Are equity markets in a massive bubble?

BY NIELS JENSEN / ON 17 DECEMBER 2013 AT 08:04 Squeaky Bum Time: The Absolute Return Letter, December !"# $Smart people learn from their mistakes. But the real sharp ones learn from the mistakes of others%$ -Brandon Mull, Fablehaven The 2002-03 season in the Eng ish !"e#ie" $eag%e& 'hi(h en)e) 'ith *i" A e+ ,e"g%son 'inning a se-enth !"e#ie" $eag%e tit e& )e-e o.e) into a he(ti( /att e /et'een Man(heste" 0nite) an) A"sena 1 At the height o2 the "a(e 2o" the tit e& 'ith on 3 a 2e' 'ee4s e2t o2 the season& *i" A e+ %tte"e) the no' 2a#o%s 'o")s: Its getting tickl no! " s#ueak bum time, I call it.$ *5%ea43 /%# ti#e )es("i/es -e"3 'e #3 e#otiona state at the #o#ent1 E5%it3 #a"4ets (ontin%e to set ne' highs& see#ing 3 ."e.a"e) to )is"ega") e(ono#i( 2%n)a#enta s1 6 ha-e ne-e" 2e t enti"e 3 (o#2o"ta/ e 'hen 6 st"%gg e to "ationa ise in-esto" /eha-io%" an) 6 a# not a one1 A o-e" the 'o" ) #a"4et .%n)its a"e /%s3 )e( a"ing this "a 3 the atest in a ong st"ing o2 #a"4et /%// es 'hi(h ha-e /een )oing the "o%n)s o-e" the .ast 2e' 3ea"s1 Mean'hi e /%siness .a"tne" an) goo) 2"ien) Ni(4 Rees has no' e2t the Cana"3 6s an)s on /oa") a "o'ing /oat set 2o" Antig%a in the Ca"i//ean 'he"e the3 e+.e(t to a""i-e in ate 7an%a"3 83o% (an 2o o' Ni(49s ."og"ess here:1 62 3o% ( i(4 on the "a(e t"a(4e" #a.& Ni(4 is in the /oat (a e) Tea# Neas Ene"g3 8-e"3 4in) 3 s.onso"e) /3 o%" 2"ien)s in Aa /o"g& Den#a"4:1 E en 8Ni(49s 'i2e: .oste) this "e.o"t 8see here: o-e" the 'ee4en): %t &pm last night 'Frida ( )ick and *d !ere on deck, )ick ro!ing, *d eating dinner. +he !ere having a good chat apparentl , % freak !ave described b )ick as -enormous reared up behind the boat. +he !ave knocked them out of the boat and it capsi.ed to the side, but righted ver #uickl and the bo s '!ho !ere !ired onto their safet lines( !ere able to get back on board safel . )ick got back on the oars to tr to continue ro!ing, and *d !ent into the cabin " ho!ever another !ave threatened to roll them again and )ick /oined *d inside. +he !ere then rocketed for!ard at a terrif ing 01.&knots b the !aves.$ *5%ea43 /%# ti#e in)ee); &o' to s(ot a bubble Ba(4 to the in2a#o%s /%// es1 Not the so"t o2 /%// es #ost o2 %s en<o3 at Ne' Yea" /%t #an #a)e /%// es1 B%// es that a"e the ."o)%(t o2 i""es.onsi/ e /eha-io%" an) g"ee)1 B%// es that (an )est"o3 'ea th in no ti#e at a 1 The"e is a ong histo"3 o2 )e2 ate) /%// es /eginning 'ith T% i.#ania in the Nethe" an)s in the 1=30s>1?1 @hen a /%// e /%"sts& the t3.i(a #oneta"3 .o i(3 "es.onse is to 2 oo) the #a"4ets 'ith liqui)ity1 The 2008 o((asion 'as no e+(e.tion1 Cent"a /an4s a o-e" the 'o" ) ."o-i)e)& an) 2i-e 3ea"s ate" (ontin%e to ."o-i)e& a#. e s%.. ies o2 (hea. #one31 The "es% ts a"e the"e 2o" e-e"3one to see1 Asset ."i(es ha-e "a ie) st"ong 3 as 6 .ointe) o%t in the No-e#/e" A/so %te Ret%"n $ette"1 Yet "ising asset ."i(es& e-en "a.i) 3 "ising asset ."i(es& a"e not ne(essa"i 3 a4in to a /%// e1 One #%st )isting%ish /et'een 'hat is s%staina/ e an) 'hat is not1 The ,inan(ia Ti#es $e+i(on )e2ines an asset /%// e this 'a3:

2hen the prices of securities or other assets rise so sharpl and at such a sustained rate that the e3ceed valuations /ustified b fundamentals, making a sudden collapse likel " at !hich point the bubble bursts.$ Asset /%// es a"e not a 'a3s easi 3 i)enti2ia/ e1 A an A"eens.an has /een 'i)e 3 "i)i(% e) 2o" as4ing the 2o o'ing 5%estion: 4o! do !e kno! !hen irrational e3uberance has undul escalated asset values, !hich then become sub/ect to une3pected and prolonged contractions5$ The #an has a .oint& tho%gh1 @e (an a s.ot the /%// es 'hen %sing the "ea"--ie' #i""o"& /%t that is a %+%"3 on 3 a-ai a/ e to a(a)e#i(s an) (o%(h .otatoes1 6n-esto"s )o not ha-e the %+%"3 o2 a "ea"--ie' #i""o">2?1 @e nee) to #a4e "ea ti#e (a s a the ti#e an) that is not a 'a3s st"aight2o"'a")1 A 1B=3 ,e""a"i 2C0 ATO (hange) han)s /a(4 in O(to/e" 2o" no ess than DC2 #i ion1 On 3 2o%" 'ee4s ago a ,"an(is Ba(on .ainting 2et(he) D142 #i ion at an a%(tion in Ne' Yo"41 6 2ee -e"3 te#.te) to )e( a"e /oth o2 those t"ansa(tions a ."o)%(t o2 i""ationa e+%/e"an(e1 @ho in thei" "ight #in) 'o% ) .a3 those ."i(es 2o" %n."o)%(ti-e assetsE Yet 6 2ee te#.te) to 5%ote the age o ) Danish sa3ing: F@hat )o 2a"#e"s 4no' a/o%t .i(4 e) (%(%#/e"sEG 6 ho.e 3o% get #3 .oint1 @hen 6 oo4 at Bit(oin& the (ha"t s("ea#s H/%// e9 to #e /%t ho' )o 6 -a %e itE 6 a# not s#a"t eno%gh to 2ig%"e that o%t1 6n s%(h a sit%ation the 'ise #o-e is no #o-e1 Anothe" e+a#. e: Cent"a $on)on ."o.e"t3 ."i(es1 Reasona/ 3 inte igent .eo. e )e( a"e) $on)on ."o.e"t3 to /e in a /%// e #o"e than a )e(a)e ago1 Mean'hi e ."i(es (ontin%e to "ise1 6s it a /%// eE 6 )on9t 4no'& /%t 6 )o 4no' that as ong as #isg%i)e) .o iti(ians in *rance& *.ain& 6ta 3 an) A"ee(e (ontin%e to #a4e /a) .o i(3 )e(isions that #a4e thei" o'n (itiIens .a(4 %. an) ea-e& $on)on 'i (ontin%e to ."os.e" 8an) ."i(e no"#a .eo. e o%t o2 the ."o.e"t3 #a"4et& /%t that is anothe" sto"3 a togethe":1 As ong as the"e )oesn9t see# to /e an3 sho"tage o2 st%.i)it3 a#ongst the .o iti(a e ite in Euro(e& 6 'i not /et against 2%"the" ."i(e in("eases on (ent"a $on)on ."o.e"t31 The DNA o+ the !" ,"# bull No' to the /ig 5%estion: 6s the"e a /%// e in g o/a e5%it3 #a"4etsE That is 'hat the "est o2 this ette" is a a/o%t1 $et9s /egin /3 .%tting the (%""ent "a 3 into a histo"i(a (onte+t1 Cha"t 1 sho's a %ninte""%.te) *J! C00 /% "%ns sin(e 1B27 that ha-e aste) C0 'ee4s o" onge"1 A togethe" the"e ha-e /een 2C o2 the# an)& (ont"a"3 to 'hat #an3 see# to thin4& the 2012-13 "a 3 is not an o%t ie"1 6t has neithe" /een e+(e.tiona 3 ong& no" has it )e i-e"e) o%tsiIe) "et%"ns 83et:& at east 'hen (o#.a"e) to the othe" #a<o" /% "%ns1 This hasn9t ."e-ente) #an3 (o##entato"s 2"o# "aising the "e) 2 ag1 A o' #e to sha"e a 2e' e+a#. es 'ith 3o% 82o"gi-e #e 2o" the n%#/e" o2 (ha"ts to (o#e& /%t the3 o2ten sa3 #o"e than tho%san)s o2 'o")s:1 One o2 the #ost .o.% a" (ha"ts on 2inan(ia / ogs in "e(ent 'ee4s (o#.a"es the ongoing "a 3 to the g"eat /% #a"4et o2 the ate 1B20s 'hi(h& as 'e a 4no'& en)e) -e"3 /a) 3 8(ha"t 2:1

-hart ": S./ 0!! bull runs since "1 2

Source6 Ineichen 7esearch 8 Management. 6 a# a#aIe) to see ho' #%(h -a %e #an3 in-esto"s assign to (ha"ts i4e these1 @hat )oes (ha"t 2 "ea 3 te 3o%E As 2a" as 6 (an te not #%(h1 ,o" e-e"3 (ha"t that s%ggests a "e ationshi.& 6 (an 2in) t'o that (ont"a)i(t it1 To #e te(hni(a ana 3sis is ong on -oo)oo an) sho"t on s%/stan(e 86 #a3 ha-e ost a (o%. e o2 tho%san) "ea)e"s "ight the"e& /%t so /e it:1 -hart : The !" ,"# bull market 3s% "1 4,#!

Source6 http699allstarcharts.com9fair-compare-market-0:;:9

Anothe" .o.% a" (ha"t )oing the "o%n)s in "e(ent 'ee4s is the so-(a e) <eath =rosssho'n /e o' 8(ha"t 3: 'hi(h has /een ."esente) as H."oo29 that g o/a e5%it3 #a"4ets a"e on (o ision (o%"se 'ith e(ono#i( 2%n)a#enta s1 -hart #: 5lobal equities 3s% economic +un)amentals 6sim(listic stu)y7

Source6 http699!!!..erohedge.com9ne!s9;>0?-00-;;9behold-!orlds-real-death-cross A #o"e tho"o%gh ana 3sis 'o% ) "e-ea that the "e ationshi. /et'een e5%it3 #a"4ets an) e(ono#i( 2%n)a#enta s /"o4e )o'n a (o%. e o2 3ea"s ago 8(ha"t 4:1 6n 2a(t& an) as 'e sha see ate"& the"e is a/so %te 3 nothing %n%s%a & et a one a a"#ing& a/o%t s%(h a )is(onne(t1 6t is a a/o%t 'he"e 'e ha..en to /e in the e(ono#i( (3( e1 -hart 8: 5lobal equities 3s% economic +un)amentals 6)etaile) stu)y7

Source6 Minack %dvisors

Anothe" -e"3 .o.% a" (ha"t& sho'ing an a..a"ent in4 /et'een the e+.ansion o2 the ,e)9s /a an(e sheet 8i1e1 KE: an) the "ise in 01*1 e5%it3 ."i(es& has /een #a"4ete) "e(ent 3 as @erhaps the onl chart that matters 8(ha"t C:1 0n ess one )igs a itt e /it )ee.e"& it is eas3 to get (a""ie) a'a3 'hen oo4ing at (ha"ts i4e these& /%t )igging )ee.e" is ."e(ise 3 'hat the goo) .eo. e at Mina(4 A)-iso"s ha-e )one an) thei" 2in)ings a"e 5%ite inte"esting1 62 KE 'as so e 3 "es.onsi/ e 2o" the "e-"ating o2 e5%ities that has ta4en . a(e& one 'o% ) e+.e(t a st"ong (o""e ation /et'een !/E "atios an) the siIe o2 (ent"a /an4s9 /a an(e sheets th"o%gho%t the .ost("isis .e"io) 8i1e1 2"o# ea" 3 200B:L ho'e-e"& !/E "atios a(t%a 3 (ont"a(te) )%"ing the 2i"st t'o 3ea"s o2 KE 8(ha"t =:1 6n othe" 'o")s& KE a one )oes not e+. ain the "e(ent /% -"%n1 -hart 0: 9E 3s% equities

*o%"(e:http699!!!.mcoscillator.com9learningAcenter9!eekl Achart9perhapsAtheAonl AchartAthatAmattersAforAno!9 No'& /e2o"e 3o% <%#. to (on( %sions& )o not 2o" one se(on) thin4 6 a# a/o%t to )o a M%gh Men)"3 8M%gh& C6O o2 E( e(ti(a Asset Manage#ent an) a ong-stan)ing /ea"& th"e' the to'e in the "ing a 2e' 'ee4s ago an) t%"ne) /% ish 2o" the 2i"st ti#e in 3ea"s:1 6 (annot .ossi/ 3 )o 'hat M%gh Men)"3 )i) /e(a%se 6 'as a "ea)3 /% ish1 Ma-ing sai) that& #an3 #o"e 'i )o 'hat M%gh Men)"3 has <%st )one1 The "e(ent "a 3 is sti not 'i)e 3 e#/"a(e)1 Man3 in-esto"s (ontin%e to /e )ee. 3 s%s.i(io%s a/o%t the %n)e" 3ing e(ono#i( "ea it3 an) 2o" goo) "easons& 6 #ight a))1 *ee 2o" e+a#. e this article in the ,T1

-hart :: 9E 3s% equity market 3aluation

Source6 Minack %dvisors The beauty o+ +inancial alchemy Ta 4ing a/o%t ha-ing goo) "easons to /e s%s.i(io%s& ta4e a oo4 at (ha"t 7& (o%"tes3 o2 Bi A"oss an) !6MCO1 E-en a (as%a oo4 at the (ha"t s%ggests that the (hi(4ens #a3 sti (o#e ho#e to "oost1 01*1 (o".o"ates a"e )es.e"ate 3 t"3ing to )e i-e" ea"nings g"o'th 'hen #eas%"e) on a .e" sha"e /asis e-en i2 the %n)e" 3ing ea"nings t"en) is 2 at to negati-e1 The ."i#a"3 too to a(hie-e s%(h #agi( is o/-io%s 3 sto(4 /%3-/a(4s1 A 'ho..ing D1 t"i ion 8N/-: is s.ent ever earon /%3/a(4 ."og"a##es in the 01*1 <%st to 4ee. the sho' on the "oa)1 -hart 2: The art o+ +inancial alchemy

Source6 @IM=B, Bianco 7esearch

The"e a"e .otentia 3 t'o )3na#i(s at 'o"4 he"e1 The 2i"st one is st"aight2o"'a") O the e(ono#i( (3( e1 !e"ha.s (ha"t 7 is te ing %s that the 01*1 e(ono#3 O an) #o"e /"oa) 3 the g o/a e(ono#3 O is not 5%ite as "o/%st as 01*1 (o".o"ates 'ant %s to /e ie-e1 The se(on) one is #o"e (o#. e+ an) has to )o 'ith ho' nationa in(o#e is )i-i)e) /et'een a/o%" an) (a.ita 1 ,o" #an3 3ea"s it 'as a "e ati-e 3 sta/ e "e ationshi.1 =CP o2 nationa in(o#e 'ent to a/o%" 'ith the /a an(e going to the o'ne"s o2 the (a.ita >3?1 As "e(ent 3 as 10-12 3ea"s ago that 'as sti the (ase1 Then things sta"te) to (hange an) a/o%"9s sha"e has /een %n)e" ."ess%"e e-e" sin(e1 To)a3 a/o%" "e(ei-es <%st sho"t o2 =0P o2 nationa in(o#e1 The "eason 6 /"ing this %. in the (onte+t o2 (ha"t 7 is that the"e a"e signs that a/o%"9s sha"e o2 tota in(o#e #a3 ha-e /eg%n to #ean "e-e"t 'ith a/o%" again ta4ing a a"ge" sha"e o2 nationa in(o#e 'hi(h& i2 s%staine)& 'i .%t (o".o"ate ."o2its %n)e" ."ess%"e in the 3ea"s to (o#e1 6t is sti ea" 3 )a3s& /%t it9s 'o"th a se.a"ate )is(%ssion 'hi(h 6 'i "e-e"t to in one o2 the ne+t A/so %te Ret%"n $ette"s1 Bubble or no bubble; 6n the #eanti#e& et9s t"3 an) get /a(4 to the (ent"a 5%estion in this #onth9s ette" O /%// e o" no /%// eE 6n o")e" to ans'e" that 5%estion 'e nee) to oo4 at so#e -a %ation (ha"ts1 Cha"t 8 )oesn9t ."o-i)e #%(h (o#2o"t 2o" the /% s1 ,o%" )i22e"ent -a %ation #et"i(s ea) to #o"e o" ess the sa#e (on( %sion O 01*1 #a"4ets a"e signi2i(ant 3 o-e"-a %e) a tho%gh not 3et at e-e s seen at the .ea4 o2 the se(% a" /% #a"4et in 20001 Cha"t B 'hi(h #eas%"es the agg"egate -a %ation o2 a )e-e o.e) #a"4ets .aints a 5%ite )i22e"ent .i(t%"e1 The"e is nothing to s%ggest that -a %ations a"e in an3 'a3 e+(essi-e1 E-en 'hen a)<%sting 2o" the o2t3 )a3s o2 the ate 1BB0s 8the g"een ine in (ha"t B:& g o/a e5%it3 #a"4ets a..ea" on 3 to /e -e"3 #o)est 3 o-e"-a %e)1 -hart 4: Di++erent 3aluation metrics a((lie) to the <%S% market

Source6 %dvisor @erspectives 'see here(.

O%" s%s.i(ions a"e (on2i"#e) 'hen 'e (o#.a"e 01*1 e5%it3 -a %ations to those o2 othe" #a"4ets 8(ha"t 10:1 6t is o/-io%s 2"o# this (ha"t that the st"ong /% -"%n in 01*1 #a"4ets has o.ene) %. a signi2i(ant -a %ation ga.& in .a"ti(% a" -is-Q--is e#e"ging #a"4ets1 One sho% ) a so "e#e#/e" that E%"o.ean (o".o"ate ea"nings a"e )e."esse) at ."esent& sen)ing -a %ations highe" so& on a (3( i(a 3 a)<%ste) /asis& E%"o.ean e5%ities oo4 #%(h #o"e att"a(ti-e 3 ."i(e) than thei" 01*1 .ee"s1 -hart 1: =aluation o+ equities in )e3elo(e) markets 6t'o year +or'ar) />E7

Source6 Minack %dvisors The "ea o..o"t%nit3 set see#s to ie in e#e"ging #a"4ets& tho%gh1 On(e g o/a e(ono#i( g"o'th "e-a((e e"ates& EM e5%ities a"e i4e 3 to (o#e /a(4 into 2a-o%"& an) #%(h o2 the -a %ation ga. (o% ) an) sho% ) )isa..ea" as a "es% t1 6n a /%// e- i4e en-i"on#ent in-esto"s "a"e 3 )isting%ish /et'een goo) an) /a)1 @e sa' it in the ate 1BB0s 'hen o' 5%a it3 )ot (o# (o#.anies 'e"e /i) %. to "i)i(% o%s -a %ations an) 'e sa' it again in the ho%sing /%// e in the #i) na%ghties 'hen in-esto"s 2o"got a/o%t the go )en "% e o2 ."o.e"t3 in-est#ents O o(ation& o(ation& o(ation1 @hen 6 oo4 at in-esto" /eha-io%" to)a3& 6 see the o..osite1 Most& i2 not a & in-esto"s& a"e high 3 se e(ti-e an) a.."oa(h #a"4ets 'ith a g"eat )ea o2 s(e.ti(is#1 -hart "!: A ?ro'in? 3aluation ?a(

Source6 Minack %dvisors

O%" 2"ien)s at *an2o") Be"nstein "an an inte"esting (ha"t 2o" #e 'hi(h .a"t 3 s%..o"ts #3 a"g%#ent1 6n-esto"s ha-e not 3et 2% 3 e#/"a(e) this "a 31 The3 ha-e in-este) in a H(o'a") 39 2ashion& 2o(%sing on )e2ensi-e& o' /eta sto(4s "athe" than #o"e agg"essi-e& o2ten (3( i(a & high /eta sto(4s 8(ha"t 11:1 62 histo"3 ."o-i)es an3 g%i)an(e& the"e 'i /e a shi2t to #o"e (3( i(a & highe" /eta na#es& /e2o"e this "a 3 is 'e an) t"% 3 o-e"1 -hart "": /rice,to,Book =aluation @ &i?h 3s% lo' beta stocks

Source6 Sanford Bernstein. MS=I <eveloped Markets, Can. 0:D> " )ov. ;>0?. Cha"t 12 ."o-i)es 2%"the" insight into 'hat it is in-esto"s ha-e a(t%a 3 /een (hasing in the "e(ent "a 31 As one (an see& sto(4s 'ith the highest )i-i)en) 3ie )s ha-e /e(o#e 5%ite e+.ensi-e& e-en i2 -a %ations ha-e (o#e /a(4 )o'n so#e'hat #o"e "e(ent 31 6t is a #ost %nhea") o2 2o" the highest 3ie )ing sto(4s to t"a)e at a ."e#i%# to the a"ge (a. %ni-e"se& /%t the3 )o no' an) ha-e )one 2o" a itt e 'hi e1 No'& an3 (o#.an3 'anting to "et%"n (a.ita to in-esto"s (an (hoose to )o so th"o%gh )i-i)en)s o" a te"nati-e 3 th"o%gh sha"e /%3-/a(4s1 The / a(4 ine in (ha"t 12 8sha"eho )e" 3ie ): (o#/ines sha"e "e.%"(hases an) )i-i)en)s1 As one (an see& in-esto"s ha-e not ta4en /%3-/a(4s to thei" hea"ts in the sa#e 'a3 the3 ha-e "e'a")e) the highest 3ie )ing (o#.anies1 The ans'e"& 6 /e ie-e& ies in the "e ent ess a..etite 2o" 3ie ) 'hi(h is a )i"e(t 2%n(tion o2 the (hanging )e#og"a.hi( an)s(a.e 'ith #i ions o2 /a/3 /oo#e"s 'o""ie) a/o%t ho' to 2%n) thei" "eti"e#ent1

-hart " : =aluation )iscount @ to( quintile yiel) 3s% <%S% lar?e ca(

Source6 BShaughness %sset Management. Ealuations based on trailing 0; month @9* ratios. The ty(ical equity cycle 6t is ti#e to "e--isit one o2 the iss%es 6 )is(%sse) in the ea" 3 .a"ts o2 this ette" O sho% ) 'e 'o""3 that the in4 /et'een e5%it3 #a"4ets an) e(ono#i( 2%n)a#enta s see#s to ha-e /"o4en )o'nE !ete" O..enhei#e"& E%"o.ean E5%it3 *t"ategist& ."o)%(e) an inte"esting (ha"t in a "e(ent "esea"(h "e.o"t& 'hi(h (asts so#e ight on this 5%estion1 $oo4ing at e(ono#i( (3( es sin(e 1B73& he )i-i)es the e5%it3 (3( e into 2o%" .hases O )es.ai"& ho.e& g"o'th an) o.ti#is# 8(ha"t 13:1 -hart "#: /hases o+ the Aty(icalB equity cycle

Source6 Foldman Sachs Flobal Investment 7esearch. Europe e3. GH. Based on economic c cles back to 0:I?.

!ete" a"g%es& an) 6 a# in( ine) to ag"ee& that 'e a"e (o#ing to the en) o2 the ho.e .hase 'hi(h is the .a"t o2 the e5%it3 (3( e 'he"e "et%"ns a"e the highest1 6n the ne+t .hase O the g"o'th .hase O "et%"ns a"e i4e 3 to /e #%(h #o"e #o)est an) a"ge 3 a 2%n(tion o2 the (o#.anies9 a/i it3 to (on-e"t the a((e e"ating e(ono#i( #o#ent%# into "ising (o".o"ate ea"nings1 Yo% 'i a so note 2"o# (ha"t 13 that& in the g"o'th .hase& !/E #% ti. es a(t%a 3 (ont"a(t so#e'hat& 3et ea"nings g"o'th #o"e than (o#.ensates 2o" that& ea-ing in-esto"s 'ith a .ositi-e& a /eit "e ati-e 3 #o)est& "et%"n1 6t is on 3 in the 2ina .hase o2 the e5%it3 (3( e 8o.ti#is#: that in-esto"s ten) to get (a""ie) a'a3 an) /%i ) in %n"ea isti( e+.e(tations 'hi(h the3 s%/se5%ent 3 .a3 )ea" 3 2o" in the )es.ai" .hase1 Ao )#an9s "esea"(h is /ase) so e 3 on E%"o.ean )ata1 One #ight a"g%e that the 01*1 is 'e in to the g"o'th .hase an) th%s ( ose" to the e+it .oint than #ost othe" #a"4ets1 6 'o% )n9t )isag"ee 'ith s%(h an o/se"-ation1 -onclusion Being ( ose" to the e+it .oint )oes not& ho'e-e"& i#. 3 /%// e /eha-io%"1 Yes& the"e a"e signs o2 e+(esses ("ee.ing /a(4 in to the #a"4ets1 The ,T "an a .ie(e on asset/a(4e) se(%"ities "e(ent 3 'hi(h sho% ) 'o""3 e-e"3one 8see here: an)& 3es& (o-enant ight oans a"e 3et again on the "ise 8see here:L ho'e-e"& 6 )o not see #%(h in te"#s o2 the ( assi( signs o2 /%// e /eha-io%" O e+(ess e-e"age& ta+i )"i-e"s gi-ing 3o% his sto(4 .i(4 )e <o%"& et(1 et(1 6t is& a2te" a & the #ost unenthusiastic "a 3 6 ha-e e-e" e+.e"ien(e)1 One o2 the 4e3 "easons 2o" the a..a"ent a(4 o2 enth%sias# is the 'i)e 3 he ) -ie' that inte"est "ates 'i /egin to "ise /e2o"e ong1 *o#e )isag"ee#ent e+ists as to 'hen an) /3 ho' #%(h& /%t one has to oo4 "ea 3 ha") to 2in) )issente"s 'ho a"e ."e.a"e) to ta4e the -ie' that inte"est "ates (o% ) in)ee) 2a 2%"the"1 6 sho% ) a)) H/e2o"e the3 "ise9 /e(a%se % ti#ate 3 the3 'i "ise1 6 thin4 'e a 4no' that1 Mo'e-e"& one i#.o"tant esson ea"ne) 2"o# 7a.an is that it is the H'hen9 that 'e #a3 get so ho""i/ 3 '"ong1 @ith (%""ent in2 ation t"en)s in #in)& it is not /e3on) (o#."ehension that 'e (o% ) see 10-3ea" /on) 3ie )s hit 2P /e2o"e 'e to%(h 4P1 One esson 6 ea"ne) #an3 #oons ago is ne-e" to %n)e"esti#ate the #a"4ets9 insatia/ e a..etite 2o" in2 i(ting #a+i#%# )a#age1 On the othe" han)& sho% ) inte"est "ates /egin to no"#a ise& going to sa3 4-CP on the 10-3ea" /on)& 6 'o% )n9t /e o-e" 3 (on(e"ne) a/o%t that eithe"& as long asit ha..ens in an o")e" 3 2ashion1 Cha"t 14 sho's the (o""e ation /et'een inte"est "ates #o-es an) e5%it3 "et%"ns1 As one (an see& in the .ast& %.'a")s #o-es in inte"est "ates ha-e on 3 h%"t the sto(4 #a"4et 'hen "ates ha-e /een no"th o2 CP1

-hart "8: The bon) 3s% equity s'eet s(ot

Source6 C@ Morgan No" a# 6 t"o%/ e) a/o%t a the ta.e"ing ta 41 ,inan(ia #a"4ets too4 a /it o2 a 4no(4 /a(4 in Ma3 an) 7%ne 2o o'ing Be"nan4e9s (o##ents on 22 Ma3 'hi(h #a"4ets 'e"e (o#. ete 3 %n."e.a"e) 2o"1 No'& a #ost se-en #onths ate"& the ne(essa"3 e+.e(tation a)<%st#ents a"e a"ge 3 /ehin) %s& an) ta.e"ing 'i #ost i4e 3 t%"n o%t to /e a non-e-ent1 Ma-ing sai) that& 'e a"e not o%t o2 the 'oo)s 3et& e(ono#i(a 3 s.ea4ing1 @e 'i ha-e to 2a(e #an3 (ha enges o-e" the ne+t se-e"a 3ea"s 3et& on the #a"gin& things aregetting /ette" an)& as ong as that is the (ase& the sto(4 #a"4et is i4e 3 to "es.on) in 4in)& e-en i2 the eas3 #one3 has /een #a)e at this .oint1 ,o" a those "easons 6 "e#ain a (a%tio%s /% 1 Niels -% Jensen RA/so %te Ret%"n !a"tne"s $$! 20131 Registe"e) in Eng an) No1 OC3034801 A%tho"ise) an) Reg% ate) /3 the ,inan(ia Con)%(t A%tho"it31 Registe"e) O22i(e: 1= @ate" $ane& Ri(h#on)& *%""e3& T@B 1T7& 0S1 C"D I am sure there are bubbles that predate +ulipmania, but that is considered to be the first !idel documented asset bubble. C D +here is at least one e3ception to this rule. In m ounger da s, before moving to Jondon, I !orked for a <anish bank. +he head of our group !as notorious for telling ever one !ho cared to listen !hat !e should have done esterda . 2hen he turned 1> !e gave him a rear-vie! mirror for his birthda . >3? The n%#/e"s 5%ote) he"e a"e /ase) on 01*1 )ata1 N%#/e"s 2"o# othe" (o%nt"ies -a"3 so#e'hat in a/so %te te"#s& /%t the t"en) has /een %ni-e"sa 1 A o-e" the 'o" )& a/o%" has ost sha"e to the (a.ita o'ne"s1