A CNBC story tells us that Bridgewater Associates–a hedge fund overseeing $169 billion in assets–recently sent a note to clients arguing that the U.S. economy was not in a bubble. The story summarizes the note’s main points:
Factors arguing against a bubble are, according to the authors:
- Prices have increased quickly, but not as fast as other bubbles
- Valuations are still in “normal territory”
- Leverage isn’t a major driving force of prices and overall lending is still “modest”
- There aren’t any significant new investors entering the market
- U.S. retail and foreign investors have “modest” positions
- Corporate stock buybacks are sustainable
- Economic sentiment is “less ebullient” than other bubble periods
In short, Bridgewater doesn’t think the situation today is analogous to the Roaring ’20s, the dotcom boom of the late 1990s or the housing-fueled bubble of the mid-to-late-2000s.
Some of those bullet points are hard to quantify, but the second last one is rather ominous: It’s bad when hedge funds are reassuring people that corporations can keep buying back their stock in order to keep prices from collapsing.
And look again at the first bullet point, which claims that prices haven’t risen as quickly as in other bubbles. Well, here’s the S&P 500:
The rise since mid-2011 is pretty steep, blowing the housing bubble period out of the water, and comparable to the late 1990s’ dot-com run-up. If the U.S. government had implemented all sorts of pro-growth policies since 2009, I might be comfortable with the above chart. But actually the last six years have seen a huge increase in federal debt and a big increase in the federal takeover of health care, to mention just two big whammies. Nobody knows the future, but I think the stock market is clearly in a bubble–with a little help from our friends at the Fed.