It’s a loaded term, a word that’s been used to describe the housing market, tech boom and even the student loan industry.
On Twitter the hashtag “bubble” has become a staple of the American lexicon: it’s been tweeted nearly 30,000 times in the past six months. But referring to the stock market as a bubble would be a misnomer, says New Yorker staff writer James Surowiecki. In his latest column titled “Boom or Bubble?” Surowiecki argues that the run-up in stock prices has not been fueled by easy money. He refutes charges that markets are “overvalued, overbought and overbullish” as characterized by hedge fund manager and longtime bear John Hussman.
“The argument for a stock market bubble is flawed,” he writes. “The four most dangerous words in investing may be ‘This Time, it’s different.’ But this time it is different.”
Moreover, “the fact that people are worried about bubbles and talking so much about them is actually part of the reason why this isn’t one,” Surowiecki tells The Daily Ticker. “The current valuation of the market is I think by almost anyone’s standards pretty reasonable.”
Surowiecki starts his anti-bubble thesis with an examination of corporate profits.
He says market bears are stoking bubble fears because they believe earnings are artificially inflated and are too high as a percentage of gross domestic product. Earnings may be at record levels, but corporations are also paying less in taxes: around 20% today versus almost 50% in 1951. Moreover, he cites a study that found more than half of S&P 500 multi-nationals get 46% of their earnings from abroad – a “relatively new phenomenon,” according to Surowiecki. Foreign earnings have nearly tripled since 2000 so “comparing corporate profits only to American GDP yields a false picture of how companies are doing,” he explains.
Last but not least, the decline of labor unions has allowed companies to slash payrolls and reduce the bargaining power of workers, which has helped profits to remain high.
“The only way that profit margins will fall is if the economy starts to accelerate and workers start to get more leverage,” Surowiecki says. “But profits won’t see a steep decline unless we go back to a real recession. I don’t see that right now.”
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