You probably don't want to hear it, but the Federal Reserve's cheap money policy has pushed the price of assets back into bubble territory. When I say "assets" I'm speaking of the two big ones: housing and stocks.
Let's start with the stock market.
There is more than one way to measure how expensive stocks are.
Public valuations for Internet and related hot tech companies are, once again, unjustifiably sky high. LinkedIn’s (LNKD) price-to-earnings ratio is 942. Guidewire Software’s (GWRE) P/E is 782. Amazon’s (AMZN) is 632. Netflix’s (NFLX) is 245. Facebook’s (FB) is 116. Twitter (TWTR) has a $30 billion market cap with no earnings and whopping price-to-sales multiple of 44.This indicator alone should give a person pause. But there are two other indicators you need to consider as well.
#1) Wall Street is pushing profit-less IPO's at the highest level since the peak of the Dot-Com bubble.
There is also another point of concern: duration of the stock bull market.
So is it really a radical suggestion to say that we are overdue for a severe stock market correction/crash?
I should note that there other bubbly indicators that will directly effect stocks and housing. Consider corporate debt.
“Five years after excessive debt propelled a housing-market collapse into a financial crisis and recession, similar bets are being placed across the U.S…..Leverage is getting back to where it was precrisis,” said Christina Padgett, head of leveraged finance research at Moody’s Investors Service…Housing
Total corporate-bond debt has grown to nearly $6 trillion, up 59% since 2007, the year before the financial crisis……Leverage by companies rated investment grade has risen 20% since 2010 … about 6% higher than in 2008, according to J.P. Morgan Chase
How can housing prices be "bubbly"? The idea is crazy, right?
Maybe not. Consider getting a mortgage today.
Millenials are being priced out of home ownership and student loan debt is one of the reasons.
More than half the homes currently on the market in seven major American metros are currently unaffordable for local residents, and one-third of homes for sale are unaffordable by historic standards.No one can ever accuse Zillow of being anything but bullish on housing. For example, they are trying to get Chinese home buyers to prop up our real estate market. So for them to admit that housing is too expensive is a big deal.
That’s the conclusion from a Zillow analysis of income, mortgage and home value data in the fourth quarter of 2013, which puts to question the regular industry claim that housing is more affordable than ever because of the current price and interest rate levels coming out of the housing crash.
“As affordability worsens, we’re already beginning to see more of the kinds of worrisome trends we saw en masse during the years leading up to the housing crash.
Like stocks, when things get expensive the risks switch to the downside.
So how can home prices be going up if mortgage affordability is dropping? Because of wealthy cash buyers.
Sales of vacation homes are surging again, the result of rising wealth in higher-income households and renewed confidence in the housing market.
The number of second homes acquired for part-time personal use jumped 30% last year to 717,000 homes, according to an annual survey by the National Association of Realtors. The gain was the largest since the association started tracking second-home sales in 2003.
No. But it does mean that there is almost no chance that we will avoid a serious stock market correction before the 2016 election. What's more, housing will soon be topping, if it hasn't topped already. Both of these things will be putting pressure on the banks and the economy in general.