Is the Stock Market a Bubble?

Is the Stock Market a Bubble?

E-mail debates of newsworthy topics.
Feb. 11 1999 11:00 PM

Is the Stock Market a Bubble?

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Well, Dave, I confess. I had all my friends log on to Slate and vote multiple times to make the score lopsided. In all seriousness, I, too, am surprised that 80 percent of Slate readers have voted that this is a bubble. But I'm afraid that I can't conclude what it means as confidently as Dave can. Dave states there's no other way to figure that 80 percent of readers would vote this way except that they're fond of guns and canned foods. I would humbly offer up another reason: It is a bubble. Now, I would be the first one to say that just because 80 percent of the readers think it is a bubble, doesn't mean it is one. But neither does it mean those people are believers in gloom and doom. According to Dave, if you happen to believe in a bubble, you are by definition a backward-thinking, gun-toting, camouflage-wearing, bean-eating Luddite. And that's simply not the case.

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I am, by nature, an optimist. I started my investment business on the long side in 1982, and I got into the brokerage business in 1979 because I thought the future looked bright for equities. Now, that doesn't sound like a doomsayer to me. It was the right decision at the right time. I think that calling a spade a spade, while not fun, is what we're supposed to do in this business. I wish that it weren't so, but to me it's a bubble, and all I can try to do is prepare myself and others for the aftermath. I'm quite proficient in the Internet. I do a nightly Market Rap on the Internet. I'm not afraid of technology: My academic training was in math and computer science, and before I got into the financial business I was in the computer business. So I think a lot of the accusations about the motives behind bubble thinkers fall flat, and I just want to be clear about that.

I disagree when Dave says I argue that the "stock market is due for a catastrophic bubble." We're not due for one, we have one. I would agree with him 100 percent if he means that I have not successfully argued that I know what the catalyst is. I have not claimed to know what will pop this bubble, and I'm not certain that it's possible to know that. All I can do is look historically at the periods that have had bubbles--both the '20s in the U.S. and the '80s in Japan--and there are dramatic similarities between the two.

Both were believed to be new eras of a sort. We can all remember the belief in Japanese invincibility during the late '80s. If anyone studies the '20s, they will see that the innovations of that period were at least as powerful as the Internet. And look, optimists in the '20s were right. There were a lot of great things to come in the future. The problem was, we had a very unstable bubble that developed, and it took us 10 or 15 years to get through that mess, through the Depression and World War II. The problem with bubbles is the destabilizing element when they pop. No one can know when they'll pop, but bubbles always pop.

I think it's a little disingenuous to try to support the fact that earnings weren't that great last year by arguing that, well, the price of oil collapsed and therefore oil companies didn't benefit. I would argue that corporate America and the S&P 500 are far bigger users of energy than producers of energy. The energy production weight of the S&Ps probably is less than 8 percent. That means the other 92 percent benefited from low oil prices. We took it out of the hide of the collapsing Third World countries that produce oil, like Russia , Venezuela, and the OPEC nations as well. So lower oil prices actually helped earnings instead of holding them back, as Dave argues.

To declare that bubble thinkers believe that we're in an old world governed by high inflation and boom/bust is absurd. I, for one, have not made these claims. I don't think these issues germane to the situation. All bubbles have been produced in periods when there were exciting things on the horizon and when there was low inflation generally created by productivity. It is low inflation that allows the central bank to keep the floodgates of liquidity open, empowering the overcapacity and misallocation of resources that take place during a bubble.

Everybody knows the demographics argument. Typically, when arguments are this well known they cease to be effective. That doesn't mean that this will be the case. But one element of the liquidity argument as it pertains to demographics is always overlooked. And that is, during the last five to seven years the boomers have taken their equity portfolios from zero to approximately 100 percent. They can't do that again--you only get to do that once. What's left is the incremental savings and the 401K contributions, and while those are powerful, they aren't as powerful as shifting your portfolio from no equities to all equities.

We will end this debate where we began it: agreeing to disagree about whether this is a bubble. But I would like to reiterate the point that I made once before. If it is a bubble, many more people are going to pay for it for a lot longer time than just the people who participated in it. And if it's not a bubble, people who want to stand on the sidelines aren't causing anyone else any harm. That's something worth keeping in mind.

Only time will tell whether or not it's a bubble, but one thing's for sure: If it is a bubble, the only safe time to get out would have been too soon, because after it's too late ... it's too late.