The main theme shared among contrarian investors over the past few months: stock market bubble.
Former Texas Republican Congressman and three-time presidential candidate Ron Paul has joined the growing number of investors who think a bubble is forming in the stock market due to the Federal Reserve’s quantitative easing program, and that bubble is on the verge of bursting.
Speaking in an interview with CNBC on Tuesday, the bestselling author of “End the Fed” and “Liberty Defined” accused the central bank of inflating the bubble with its massive easing initiative and record low federal funds rate targets (zero to 0.25 percent) since the end of 2008.
According to Paul, there is a tremendous amount of inflation in the stock market and there is absolutely no genuine economic growth. Essentially, the way asset prices are moving doesn’t necessarily correlate with what’s actually taking place in the overall economy.
“The growth isn’t there. The only thing that grows is the debt, and just think about how much money they have to create value in the stock market,” he said. “The unemployment is very, very bad, despite some of the optimism that is expressed with Wall Street, but that’s all deception. I think you still have to see a healthy economy and people aren’t complaining about structural employment, which is really insidious.”
As the Fed continues to distort the economy with questionable monetary policies, this establishes a disfigured market.
“One thing we have to remember is that when you get false information from artificially low interest rates, that mistakes are made, they’re inevitable. You make mistakes even when you have market rates of interest,” averred Paul. “But when the market rate of interest is so low for everybody, there’s a lot of mistakes, and that’s why you have the bubbles, and that’s why you go through the catastrophe we had in ’08 and ’09, and I think the conditions are every bit as bad as they were in ’08 and ’09.”
In other words, the U.S. stock market and economy is in a vulnerable position. The stock market bubble will eventually incite a correction and a potential crash. “I think we’re very, very vulnerable,” added Paul. “When it’s artificial, it’s distorted, it’s vulnerable, and it’s just looking for the correction.”
The best direction moving forward is to abolish the Federal Reserve System, reiterating a policy that he has maintained since entering Congress for the first time in the 1970s. What the Fed does, according to Paul, has nothing at all to do with free markets, capitalism, savings and other important elements to growing the economy. This makes its existence superfluous.
Paul’s logic coincides with that of Austrian Economics. Economist Murray N. Rothbard articulately wrote in “America’s Great Depression” that artificially low interest rates send the wrong signals to financial institutions and companies. An important factor to consider is time preference and individual value scales.
“An individual can rank prospective and currently held future goods on his or her value scale, just as he or she can rank any goods in the current time period. Thus, an individual might prefer two units of steak next year over one unit of steak this year. (Because of time preference, an individual will always prefer the same quantity of a given good earlier rather than later.) A different individual, however, might consider one unit of present steak to give more utility than two units of future steak. There is thus a potential gain from (intertemporal) trade, with the first individual selling one unit of present steak in exchange for the other individual’s promise to deliver two units of steak next year. The pure rate of interest (i.e. exchange rate between present and future goods) will be established by the various individuals’ time preferences in the same way that any other price is established. The demand for present goods is constituted by the supply of future goods, and vice versa. Although we cannot compare the marginal utility that various individuals enjoy from present and future goods, we can certainly compare their time preference schedules.”
Most likely a correction is coming as illustrated by the article 6 signs of a correction from my book Market Timing: Profitable, Predictable and Preventive (amazon).
I completely agree with Ron Paul and other investors who think that a bubble is forming and is on the verge of bursting. Yes, I agree to that but it will still take at lest a year to reach that situation. So, there is still time for correction. However, I doubt any change will be there in the coming one year as the existing economic belief stresses too much on Monetary Policy rather than putting any stress to Fiscal Policy. This is what monetarism is. They never realize that the economy has entered Liquidity Trap and the tools of monetary policy will not work, until and unless they are well supported by the Fiscal Polices. Government must now stress upon more capacity building directly rather than providing money to the corporates. This is the only way how the economy can expect to survive in the coming years.
Every 6 to 8 years, we forget that the we experience a recession every 6 to 8 years. You can blame it on the president, congress, the fed, people saving too much, people spending too much, taxes, etc. But we will experience market corrections and if people want to make obvious ascertains while claiming their obvious ascertains are profound or unique, God bless them.
the website is called “Economic Collapse News”, I’d be surprised if they reported that the economy was doing well and everything is fine.