"Are We Back in a Bubble?" is printed on the cover of this Financial Times issue and refers to this article inside:
A Risky RevivalBy John Authers
Published: September 25 2009 22:24
This should have been a week for traders in the stock market to feel good about life. US stocks have rallied by close to 60 per cent in barely six months since they hit bottom in March. The Federal Reserve meanwhile pronounced this week that “economic activity has picked up” – the most confident language the central bank has used for some time.
But Crispin Odey, one of London’s most respected hedge fund managers, was seeing things differently. He chose Wednesday, the day of the Fed’s pronouncement, to ruminate, both in a note to clients and in the Financial Times, that the rally was “entering a bubble phase”. The word “bubble” is highly emotive but Mr Odey could justify it. He argued that markets were being distorted by governments’ deliberate attempts to push down the price of money by buying bonds, a policy known as quantitative easing. “At some point the quantitative easing will have to come to an end,” he said, “but, until it does, this bull market is sponsored by
and everyone should enjoy it.”
The remarks struck a chord. Stocks endured a sharp sell-off after his words . The fear that the unprecedented supply of cheap money from governments is creating another bubble has been circulating in Wall Street and the City of London for months.
To some, this seems alarmist. History is full of examples of strong rallies after big sell-offs – it is all part of the “physics” of markets. The all-time highs for developed market stocks, set in 2007, are not in sight. On conventional valuation measures, stocks are nowhere near as expensive as at the top of past investment bubbles. Also, the economic “free-fall” at the end of last year appears to have been halted. In addition, the Fed’s pronouncement signalled interest rates will remain low for a while – a sweet spot for risky assets such as stocks. A strong recovery for share prices since March, when there was a real fear of a second Great Depression, seems reasonable.
But the question of whether this is a real recovery or a bubble must still be asked, and there are worrying signs. The rally has been achieved with global economic growth barely above zero and unemployment still rising. The S&P 500 index of US stocks is already far above the forecasts nine out of 10 Wall Street strategists have in place for the end of the year, according to a Bloomberg survey. Concerns are prevalent that US consumers will not return to their old buying habits because of high unemployment and the debts they need to pay off.
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http://www.ft.com/cms/s/0/defff18e-aa07-11de-a3ce-00144feabdc0.html?nclick_check=1