The return of the bubble

Another bubble is blowing up in the US, with stocks up by almost 80% since last March. But as everybody knows, bubbles always burst.

With US stocks up by almost 80% since last March, the Fed is "playing with fire" by allowing another bubble to develop, says Jeremy Grantham of GMO. "Speculators are not stupid." They have seen that after previous crashes, "a long, artificial period of low rates and easy financial borrowing has been delivered" thus blowing up another bubble. They also know that Fed chairman Ben Bernanke subscribes to the Greenspan doctrine of not tackling bubbles as they build, but merely limiting the fallout when they burst. So, they reason, why not have a punt?

Another cause to worry is that the quick economic recovery that would force the Fed to raise rates is hardly likely, given the fragile, deleveraging private sector. David Rosenberg of Gluskin Sheff calculates that leaving aside the monetary and fiscal stimulus in the system, GDP growth would have been an annualised 0.7% in the first quarter, rather than the reported 3.2%. Not much "organic vigour" there.

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