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The Stock Market Is at Bubble Levels – And Yes, Inflation Is to Blame

Last Updated September 26, 2020 5:03 PM
William Ebbs
Last Updated September 26, 2020 5:03 PM
  • The government is misleading people about inflation. While consumer prices remain stable, asset prices are soaring.
  • The S&P 500 is trading at levels unseen since the tech bubble in 2000.
  • This represents extreme asset price inflation caused by massive government stimulus, and it will drive income inequality in the country.

The United States’ core inflation rate stands at 1.6% . To hear the government tell it, that’s a low number compared to the Federal Reserve’s target of 2%. That’s misleading. Official calculations – which center on consumer prices – don’t consider the relentless inflation in education, housing, and especially the stock market.

Stocks are trading at forward earnings multiples unseen since the tech bubble of 2020. For new investors, it’s simply impossible to get a good deal on stocks right now. This trend will drive income inequality and worsen social instability in the United States.

Unlimited Stimulus Drives Stock Market Valuations to Bubble Levels

federal reserve stimulus
In a less sophisticated economy, this money printing would have caused runaway inflation | Source: AP Photo/Jacquelyn Martin

We all remember back in March when the stock market was in a tailspin due to the coronavirus pandemic. All of that changed when the Fed stepped in with a virtually limitless  monetary stimulus program.

Fed Chair Jerome Powell directed the central bank to buy up corporate bonds and ETFs, flooding financial markets with liquidity and expanding the Fed balance sheet to around $7 trillion  – which is a little over $1,000 for every person on earth.

In a less sophisticated economy, this money printing would have caused runaway inflation, as we see in places like Venezuela, Zimbabwe, and Lebanon. U.S. financial markets are insulated away from the regular economy, so this hasn’t happened.

Instead, asset prices are soaring. Let’s use Tesla stock as an example.

Tesla Stock Is an Example of Asset Price Inflation

tesla stock price
Tesla’s massive rally may be partially due to excessive liquidity in financial markets. | Source: YCharts 

This time last year, Tesla traded at around $215 per share. A massive pandemic and a global recession later, the stock has soared nearly 600% to more than $1,500 per share. Did Tesla’s intrinsic value really increase 5x in just 12 months?

No. This is a clear example of asset price inflation.

Tesla has a market cap of $290 billion – a staggering 810 times earnings – because there is too much liquidity in the system. And it’s not the only company with an astronomic valuation in today’s over-stimulated stock market.

The S&P 500, a measure of the 500 largest listed companies in the U.S., is trading at levels not seen since the dot-com bubble in 2000.

stock market valuations are approaching dot-com bubble levels
The stock market is trading at near-record valuations. And the party is just getting started. | Source: Bloomberg via Abigail Doolittle 

What Does Asset Price Inflation Mean for Regular People?

Because wealthier people disproportionately own stocks, asset price inflation will accelerate income inequality. Corporations and the wealthy can use their enlarged capital bases to acquire more assets – including real estate. This will drive up the cost of housing and rent in major cities.

Quality stocks and other financial instruments are becoming increasingly unaffordable for the middle and lower classes who have seen their wages stagnate in recent years.

income inequality in the united states
Income inequality soared after the recession in 2007 because of extreme government stimulus. | Source: The Economist 

This isn’t the way capitalism is supposed to work.

Recessions should be a reset button where investors who made bad bets get wiped out, so stock market valuations fall and corporate earnings transfer to better investors.

The current system of Federal Reserve stimulus, bailouts, and corporate welfare increases income inequality, which will lead to rising levels of economic inefficiency and social instability.

Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. Unless otherwise noted, the author has no position in any of the stocks mentioned.