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The stock market bubble starts to burst

Financial Events
By Paul Hodges on 23-Jan-2022

For the past 20 years, the central banks have been happily creating bubbles in the stock market by printing more and more money at lower and lower interest rates. Finally, now, it looks as they have run out of air – and the NASDAQ bubble is already starting to burst. 

The chart tells the story of what has been happening:

  • On the left is the “stimulus spending” by the main Western central banks – USA, EU, Japan, Swiss, UK
  • It started in a small way after the dotcom crash and the 9/11 terror attack, and reached $5tn by the end of 2008
  • But then it really increased, doubling to $10tn by 2015, reaching $15tn by 2020 and $28tn by the end of last year

2010 was, of course, the moment when the US Federal Reserve threw away its previous role of:

“Taking away the punchbowl as the (stock market) party starts to get going”

Instead, it adopted Chairman Ben Bernanke’s theory that:

“Higher stock prices will boost consumer wealth and help increase confidence“.

And even worse, we have recently learnt (thanks to the Richard Clarida scandal) that it allowed Fed Governors to trade on their inside information about Fed policy moves. As the Financial Times’s financial commentator, Rob Armstrong, notes:

“There are lots of subtle and slippery ethical issues that face anyone with tradeable inside information. Nothing is subtle about this case. It is batshit insane and makes the Fed look crooked”

We therefore have to assume that the obvious linkage with NASDAQ’s rise, as shown in the chart, was based:

  • Not only on the idea that higher stock markets were somehow a good idea for the economy
  • But also, that was what good for the economy was good for Fed Governors’ bank balances

The first idea was always crazy, as I have noted here many times. In December 2019, the Fed’s support for the S&P 500 was even my Chart of the Decade:

“The Fed’s focus on boosting the stock market is clearly going to end in a debt crisis” and warned:

Now we seem to be learning that it was also being done for personal gain.


Unsurprisingly, stocks have begun to sell off as traders realise they can no longer rely on the central banks to support the market. By the end of last year, as the chart shows, it was really just 7 NASDAQ stocks keeping the bubble aloft:

  • Using Ben Graham’s long-time valuation formula, Tesla was the most over-valued by 3419%
  • Amazon was next at 760%, Netflix at 580%, Microsoft at 419%
  • Then there was Apple at 368%, Google (Alphabet) 320%, and Facebook at 280%

These were clearly bubble valuations, and already they are starting to reduce.

What we also know is that’s Fed’s foolishness will likely now lead to a major downturn in financial markets. After all, the upturn has followed the usual pattern of all bubbles, as shown in the chart.

We saw the Mania phase last year in all its glory with the rise of “meme stocks”. As I noted last summer, stock markets had

“Essentially become a casino, financed by ever-growing amounts of debt. May’s margin data was the highest on record at $862bn. And who can forget the Dave Portnoy phenomenon, with his 3.5m Twitter followers and motto “stocks only go up“?”

Just as I expected then, markets have since had “one last hurrah”. But as I also noted then, Rule No 6 of legendary investor Bob Farrell is worth remembering as the Fed’s support starts to disappear:

“Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways.” Anyone wanting to investigate further, might like to read long-time bubble spotter Jeremy Grantham’s commentary on the outlook and his summary below.