Singer Billy Joel almost got it right in his song “We didn’t start the fire.” The Federal Reserve started the asset bubble fire.
The famous Buffett Indicator is signalling a massive stock market bubble or serious overheating.
Here is your first assignment for class. Plot the Buffett Indicator (Wilshire 5000 Total Market Full Cap Index/GDP *100 against The Federal Reserve Balance sheet). It should look like the following:
How about Robert Shiller’s cyclically-adjusted price-to-earnings (CAPE) ratio? It is climbing rapidly and is above Black Tuesday’s spike in 1929 but still below the peak of the dot.com bubble.
In terms of price-to-book ratio for the S&P 500 index, the P/E ratio is rising rapidly and it just below the dot.com bubble level.
The S&P 500 dividend year is at its lowest point since the dot.com bubble and considerably below Black Tuesday (1929) and Black Monday (1987).
Speaking of Robert Shiller, the Case-Shiller National Home Price Index keeps rising rapidly along with The Federal Reserve’s balance sheet.
What will happen if The Fed stops flooding the markets with liquidity? I don’t think they can stop the fire.