This is a Bull Market, Not a Bubble

Tim 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.