Financial Bubbles | timiacono.com

Slack, Too Much of It

It will surely be interesting to look back in a few years or so (i.e., after the next financial crisis) at the whole idea of too much “slack” in the economy as being sufficient justification for central banks to have taken such unprecedented actions, money-printing-wise.

Here, economist Paul Krugman talks to Bloomberg’s Tom Keene on the subject.

It’s easy to sympathize with the unemployed as the global labor market has clearly fallen on tough times in recent years, but, the idea that all you have to do is stimulate the same levels of demand that we saw before the last financial crisis and everything will be hunky-dory still strikes some of us as loony.

Of course, it’s entirely possible that this is exactly what we’ll see as policy makers seem to be working under the tacit assumption that all we have left are bubbles and that we need to create more and bigger ones to regain our lost prosperity.

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Janet Yellen and the “B-Word”

John Cassidy writes in the New Yorker that Federal Reserve Chair Janet Yellen didn’t see fit to once mention asset bubbles in her speech at the Economic Club of New York the other day and that, in itself, is a bit disconcerting.

But what was most striking to me about Yellen’s remarks was that she didn’t even discuss the financial markets and the overriding need to avoid another damaging speculative bubble, like the ones that the American economy experienced in the late nineteen-nineties and mid-two-thousands. Indeed, Yellen didn’t use the B-word at all. Given that her immediate predecessors, Alan Greenspan and Ben Bernanke, will be remembered for, among other things, their roles in inflating the bubbles in the stock market and the housing market, that was a pretty remarkable omission.

Recent history can’t be avoided, and neither can the task of maintaining financial stability and avoiding boom-bust cycles, particularly in the credit markets. Together with maintaining an adequate level of over-all demand in the economy, which is necessary for investment and job creation to proceed, it is the key challenge that all central banks face. But Yellen didn’t even mention it. Instead, she couched her remarks in terms of the old-fashioned inflation-unemployment trade-off, which is precisely the conceptual framework that encouraged Greenspan and Bernanke to shrug off what was happening in the financial and housing markets.

It’s hard to believe that Yellen will be any different than her predecessors in spotting a looming crisis be it of the bursting asset bubble variety or something different.

Moreover, when considering that history rarely repeats, but often rhymes as Mark Twain purportedly quipped, the Fed will probably be more attuned to spotting something they’ve already seen (e.g., stock bubble, housing bubble, etc.) rather than the more likely case of something completely different (e.g., currency crisis, sovereign debt crisis, etc.)

The Diverging U.S. Stock Market

This CNN/Money story about how a peak in the number of new highs for individual stocks (as shown below) consistently spells trouble for broad equity market indexes almost a year later is probably of little concern to those who bid share prices higher in recent days as all major U.S. stock indexes turned in big gains this week after last week’s tumble.

Ned Davis Research looked at 15 stock market highs since 1962 and says the peak in new highs for individual stocks precedes the peak in the overall markets by 9 to 11 months.

If that holds true this time around, we’re about done with the bull run.

We’re 11 months past the May 2013 peak of new highs in individual stocks.

I recall reading about this in the wake of the early-2000s internet stock crash where some investors were able to avoid the carnage by taking note of this development before share prices reversed course.

They say what’s different this time is that stock market leaders are the first to fall (e.g., tech and biotech shares in recent weeks), however, this may well be another case where we’re in such uncharted territory (i.e., due to the mis-pricing of assets after unprecedented central bank intervention) that historical comparisons are all but meaningless.

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Tyler Cowen of Marginal Revolution notoriety points readers to two CBC News stories about the listing of the cheapest house for sale in the Vancouver market at just under $600,000 and its subsequent sale just two weeks later at almost $50,000 more than the sellers asked.

From the latter, we learn the following:

Vancouver’s cheapest listed single family home attracted large numbers to open houses, with two written offers pushing the final purchase price seven per cent over asking.

The house was the cheapest listing in Vancouver last week.

The price of the 100-year-old, 1,951-square-foot, three-bedroom, detached house at 2622 Clark Dr. was set low initially due to its smaller size and half lot site.

“It’s very rare, and that’s why all the excitement,” said RE/MAX realtor Mary Cleaver.

“I believe this house was, potentially, saved because it is on a different kind of lot, one that isn’t necessarily appealing to builders. So this has been a lovely family home for 100 years and, if well taken care of, could house a family 100 years from today,” she said.

Looking at the house and that lot, the excitement really is perfectly understandable.

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