Tapering is new jargon,in financial makets it describes the reduction in the Fed's stimulus or quantity of monthly asset purchases. In mathematics, it is the second order derivative of money supply. When the market gyrates on a second order derivative phenomenon, you know it is a really sensitive beast. In the financial world, a sensitive thing is usually a bubble.
The current market level gives it a price-earnings ratio of 15 to 16 times. Compared to the historical average of 15, it does not look overvalued. But, three factors mean the valuation is stretched.
First, a declining interest rate could account for one-fifth of the earnings. The interest rate cycle has bottomed. Sooner or later it will go back up. Second, the earnings may disappoint. The global economy is weak, growing half as fast as in the past. The diminished earnings prospect makes even the historically normal valuation expensive. Third, the average valuation masks the bubbly atmosphere in most stocks. Energy, telecoms and financials are cheap due to reasons linked to their sector. The rest of the market has a very high valuation.
The odds are that the United States' stock market is in the early stages of a bubble, say, 30 percent above a sustainable level. A bubble, after expanding gradually for a period, wants to surge and then burst. In 1999 and early 2000, the U.S. stock market did that. It seems to really be in a euphoric mode now. Without an intervention, we could see a repeat of what occurred in 1999 and 2000. That would be bad news for the Fed. It would expose the futility of its bubble policy.
Tapering is something deliberately introduced to cool a stock market's fires. The Fed wants to hold the bubble in animated suspension. Many have tried to control a bubble. None succeeded. Can Ben Bernanke pull it off? Maybe only for a short time. A bubble either expands or contracts. Holding steady is not a natural state. When the market declines significantly, say by 10 percent, you can bet that Bernanke would say that there is no end in sight for stimulus. The market would then throw away any caution and really party big. A repeat of 1999-2000 may be delayed for a month or two, but will happen eventually.
Source: Caixin
Tapering is something deliberately introduced to cool a stock market's fires. The Fed wants to hold the bubble in animated suspension. Many have tried to control a bubble. None succeeded. Can Ben Bernanke pull it off? Maybe only for a short time. A bubble either expands or contracts. Holding steady is not a natural state. When the market declines significantly, say by 10 percent, you can bet that Bernanke would say that there is no end in sight for stimulus. The market would then throw away any caution and really party big. A repeat of 1999-2000 may be delayed for a month or two, but will happen eventually.
Source: Caixin
