A bull market in bubble warnings

Another week, another warning that stock markets are looking frothy. In June, the Bank for International Settlements, an organisation of central banks, highlighted the “puzzling disconnect between the markets’ buoyancy and underlying economic developments globally”. Last week, the Institute of International Finance (IIF) did the same. Such warnings have become more frequent in recent months.

The gap between the fundamentals and the performance of equities is worrying. Bank of America Merrill Lynch (BAML) notes that, since March 2009, world stocks have jumped by 190%, but US GDP is up just 18%.

The problem is the inevitable hangover after a credit boom and bust. Companies and households have been concentrating on paying their pre-crisis debt loads down. The printed central-bank money intended to boost the economy remains “trapped in Wall Street to the benefit of equity prices”. With plenty of cash still parked on the sidelines, further gains are likely, says BAML.

But eventually there will be a setback – perhaps caused by signs that interest rates will have to go up faster than expected, thanks to rising inflation. Investors know this, says Jeremy Warner on Telegraph.co.uk, yet they keep riding the rally.

They’re not delusional. “It’s just that years of central-bank money printing has compressed returns to a point where there is nowhere else to put your cash. There are few good alternatives to buying poor value for money. This bizarre state of affairs is almost bound to end badly. The only question is how badly and when.”

• Stay up to date with MoneyWeek: Follow us on TwitterFacebook and Google+

MoneyWeek magazine

Latest issue:

Magazine cover
Heading higher?

Or are house prices set to fall?

The UK's best-selling financial magazine. Take a FREE trial today.
Claim 4 FREE Issues

'Would you rather upset God, or have Him just ignore you?'

In the first of three interviews with Merryn Somerset Webb, Hugh Hendry, manager of the Eclectica Fund, talks about what it takes to be a good hedge fund manager – and how he learned to stop worrying and love central banks.


Which investment platform?

When it comes to buying shares and funds, there are several investment platforms and brokers to choose from. They all offer various fee structures to suit individual investing habits.
Find out which one is best for you.


21 November 1969: The first permanent Arpanet link

A milestone in the formation of the internet, the first permanent Arpanet link was established on this day in 1969 between researchers in the United States.