Richard Bernstein joins the chorus of people on the side who say there is no equity market bubble. In his latest letter he says:
“In his wonderful book, Devil Take the Hind Most, Edward Chancellor demonstrates that financial bubbles tend to follow similar patterns. Most important, his work suggests that valuation alone does not constitute a financial bubble. Financial bubbles go beyond the financial markets and tend to pervade society.
Our interpretation of Chancellor’s work is that there are five common characteristics to a financial bubble. The US equity market does not seem to match these characteristics.
The five characteristics are:
1) Available liquidity
2) Increased use of leverage
3) Democratization of the market
4) Increased turnover
5) Record new issues
One could certainly argue that the Fed’s extraordinary efforts to stimulate the US economy have provided tremendous liquidity to the financial markets. However, we find scant evidence that the other four characteristics currently apply to the US equity market. For example, many have noted that volume was weak during 2013, new issues were not rampant, and protection was more important to most investors than using leverage to accentuate performance.”
Hmmm. There’s certainly increased liquidity. There’s certainly a substantial increase in margin debt. But the other three characteristics seem to confirm Bernstein’s thinking. What do you think? Equity bubble or no?