The Stock Market is an Asset Bubble Ready to Burst
by John Lawrence
Every so often the stock market crashes. It's like the game of musical chairs. When the music stops, the last one out loses his or her money. So it's probably a good time to take your money out of the stock market. A total of 8 trillion dollars of wealth was lost in the crash of 2000. The stock market went down to 6500 in the crash of 2008. Stocks tumbled 40%. Today the Total Market Index is at almost 27,000, about 4 times higher than it was just 9 years ago.
Warren Buffett thinks that the market at 138% of GDP is significantly overvalued. The underlying economy doesn't justify the current stock market valuation. Over the long run, stock market valuation reverts to its mean. A higher current valuation certainly correlates with lower long-term returns in the future. On the other hand, a lower current valuation level correlates with a higher long-term return. The total market valuation is measured by the ratio of total market cap (TMC) to GNP -- the equation representing Warren Buffett's "best single measure".
The stock market bubble is another reason why the Fed doesn't want to raise interest rates. If they did, money would be taken out of the stock market and go into the bond market, and the stock market could collapse. As it is, the low interest rates fuel the profits of the big Wall Street banks which can borrow money for practically nothing and then loan it out at fantastically higher interest rates. Credit card interest rates are currently over 20%. Student loan interest rates are as high as 7%. Mortgage interest rates are around 4%.
Savers are getting screwed because interest rates on savings accounts are near zero. Real estate in some parts of the country like California and New York is ridiculously high forcing a lot of people into homelessness. In other parts of the country it is very reasonable. Taking money out of the stock market and putting it into real estate where real estate is cheap seems like a good strategy, but I'm no Warren Buffett.
