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Bubble Talk? It’s Just a Bunch of Hot Air Says Ritholtz

Pras Subramanian

Readers who follow financial news have recently been inundated with a certain type of story. In fact it’s the cover story of Barron’s this week. We at Yahoo Finance are even guilty of dipping our toes in this heavily treaded area. It’s called “bubble talk,” and reporters, pundits, and other market commentators are taking sides.

Barry Ritholtz, CIO and founder of Ritholtz Wealth Management, (and a blogger himself at Bloomberg View), is not shy with his take on whether equities have entered the bubble zone. As Ritholtz puts it, we are in the midst of a “bubble in bubbles.”

“It’s amazing that we have this inability to spot bubbles in real-time, but the same guys that missed dot-com, who missed subprime, who missed derivatives, they’re spotting bubbles everywhere,” he says in the attached video.

Indeed, what Ritholtz is comparing this to is akin to the financial version of the game “whack-a-mole.”  In the last five years we have had commentators calling bubbles in all sorts of asset classes – stocks, gold, commodities, housing. While some may be proven correct (gold, for example), most have missed the boat.  Why investors are wary of trusting stocks in the present environment is pertinent. 

“The classic expression is ‘every general fights the previous war,’ and that’s pretty much what’s going on now,” he surmises. Ritholtz believes psychological (and financial) wounds from 2008 are affecting investing today. “The psychological damage of the collapse is so significant, that it just affects people’s perspectives going forward. When you’re punished every time to buy equities, you’re reluctant to buy equities.”

While he is bullish, Ritholtz advises there are indicators to keep an eye on. Ritholtz is keeping an eye on the advance/decline line, or market breadth, to see if it stays significantly positive. With strong market breadth it’s “easier to stay on the long side,” he says, just as its been a bullish sign for buying equities when bubble talk rises since it’s been “a contrarian indicator” in the past for market performance.

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