3 Reasons This Bubble Will Continue to Grow


"Periods of cheap money policy. . .have always resulted in bubbles."

Rallies and bubbles tend to last far longer and grow much larger than most anyone expects. . .there’s no reason to expect this time around to be any different.

The most important driver behind this rally has been cheap money. Periods of cheap money policy—low interest rates and sharp increases in money supply—have always resulted in bubbles.

Here are three reasons, which dominated mainstream headlines this week, the rally could last quite a while longer:
  1. The Herd Still Hugs the Sidelines: Since the rally began, there have been very few true believers. Like generals who tend to fight the last war, investors fail to adjust to what the market gives them. Most investors failed to take what the market gave them and passed up on the 2009 rally—the hottest investment of 2009 was bonds.

  2. Jim Chanos on China Bubble: It's not just the herd falling back in love with stocks or another asset class, though. There's also the media bias. For example, Jim Chanos reiterated his bearishness on China has all of a sudden become big news.

    The China miracle has been a divisive one for many investors. We all know the boom in China has been fueled by government spending, cheap money; it's just like the rest of the world—only on a much bigger scale. Frankly, only time will tell if and when the China bubble will burst.

    The important thing here is that Chanos has been getting so much attention. When we're truly in a euphoric bubble, investors like Chanos will not get any exposure. Their views will seem "antiquated" because they "just don't get it."

  3. Sense of Urgency and a New Paradigm: All bubbles are marked by a euphoric period when almost all investors are drawn in. It's when fear and greed, the two most powerful market forces, are working together. Greed brings many investors in. Fear of missing out brings in the rest.
Also, while everyone is bidding up the prices of a select group of assets, you'll see them start to rationalize it all. Think about "price-to-eyeballs" ratios and how "house prices only go up." These are new paradigms which will dominate the bubble. They'll be strong enough to foster the get-in-now-or-you'll-never-get-in boom right before the bust.

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