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Are we experiencing a financial bubble?

Are we experiencing a bubble ?
Markets from March 2020 to the present have become increasingly disconnected with the real economy.
In a pandemic year, the SP500 and especially the Nasdaq have grown tremendously.
Many people are wondering when this bubble will burst. When this contradiction between financial markets and the real economy comes to a head.

Obviously “inconsistency” exists and cannot last forever.
Certainly there is a lot of confusion, and the idea of imminent market collapse that some people have certainly does not help in making well-reasoned investments.

To understand whether markets are truly in a bubble or have risen on reasonable criteria, one must look for benchmarks.

From March to the present, we have seen a V-shaped upswing in the markets with a big climb in tech and e-commerce stocks that have benefited from the pandemic (zoom, microsoft, amazon).
But it is also true that markets, including in Europe, have seen a good recovery in different sectors as well.

So, are traders and investors so “crazy” as to continue investing in stocks and companies in a messy economic situation, creating a bubble, or are we not considering some other element?

To understand whether markets are in a bubble or not, an interesting indicator might be the CAPE RATIO.
The CAPE ratio (also known as the Shiller P / E ratio or PE 10) is an acronym for C yclicly- A djusted P rice-to- E arnings Ratio. The ratio is calculated by dividing a company’s stock price by the company’s average earnings over the past ten years, adjusted for inflation.

Simply put, the CAPE RATIO analyzed on a market tells us that the higher its value, the more the market we are paying for it. The lower it is, the more we are entering at a discount.

So are we on the bubble? Are we entering the market on prices that are too high compared to what they will be in the near future? In 2020, the CAPE RATIO (SHILLER PE RATIO) scored 34, exceeding the value of 30 as few times in history.
Therefore if we look at this indicator we are at high values of prices compared to the near future.

We are experiencing a bubble

Are we therefore experiencing a bubble ?

We cannot rely solely on Shiller’s CAPE RATIO to tell us this, although it is an excellent indicator. We need to take a broader view of the socio-economic context we are experiencing.

From the period analysis, we cannot fail to consider the trend of interest rates. It is true that Shiller’s PE RATIO is high, but it is high within an environment of interest rates that have never been this low and will not go up for a long time. What does this mean?

It means that the lower interest rates are, the higher investment valuations go up. This is because investors have no other avenue but to invest in equities (Actually some other avenues exist, e.g., GOLD and Bitcoin, but they are complex instruments to most).
Keeping money in the bank or investing in the stock market would not bring any gain. So in this situation, it is true that stock prices are high, but not so exaggerated when you consider that interest rates are very low and thus can lead to good future returns in the stock market.

Shiller, Nobel laureate in economics and father of CAPE RATIO, invented a new tool(EXCESS CAPE YIELD) that can consider CAPE RATIO with interest rate trends.

This new indicator tells us today that prices are high but not crazy and therefore a justifiable price. No movement from equities to bonds is seen in the coming months. Almost no one today would move money they invested in stocks to bonds that yield almost zero, precisely because interest rates are so high,

Who would buy bonds today that yield almost zero at 10 years? Therefore one stays on the stock while continuing to invest (thus buying).

We are therefore facing the famous TINA (There Is No Alternative). The money has to be invested somewhere. From bonds they all went to equities.

Shall we add that the Central Banks are putting a huge mass of currency into the markets to support the economy? As long as Central Banks inject debt by creating debt, markets will be able to hold and even grow. It is clear that debt cannot be created indefinitely. And sooner or later the real economy will be taken into account by the markets.
Are we therefore experiencing a bubble ? Maybe not. For now with such low interest rates and strong liquidity in the markets, we cannot say that we are facing a bubble. At least as we have conceived it to date.

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