Everything Looks Like A Bubble

My Comments: The article below comes courtesy of a writer by the name of General Expert.

He/she/they write extensively and appear on an investment news feed I follow called Seeking Alpha. You’ll have to draw your own conclusions about the message but I, for one, find it interesting and informative.

Here’s a link to the news feed: https://seekingalpha.com/author/general-expert.xml

Jun. 5, 2017

Summary

Calling the top is in fashion as the market makes new highs.

I see nothing in the market that is indicating a bubble.

Consumers are taking on more debt, but debt is essential for growth.

Consumers and corporations have no problems servicing their debts.

I see no reason why the Fed can’t keep interest rates low if there is a need.

Everything looks like a bubble… if you are a hedge fund manager that wants to protect your reputation or if you are a fearmonger that is just relishes schadenfreude on the off chance that everyone suffers.

I am never a mindless optimist, but I believe that we are currently experiencing one of the best economic environments since the financial crisis. Major indices such as the S&P 500 (NYSEARCA:SPY) and the Dow (NYSEARCA:DIA) are making new highs every week, but so what?

I believe that this is a testament to the economic strength of the U.S. rather than a reflection of the irrational exuberance of market participants. Today I would like to address two of the major arguments that I see being repeated again and again by bears, and why they are of no concern.

Too Much Debt

Consumers have been taking on more debt as the economy grew:
But debt isn’t bad. In fact, I would go on to argue that debt is great. Debt is what fuels economic growth. Part of the reason why recovering from a financial crisis is so difficult is because credit market freezes up and no one can take on debt to spend or to invest. But are we taking on too much debt? I believe that the answer is a firm “no.” As I mentioned in my previous article, consumers’ ability to service their debts is nowhere near pre-crisis levels.

Of course, a bear would say that this is all a ponzi scheme perpetuated by the Fed, which is keeping interest rates artificially low.

The Fed

The Fed’s dual mandate is simple enough: lower unemployment and stabilize prices. If these two objectives are achieved, it is likely that the economy will do well. The Fed took drastic measures (i.e. near zero interest rates) to stimulate spending during the financial crisis, and because interest rates are still low right now, bears are saying that the Fed is prolonging the inevitable collapse of the economy as the Fed can’t print money forever (both through QE and low interest rates to encourage lending). But why? I see absolutely no reason why the Fed cannot simply keep interest rates low for the foreseeable future if the economy is truly dependent on low interest rates.

What is a bubble? A bubble is something that is unsustainable. I would really like to be educated as to why the current regime could collapse at any time. Low interest rates have not caused rampant inflation contrary to the opinion of many experts, nor has debt spiraled out of control, neither at the consumer level (see previous graph) nor at the corporate level (below).

As we can see, interest coverage has risen far above pre-crisis levels, meaning our corporations have become less susceptible to shocks than before.

If the Fed can keep rates low forever then why bother with rate hikes and why should it unwind its balance sheet? While the Fed could keep interest rates low forever, it needs to proactively prevent the formation of bubbles. Because consumer confidence has risen since the election, the logical thing to do would be to offset this increase by enforcing a tighter monetary policy. The expectation of higher interest rates should allow corporations and consumers to make more level headed decisions. In my opinion this does slow down growth, but higher interest rates should reduce the volatility of the business cycle. Note that there is no reason to believe that the current level of spending is excessive, as evidenced by the low debt servicing ratio graph shown earlier.

Conclusion

I believe that the economy is in very good shape right now and any talk of a bubble is ludicrous. Neither corporations nor consumers are having any trouble servicing their debts. The Fed’s act of “printing money” is not harmful and I fail to see why low interest rates have to go away. While the Fed is raising rates, this is being done with the intention of offsetting rising consumer confidence. Even though higher rates may hamper growth, the Fed must make the safe choice in order to prevent the formation of an actual bubble, as opposed to the fictitious one that is often discussed in the media today.

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