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Financial consultant warns that U.S. is entering third largest stock bubble

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Smithers warns that bubble will grow until it pops

A new research report by financial consultant Andrew Smithers, chairman of Smithers & Co., suggests that the U.S. is in the midst of another stock-market bubble, much like the bubbles in 1853, 1906, 1929, 1969 and 1999.

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By Catholic Online (NEWS CONSORTIUM)
Catholic Online (https://www.catholic.org)
7/18/2014 (8 years ago)

Published in Business & Economics

Keywords: Finance, News, Market

LOS ANGELES, CA (Catholic Online) - U.S. stocks are now overvalued by about 80% on certain key, long-term measures, according to Smithers.

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The five dates listed above are the only times since 1802 when data began being tracked, when stocks have been overvalued by 50% or more, and only 1929 and 1999 have bigger bubbles than today, and both of those were followed by disastrous crashes.

Smithers suspects that we are now in the third biggest stock bubble in U.S. history, and that it will grow even bigger before it comes back down.

This research studied data based on a combination of measures: 30-year returns after the bubble and a comparison of U.S. stock prices-since 1900-in relation to a key measure that looks how much it would cost to replace a corporations assets from scratch-called "Tobin's q".

Smithers argues that stock prices are likely to go even higher because they are being driven up by two forces. The first is the Federal Reserve's "quantitative easing" program, the policy of giving banks money in the hope that some of it finds its way into the wider economy, and the second is corporate buying. Today the top buyers of U.S. stocks are companies not people, and many of these companies have been borrowing aggressively to purchase their own stock.

Probably the most important implication of this study is not about what may happen within a year, but that stocks in aggregate do not always generate high returns. The stock-market, even through modern history has gone in long waves, with booms of several decades, followed by mediocre or even disastrous returns of many years.

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