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Chart reading is stupid. You could cut that chart off before any of the tech bubble starts and you would be able to say the same thing over and over about the market being in an 'exceptional period'.

1990 - reaching all-time highs, 'exceptional period'

1991 - reaching all-time highs, 'exceptional period'

1992 - reaching all-time highs, 'exceptional period'

1993 - reaching all-time highs, 'exceptional period'

1994 - reaching all-time highs, 'exceptional period'

1995 - reaching all-time highs, 'exceptional period'

>I think there's just too much money sloshing around right now.

Why? Are you the tastemaker in how much money supply there should be? We have inflation numbers to help dictate that. If inflation isn't above its target, then there isn't too much supply.

I don't know why you're getting downvoted (I upvoted you). You make a good point. Valuations are both subjective (your view) and relative (where else can I put my money). This 'boom' could end tomorrow or go on for years to an end. Being early on a market call is the same as being wrong..which is why speaking about frothy valuations is one thing, putting money to work based on those presumptions of frothiness is playing with fire.

If the U.S. stock market is really fairly valued then moving rates up wouldn't be such an issue. Yet, the Federal Reserve can't talk about moving rates up a quarter point six months in the future without the market taking a dive.

Why the anxiety??

Because everyone's freebasing and edging profits thinking they can get out quickly enough right before they loose consciousness.

Exactly. Trying to predict a "bubble burst" using line charts alone is analogous to scrying with tea leaves.

With the housing bubble, it was very clear that the traditionally correlated mortgage and rental prices had separated, signalling that mortgages were in a bubble.

Pointing a chart and saying it's high doesn't prove anything. You need to show signals other than the federal reserve moderating inflation (which is normal).

Tastemaking? Okay, I can try that.

I was visiting a friend last night, who is looking to buy her first house.

She told me that she's been having trouble because people are showing up for $300k houses ($150-200k 5 years ago) and offering, same day, without an inspection, $600k cash offers.

That tastes funny.

Was this in the SF Bay? Because that market is in a bubble from foreign investors looking to unload cash.

I was just gonna say the same thing, SF and NY real estate markets (and a few others) have become asset dumps for the very wealthy and this has hugely distorted prices. We bought a house in the East Bay when the market was more or less at bottom and now I get a postcard almost every week from some local realtor asking if we're interested in cashing out.

I rent a SFH on the peninsula, and I get those same postcards almost weekly.

I think what's most amazing to me is how much realtors are making right now. I'm not sure if it's still standard for the buyer's agent & seller's agent to each take a 3% cut like elsewhere in the country, but I've gotten multiple postcards where a realtor has moved $10MM-$15MM of inventory, in the last quarter, in my neighborhood alone. A 3% cut of that ain't a bad gig...

Only a very few star real estate agents make anywhere near that much. Most close few if any transactions per year. Out of the typical 3% commission per side of the transaction, the agent will only net about half. The rest goes to the broker and expenses.

I'd be surprised if you could find a house there for $300k

The property was purposefully underpriced on the listing.

In an extreme seller's market, it's effectively equivalent to not providing even a listing price. They might as well say $0, because there will be plenty of buyers who show up to establish market price immediately (and then bid up from there).

The DJIA is essentially useless [1]. We should look at the SP500 instead, or the Nasdaq, or... anything that's at least somewhat representative of the state of the US stockmarket.

[1] http://www.fool.com/investing/general/2014/04/18/why-the-dow...

Here's the Nasdaq chart, '73 to Feb 2015: http://i.imgur.com/gyyQtae.png

This is something that people like to spew, but the DJIA has two nice properties that make it worth referencing sometimes.

(1) Its correlation with the S&P 500 is insanely high. So, just using it as a proxy for the S&P is fine.

(2) We've tracked the DJIA going back over a hundred years, so that data is readily available.

Overall, the S&P 500 is a better index, but criticizing someone for using it in their analysis isn't worth the distraction from their actual thesis.

Have you looked at the S&P 500 chart for the time period in question?

The S&P 500 and Nasdaq have the same shape.

I'm no economist, but I agree with this.

One, the real estate market is once again through the roof while homeownership is at the lowest it's been in decades. Seems to me that wealthy people, domestic and foreign, are parking their money in real estate assets, and banks refuse to go through with the foreclosures they've been holding onto since around '09

Next is oil. It's possible that the full brunt of the collapse in oil prices hasn't been felt, but most oil companies were profitable to the tunes of billions of dollars, again. Profit margins were only off about 30% from last quarter, and the predicted merger/acquisition apocalypse analysts were predicting hasn't materialized, while oil prices are on their way to recovery, even though the dollar is ridiculously strong against other currencies at the moment

Hiring has pulled back, wages are stagnated, consumer spending is down, but the stock market is at record highs. Honestly, for the most part I wish the government had let it crash

Chart one, DJIA, adjusted for inflation:

http://home.earthlink.net/~intelligentbear/dj-lt-infl.gif

When you take inflation into account, it doesn't look nearly so interesting.

it actually looks like things are getting _more_ stable.

Much better. Also logarithmic, which was another failing of the above graph. With a line of best fit!

Yes, if the market is overinflated, it's because growth itself has failed to happen.

A Lograthmic chart is much better, but when you add in dividend reinvestment and inflation adjustment you get a vary different chart.

^This. If you don't take into account inflation and don't plot on a log scale, you can't make any sense of a long term stock or bond price chart. It really doesn't make any sense (though it would be nice if this chart were also a broader index).

DIJA chart doesn't include reinvested dividends.

We need to get back to normal interest rates asap. The whole situation has become absurd, every single asset class is ridiculous. Force policymakers to make real changes that boost global growth, not simply lazy monetary policy. When the wealthy stop getting so rich by frothy asset prices, they'll clamor for it too.

In this case I'm not too worried about public equities, it seems to be everything else right now.

That interest rate policy will have some interesting effects on national/state/local/corporate debt payments.

>Force policymakers to make real changes that boost global growth, not simply lazy monetary policy.

The basic problem is that every major economy is simultaneously trying to restart its growth through exports. We're in a currency war.

This is the key insight in my opinion. What are the possible outcomes of this scenario? Hyper inflation? War?

Well, we've been stuck in this situation for a while. I'd say the consequences have been: persistently low inflation because the new money never gets into people's wallets, and lots of capital-asset valuation bubbles.

Ultimately, actual inflation would be a good thing, by helping households deleverage. Instead, the asset bubbles are likely to cause more household debt, and around we will go until another crash.

I honestly think there will be open revolution in at least some countries (well, Greece is already in such a state!) due to the radical detachment of the capital markets, and the political class held captive to those capital markets, from the household sector.

We are indeed in a currency war right now. The Fed lowered interest rates, and pretty much every other economy followed suit. It's especially bad in Asia right now, where many economies have trouble exporting goods without having a lower valued currency. Japan really sent a shock wave around the region when they started pumping a few years ago.

The currency war This may explain why inflation has not followed, but my current favorite explanation is that the middle class has not seen signifigant wage growth over the last 30 years. You only see monetary CPI if more money is chasing fewer goods, but that requires people to have more money to perform that chase. This (combined with the oil panic) was a big reason for the inflation that happened in the 70s: printed money largely went into giving workers a raise, instead of being put into financial investments. I'm not an expert on modern monetary inflation (is anybody at this point?), but when you drop the interest rates to the lowest point in 50 years and have near zero inflation, there's something weird going on.

Most of the wealth generated here is not going into the hands of the middle class. The wealthy invest their money into big (and/or risky) assets like what's being invested in right now. I'm not just talking about a cigar-chomping Daddy Warbucks character when I say "wealthy", I also mean entities like corporations that are able to take out money at very low cost. This isn't necessarily a bad thing, as corporations use this money to invest and strategize. But we're not seeing a lot of gains for the majority of Americans, and that's a problem, especially when things they need (like real estate) spike up a lot.

It's important to note that monetary inflation is not the same thing as the cost of a good going up. For example, if oil becomes more expensive, it makes goods increase in price due to the increased cost of producing and shipping those goods. That's not the same thing as prices going up because there's more money chasing the same amount of resources. Production cost inflation doesn't bother me as much as monetary inflation does (frankly, we need expensive oil to signal that it's time to look for alternatives), but we're not really seeing either right now.

The one positive metric I'm seeing for the markets, ironically, has been a reason for a lot of it's volatility lately. When oil goes down in price, it's good for the economy, and consumers have more money to purchase things. It's been estimated that 80% of the stock market benefits from lower energy costs, but of course, people still freaked out when oil tanked and sold a lot of stocks, especially in the oil sector.

Fit an exponential curve to that DJIA graph and I think it's hard to say if we're up or down.

Plot it with a logarithmic y axis. Doesn't look as bad, does it?

I'd probably look at the S&P Price/Earnings Ratio. You can't just go by price because what if the US economy really is growing faster or slower? The stock market should reflect that, and it shouldn't be growing at some constant rate.

P/E ratios are a bit high compared to average, but not crazily so.

P/E highly depends on an interest rate. If interest rates are low, higher P/E are justifiable.