Let’s see we have a housing bubble, a credit card bubble, and now I suggest a stock market bubble. Notice that I am not whipping out a bunch of charts to prove my points, just some thinking that suggests that there are discrepancies in the widely held mind set.
If you were in the market back in the 1970’s, it didn’t matter what you bought, it didn’t go up or down. It was like watching paint dry. Now the dividend was another story. This was where the money was made.
Let’s fast forward to today. If you bring to market a stock for "Cosmetic Dentistry for Dogs," a lot of investors’ will buy it. There is no concern as to the dividend rate; “Hell that’s taxable, give me growth!”
If you go back to the housing bubble there was a similar situation. The cost of ownership became financially impractical when considering the cost of renting the same property. This same problem occurs with stocks. If they go up forever, there is no problem. But if they stop appreciating, then the only thing that sets them apart from an interest bearing bank account is the dividend.
Using Big Blue as an example, IBM is at $102 and paying $1.60 per share. Let’s figure over a 10 year period it doesn’t budge in price. In this scenario, the return from a saving’s account would return three times more than the IBM investment. Looking back to 1984, IBM was at 124 and paid $4.20 in dividends.
Notice how the logic of the last paragraph falls apart, if stocks take off and go up another gazillion points. Notice also, the mind set of the investors that bought into the real estate market. “Real estate always goes up.” We know where that thinking could lead in the end.
The stock market has been going up since 1982 and has not had a 5,10 or 20 year bear market in the interim. Very few people can remember back to when the market was a cruel master.
You could argue that the market is fairly priced, (if you figure for inflation) and I would have no argument with that. But, if you consider the lack of reasonable dividends to support the present prices, and the absurd prices for stocks that have no dividend or earnings, you have to realize the market is not functioning on a rational level.
The baby boomers are not going to be interested in growth when they retire, only interest and dividends. They will be trying to preserve their principle and live off of the interest.
Something is wrong. Everyone seems to be a professional trader. It defies logic, that every household using a discount broker, knows what they are doing. People are placing bets and making money. They must be doing something right. This has no grasp on reality, if you compare it to the investment environment of the 1970’s.
The contraction of the money supply has started. Housing foreclosures nation wide are a good indication of that. Marking all of this housing to market, is enough to give the note holders spasms of the lower colon.
The housing bubble is obvious, the credit card bubble is a little hidden, and the stock market bubble—who knows. If gas goes to $40 per gallon, then we know that there is no bubble, just your ordinary hyperinflation. That concept is the one I don't want to entertain.