virtually no asset class right now, with a couple

of small exceptions such as green energy, really looks very much like a bubble.

Most of us still vividly remember the dot-com bubble, which was a bubble, where

individuals would buy stocks in the hope that they would go up by ten times

or more. Similarly there has been something of a speculative housing bubble

in some areas – Miami springs to mind – where similar returns could

be made by flipping property you never intended to move into. (You buy a $1

million apartment with a $50,000 downpayment. You sell the apartment for $1.5

million: you make ten times your original investment. Rinse and repeat.)

But I don’t see that kind of greed in most asset classes, and certainly not

in the debt markets, where valuations seem to be the most out of whack. What

we’re in right now is a bull market, not a bubble. And although both bull markets

and bubbles do come to an end, the chances of a disastrous crash are much lower

in the former case than in the latter.

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