Quantitative easing has failed to promote economic activity as expected, but it has driven interest rates to virtually zero for six years. Given that backdrop, asset bubbles are to be expected, said KC Mathews, CIO and economist at UMB Bank . “Clearly we are not experiencing a productivity boom similar to those that have promoted bubbles in the past. However, we are experiencing the other end of the equation-historically low interest rates,” said Mathews. “I believe that a bubble is developing, caused by aggressive monetary policy around the globe.” Presently the valuation of the market is “rational”, according to Mathews, with the current price earnings (PE) ratio 20 times the last 12 months earnings and the current yield on the 10-year Treasury at 1.5%. In early 2000 when there was clearly a bubble, the PE ratio was 30 times trailing earnings and the yield on the 10-year Treasury was 6.8%. “Keep in mind that low interest rates and low inflation should support a higher multiple, so today 20 times trailing earnings would be defined as rational,” said Mathews. Mathews labels today’s bubble “rational” because he can’t provide the counter-factual argument. “What if Ben Bernanke didn’t execute on QE? Would we have fallen into a recession?” asks Mathews. “I don’t know; no one does and more importantly, it never happened.” That said, it appears to be rational that the Federal Reserve (Fed) would lower interest rates and keep them low for quite some time. In addition, by analyzing the global economy, one could conclude that low interest rates are rational and the bubble will remain in place for some time. As to when this bubble will become irrational to the point it pops, Mathews said most asset bubbles come and go within a three to five-year period. He said defensive sectors like utilities are looking the most inflated at this point and are worth monitoring. “Rational bubbles become irrational when valuations can’t be justified. I do not believe we are there yet,” said Mathews.
Subscribe to TheStreetTV on YouTube:
For more content from TheStreet visit:
Check out all our videos:
Follow TheStreet on Twitter:
Like TheStreet on Facebook:
Follow TheStreet on LinkedIn:
Follow TheStreet on Google+:
source
