The Next Market 'Bubble' Is In Punditry

If a well-known economist couldn't spot the biggest equity bubble ever, I wouldn't put much faith in his prediction of a bursting bond bubble.

The Aug. 18 Wall Street Journal contained an op-ed headlined "The great American bond bubble," which offered some arguments that I felt could not go unchallenged.

The authors were Jeremy Schwartz, WisdomTree's director of research, and well-known economist Jeremy Siegel, the latter a man who was wildly bullish about stocks during the biggest equity bubble in history (his cautionary Wall Street Journal op-ed in March 2000 regarding tech stocks with huge multiples notwithstanding).

Over the past year, I have made no secret of my belief that bonds are going to cost investors a lot of money at some point. However, when someone such as Siegel shows so much confidence that the bond market is a bubble about to burst that he's willing to write about it in The Journal, I have a feeling those looking to make money by shorting bonds might need a bit more patience.Msn.Video.createWidget('PlayerAd1Container', 'PlayerAd', 300, 213, {"configCsid": "MSNmoney", "configName": "player-money-articles-16x9", "player.vcq": "videoByUuids.aspx?uuids=96099baa-52e3-4e2d-9939-6d7c01018889,d021c9f3-7d42-4d3c-984c-3d08d7eec6d3,56564bf6-ac75-db58-bdd1-1ca4049d2364,0516ba1c-37fa-47f9-ab18-6c499e0cc682,500abfa9-4bbf-4666-abaf-909556f04093,8c7aa31a-2829-48eb-b319-c0bff94eb92c,0c0efc75-0408-449a-977c-4049d5a0f69b,c260772e-45af-4aba-85ef-be300ab46a3a,69a01997-9949-445d-99fa-485da167720a", "player.fr": "iv2_en-us_money_article_16x9-Investing-ContrarianChronicles"}, 'PlayerAd1');Msn.Video.createWidget('Gallery4Container', 'Gallery', 304, 150, {"configCsid": "MSNmoney", "configName": "gallery-money-articles", "gallery.linkbackLocation": "bottom_left", "gallery.numColsGrid": "3", "gallery.categoryRequests": "videoByUuids.aspx?uuids=96099baa-52e3-4e2d-9939-6d7c01018889,d021c9f3-7d42-4d3c-984c-3d08d7eec6d3,56564bf6-ac75-db58-bdd1-1ca4049d2364,0516ba1c-37fa-47f9-ab18-6c499e0cc682,500abfa9-4bbf-4666-abaf-909556f04093,8c7aa31a-2829-48eb-b319-c0bff94eb92c,0c0efc75-0408-449a-977c-4049d5a0f69b,c260772e-45af-4aba-85ef-be300ab46a3a,69a01997-9949-445d-99fa-485da167720a;videoByTag.aspx%3Ftag%3Dmoney_dispatch%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1;videoByTag.aspx%3Ftag%3Dbest%2520of%2520money%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1"}, 'Gallery4');The commentary begins in a rather misleading fashion, considering Siegel's continued cheerleading during the stock market bubble of the late 1990s:

"Ten years ago we experienced the biggest bubble in U.S. stock market history -- the Internet and technology mania that saw high-flying tech stocks selling at an excess of 100 times earnings. The aftermath was predictable: Most of these highfliers declined 80% or more, and the Nasdaq ($COMPX) today sells at less than half the peak it reached a decade ago."

The problem I have with that statement is that the authors seem to be taking a page out of former Federal Reserve chief Alan Greenspan's revisionist history textbook. Yes, the aftermath was predictable, but it wasn't the one Siegel had predicted, as it wasn't those few stocks that were the problem. It was the "cult of equities," in which people felt stocks had no risk -- a view Siegel helped promote. Right place, wrong time Just to show that Siegel (along with his co-writer) really doesn't understand what happened, even with 10 years of hindsight, the Wall Street Journal piece ends with this statement: "One hundred times earnings was the tipping point for the tech market a decade ago. We believe that the same is now true for government bonds."

That isn't true at all. Legions of stocks sold for far in excess of a hundred times earnings and in fact were priced in terms of eyeballs and other goofy measurements. There was no magic tipping point related to valuation. The bubble burst -- i.e., "tipped" -- as it always does, when it became exhausted.

Search Bing and decide: Is there a bond bubble?

The bond market, too, will become exhausted somewhere along the way, but I would not look to Siegel to identify when, especially considering that he believes the outlook for the country is on the OK side -- that is, stocks discount the risk and therefore should be bought (thus Treasurys are vulnerable). Perhaps if he understood that the bond market is a train wreck because we're living beyond our means and are headed toward a funding crisis, I might be able to take him more seriously.

I don't want to make too much out of one column, but if I were even thinking about selling bonds short in the near term, I would have to think twice about it based on this one.

Continued: A closer look at the tech-age wreckageMore from MSN Money

The cost of this time down: Stagflation

Is America the next Japan?

A patently obvious way to add jobs

Stocks on the road to nowhere

The Glenn Beck school of investing

 1 | 2 | next >

Rate this Article Click on one of the stars below to rate this article from 1 (lowest) to 5 (highest). LowThank you for rating.UGR('ratCntrl')High var avgRating=0;avgRating=8.583941; if(avgRating!=0){avgRating=avgRating/2;avgRating=Math.round(avgRating*100)/100;var sDisplayText="Average rating: " + avgRating + " from ";var usersCount=137;sDisplayText = sDisplayText + usersCount;if (usersCount==1)sDisplayText=sDisplayText + " user";else sDisplayText=sDisplayText + " users";avgRatingElem=document.getElementById("averageRating");avgRatingElem.innerText=sDisplayText;} View all top-rated articlesE-mail us your comments on this article Discuss in a message board MSN Money InsightNew Investor CenterMarket DispatchesJubak's JournalTop Stocks blogCompany FocusContrarian ChroniclesSmart Spending blogFast AnswersDecision CentersStart InvestingMutual FundsFind Hot StocksSimple StrategiesPower ToolsInvesting for IncomeReal Estate InvestingRecent Contrarian Chronicles ArticlesCost of this time down: Stagflation 08/20/2010A patently obvious way to add jobs 08/13/2010Stocks on the road to nowhere  08/06/2010More . . .Contrarian ChroniclesAbout Contrarian ChroniclesLearn the Contrarian Chronicles lingoSubscribe to Market Rap on Fleckenstein CapitalFund data provided by Morningstar, Inc. © 2009. All rights reserved.StockScouter data provided by Gradient Analytics, Inc.Quotes supplied by Interactive Data.MSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.Msn.Video.createWidget('Gallery8Container', 'Gallery', 500, 230, {"configCsid": "MSNmoney", "configName": "gallery-money-article-site-wide"}, 'Gallery8');msft.msn._ic.cid='83indnc4x8f7x0xr3n3nr9irmwyugfns';msft.msn._ic.pst=false;msft.msn._ic.pgn=1; Be the first to commentAdd a commentShow commentsSort by:Newest firstOldest first_uc2f12('iucGo');1 - 2 of 2PreviousNextjpc000 #18/28/2010 11:29 AM

I have been a big fan of Bill's for years. He convinced me that the real estate bubble was going to bust and I resisted the trend of upsizing. I will always be grateful.

 

However in his last two articles he has reiterated a couple of his ideas that I believe are incorrect. First, he is saying we are  headed toward a period of inflation. While this may be true for commodities, especially food and energy, it is most certainly not true for real estate, wages, and consumer goods. While we have printed way to much money lately we gave a lot of it to banks and corporation who are hoarding it. Sure, we will have inflation at some point but I just don't see it anytime soon.

 

Second, is his weird fascination with Microsoft. They are profitable because they are a monopoly not because of their great products. I could go into great detail on why this is true but a one word explanation will suffice, Vista. It is also worth noting that the rest of the world is less tolerant of Microsoft's monopoly than we are in the USA.

 

The computer industry has always been driven by the decreasing price of processing power and memory. Memory prices have leveled out in the last couple of years. Much more dramatic has been the slowdown in processor improvements. Intel is selling processors that are nearly three years old for the price they were sold at two years ago. Moore's law is dead. With new innovation the computer industry could continue to do well but it won't be led by Microsoft, HP, or Dell. Even if it does well the boom days are unlikely to return.

 

 

 

ReplyReport AbuseWorking Monday #28/29/2010 6:53 PM

Bonds go on the skids for how long?

 

Corporations and Countries get re-sized for value!

 

Have a safe week ahead and see where we go by Friday.

 

 

 

ReplyReport Abuse1 - 2 of 2PreviousNext_ucf13('0'); _iuc2Om1('MSNPortalInlineComments','Initial_Load_Comment_View','http://articles.moneycentral.msn.com/Investing/ContrarianChronicles/the-next-bubble-is-in-punditry.aspx?page=2&','en-us');Are you sure you want to delete this comment?Report AbusePlease help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.CategoriesSpam or advertisingChild pornography or exploitationProfanity, vulgarity or obscenityCopyright infringementHarassment or threatOtherAdditional comments(optional)100 character limit To add a comment, pleasesign-in/*MSN PrivacyLegalAdvertiseRSSHelpFeedbackSite mapAbout our ads© 2010 Microsoft/*

"Ten years ago we experienced the biggest bubble in U.S. stock market history -- the Internet and technology mania that saw high-flying tech stocks selling at an excess of 100 times earnings. The aftermath was predictable: Most of these highfliers declined 80% or more, and the Nasdaq ($COMPX) today sells at less than half the peak it reached a decade ago."

The problem I have with that statement is that the authors seem to be taking a page out of former Federal Reserve chief Alan Greenspan's revisionist history textbook. Yes, the aftermath was predictable, but it wasn't the one Siegel had predicted, as it wasn't those few stocks that were the problem. It was the "cult of equities," in which people felt stocks had no risk -- a view Siegel helped promote. Right place, wrong time Just to show that Siegel (along with his co-writer) really doesn't understand what happened, even with 10 years of hindsight, the Wall Street Journal piece ends with this statement: "One hundred times earnings was the tipping point for the tech market a decade ago. We believe that the same is now true for government bonds."

That isn't true at all. Legions of stocks sold for far in excess of a hundred times earnings and in fact were priced in terms of eyeballs and other goofy measurements. There was no magic tipping point related to valuation. The bubble burst -- i.e., "tipped" -- as it always does, when it became exhausted.

The bond market, too, will become exhausted somewhere along the way, but I would not look to Siegel to identify when, especially considering that he believes the outlook for the country is on the OK side -- that is, stocks discount the risk and therefore should be bought (thus Treasurys are vulnerable). Perhaps if he understood that the bond market is a train wreck because we're living beyond our means and are headed toward a funding crisis, I might be able to take him more seriously.

I don't want to make too much out of one column, but if I were even thinking about selling bonds short in the near term, I would have to think twice about it based on this one.

Continued: A closer look at the tech-age wreckageMore from MSN Money

 1 | 2 | next >

I have been a big fan of Bill's for years. He convinced me that the real estate bubble was going to bust and I resisted the trend of upsizing. I will always be grateful.

 

However in his last two articles he has reiterated a couple of his ideas that I believe are incorrect. First, he is saying we are  headed toward a period of inflation. While this may be true for commodities, especially food and energy, it is most certainly not true for real estate, wages, and consumer goods. While we have printed way to much money lately we gave a lot of it to banks and corporation who are hoarding it. Sure, we will have inflation at some point but I just don't see it anytime soon.

 

Second, is his weird fascination with Microsoft. They are profitable because they are a monopoly not because of their great products. I could go into great detail on why this is true but a one word explanation will suffice, Vista. It is also worth noting that the rest of the world is less tolerant of Microsoft's monopoly than we are in the USA.

 

The computer industry has always been driven by the decreasing price of processing power and memory. Memory prices have leveled out in the last couple of years. Much more dramatic has been the slowdown in processor improvements. Intel is selling processors that are nearly three years old for the price they were sold at two years ago. Moore's law is dead. With new innovation the computer industry could continue to do well but it won't be led by Microsoft, HP, or Dell. Even if it does well the boom days are unlikely to return.

 

 

 

Bonds go on the skids for how long?

 

Corporations and Countries get re-sized for value!

 

Have a safe week ahead and see where we go by Friday.

 

 

 

Read Full Article »