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You can find the current article at its original source at https://www.theguardian.com/business/2017/feb/16/stock-market-crash-optimism-recklessness-boom-bust
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| A stock market crash is a way off, but this boom will turn to bust | A stock market crash is a way off, but this boom will turn to bust |
| (about 3 hours later) | |
| All three main measures of the health in the stock market are at record levels. Donald Trump is bragging about the boost he has given to share prices. Bourses around the world are taking their lead from Wall Street and heading higher. | All three main measures of the health in the stock market are at record levels. Donald Trump is bragging about the boost he has given to share prices. Bourses around the world are taking their lead from Wall Street and heading higher. |
| What does that mean? It means the stock market is going to crash because sooner or later optimism breeds recklessness and boom will turn to bust. All that’s in question is how big the bubble will get before it bursts and when that moment will come. | What does that mean? It means the stock market is going to crash because sooner or later optimism breeds recklessness and boom will turn to bust. All that’s in question is how big the bubble will get before it bursts and when that moment will come. |
| Stock market hits new high with longest winning streak in decades. Great level of confidence and optimism - even before tax plan rollout! | Stock market hits new high with longest winning streak in decades. Great level of confidence and optimism - even before tax plan rollout! |
| Let’s be clear, that moment is still a way off. Markets are in that part of the cycle where every piece of news is a reason to buy equities. Rising inflation? A sign that the global economy is picking up speed, which is good for corporate profits. Hints from the Federal Reserve that it is contemplating another increase in US interest rates? An expression of confidence by America’s central bank in the health of the world’s biggest economy. | Let’s be clear, that moment is still a way off. Markets are in that part of the cycle where every piece of news is a reason to buy equities. Rising inflation? A sign that the global economy is picking up speed, which is good for corporate profits. Hints from the Federal Reserve that it is contemplating another increase in US interest rates? An expression of confidence by America’s central bank in the health of the world’s biggest economy. |
| Wall Street is also salivating at the prospect of nice fat tax cuts from Trump. The White House will announce details of its plans shortly but they are certain to involve a hefty cut in corporation tax. Another reason to pile into the stock market. | Wall Street is also salivating at the prospect of nice fat tax cuts from Trump. The White House will announce details of its plans shortly but they are certain to involve a hefty cut in corporation tax. Another reason to pile into the stock market. |
| The other indication of a bubble mentality is that all bad news is ignored or downplayed. So, investors seem blissfully unconcerned that Trump might trigger a new global trade war or by his chaotic foreign policy. The risks of a victory for the far right in the imminent Dutch and French elections are being brushed under the carpet. | The other indication of a bubble mentality is that all bad news is ignored or downplayed. So, investors seem blissfully unconcerned that Trump might trigger a new global trade war or by his chaotic foreign policy. The risks of a victory for the far right in the imminent Dutch and French elections are being brushed under the carpet. |
| Keynes provided the best explanation for this kind of herd behaviour, noting that markets can remain irrational longer than investors can stay solvent. A fund manager might think stocks are already richly valued but if everybody else is buying then the temptation is to swallow any doubts and do likewise. | Keynes provided the best explanation for this kind of herd behaviour, noting that markets can remain irrational longer than investors can stay solvent. A fund manager might think stocks are already richly valued but if everybody else is buying then the temptation is to swallow any doubts and do likewise. |
| Traditionally, one of the best yardsticks for whether shares are over-valued or under-valued has been the cyclically adjusted price earnings ratio constructed by the economist Robert Shiller. This ratio is currently at about 29 and has only twice been higher: in 1929 ahead of the Wall Street Crash, and in the last frantic months of the dotcom bubble of the late 1990s. | |
| Already, reasons are being put forward for why Shiller’s metrics are not applicable to today’s market conditions. Whenever the words “it’s different this time” are uttered it is a sure sign of trouble ahead. | |
| For the time being, Wall Street is being supported by negative real interest rates and the prospect of tax cuts to come. That means stock market records will continue to be broken over the months ahead. | For the time being, Wall Street is being supported by negative real interest rates and the prospect of tax cuts to come. That means stock market records will continue to be broken over the months ahead. |
| Until the moment comes when traders get spooked by rising interest rates, burgeoning budget deficits, protectionism or a combination of all three. Wall Street is getting intoxicated on irrational exuberance. But remember: the wilder the party, the bigger the hangover. | Until the moment comes when traders get spooked by rising interest rates, burgeoning budget deficits, protectionism or a combination of all three. Wall Street is getting intoxicated on irrational exuberance. But remember: the wilder the party, the bigger the hangover. |