Market Watch: Investors are in a Euphoric State as the Stock Market Bubble Gets Bigger
Article by Nigam Arora in Wall Street Journal Market Watch
European Central Bank President Mario Draghi turned ultra-dovish in a speech in Portugal on Tuesday.
Draghi is almost pre-committing to more monetary stimulus as risks rise. Is this a motivation for Federal Reserve Chairman Jerome Powell and his cohorts to cut interest rates as they meet this week?
Please note the following:
• The bubble is already developing in debt, both government and private.
• Lower interest rates will simply enlarge the bubble.
• Bubbles eventually burst. Of course, it is difficult to call when this bubble will burst.
• Volume shown on the chart is relatively low. This indicates that there is not high conviction in this rally in the stock market.
Let’s bring some common sense to the forefront. Is there a free lunch here? The answer from the politicians, central bankers, stock market permabulls as well as from buy-and-hold mom-and-pop investors is a resounding “yes.”
What to do now depends on your belief in this free lunch.
I, for one, do not believe in free lunches. The debt bubble is getting bigger and will eventually burst. Many investors will get badly hurt. Think of it as a party where almost everybody is drunk and all the drunken people claim that nobody is drunk. I would suggest to investors that they enjoy the party but be aware of the risks ahead.
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