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Liked 2013? Why 2014 could be better: The case against a bubble

Talking Numbers

Some of the biggest names in finance are throwing around the b-word: Bubble. But are the markets really bubbling or is there a good reason for its recent rise?

Some of the biggest names in finance are throwing around the b-word: Bubble. But are the markets really bubbling or is there a good reason for its recent rise?

In the past couple of days, the world "bubble" has, well, been bubbling up as some of world's largest fund managers are using that term to describe the current markets. They ultimately point to one source for this effervescence: The Federal Reserve Bank.

Since the start of the financial crisis five years ago, the Fed has been adding dollars into the financial system by buying Treasury and mortgage bonds. That has raised bond prices, thus lowering interest rates since bond yields move inversely to bond prices. Part of the Fed's reasoning for this policy, known as "quantitative easing" ("QE"), is that it would make financial institutions flush with cash from selling bonds to the Fed lend to businesses and individuals at cheap rates.

(Read: US bond prices slip as data offers hope on economy)

That money had to go somewhere and, according to more than a few large fund managers, it has gone to the stock market. Since the market's bottom in 2009, the S&P 500 has risen 160%. (To be sure, though, the S&P's current levels are just 12.7% higher than its 2007 peak).

As of last December, the Fed upped its bond-buying game. Now it's doing so at a rate of $85 billion every month. And, since the start of the year, the S&P 500 is up almost 24%. The Fed was expected to taper its QE buying in September but decided against doing so, saying economic conditions required the stimulus to remain at the same pace.

At a recent conference, Laurence D. Fink, CEO of BlackRock, a firm managing $4.1 trillion in assets, said:

"It’s imperative that the Fed begins to taper… We’ve seen real bubble-like markets again. We’ve had a huge increase in the equity market. We’ve seen corporate-debt spreads narrow dramatically."

Then on Wednesday, Bill Gross, co-founder of Pimco, the largest money market mutual fund in the US with close to $2 trillion under management, said this on CNBC's Street Signs:

"I think the markets are bubbly, all asset prices are bubbly, bond prices, stock prices. Steve Liesman has pointed out profit margins are bubbly. To the extent that any of them can be sustained is the ultimate test in terms of tapering or, you know, the purchases by the Fed in terms of adding them to their balance sheet. Yes, slightly bubbly."

But Andrew Busch, editor and publisher of The Busch Report, believes the market isn't necessarily as frothy as has recently been described. "It's really tough to call a bubble," says Busch. "Alan Greenspan back in 1996 said 'irrational exuberance' and that bubble didn't pop until 2000."

The key for the markets, according to Busch, remains growth. "If you have growth at 2% or less next year, yes, the stock market will come off," says Busch. "But, if growth is at 2.75% or higher, then these valuations are justified. Actually, they're probably too low."

(Watch: This could be a scary sign for market—or not)

Steven Pytlar, Chief Equity Strategist at Prime Executions, looks at the charts for the S&P 500 versus one of the more famous bubbles out there – the NASDAQ Composite Index in the late 1990s.

"The only thing in the market not telling us that it's a bubble actually is the charts, which tell us there really is no comparison whatsoever right now between the S&P 500 and the NASDAQ from '90 through 2000 phase," says Pytlar.

What would it take for the charts to show a bubble according to Pytlar? And, what happened when over the last 60 years after each market rally more than 15%? Watch the video above to see Busch on the fundamentals and Pytlar on the technicals.

More from Talking Numbers:
Market set for ‘a sharp and swift decline’: Trader
Billion-dollar fund manager: This sector is overvalued
Why Garmin hasn’t gotten lost

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