“With U.S. stocks hitting all-time highs and bond yields under pressure, bubble talk is rampant. But you shouldn’t pay any attention to it, according to Princeton economics professor and New York Times columnist Paul Krugman.
In his Friday column, Krugman writes that there “definitely” is no bond bubble and is “probably not” a stock bubble, either.
The Nobel laureate takes a stab at defining a bubble, calling it a situation in which asset prices appear to be based on implausible expectations for the future. Think of dot-com prices in 1999 or housing prices in 2006. In the latter case, housing prices only made sense if you thought home prices would continue to significantly outpace buyers’ income for years.
When it comes to bonds, you wouldn’t want to buy a 10-year Treasury at a yield of less than 2% if you believed the Fed would be raising short-term rates to 4% or 5% soon, notes Krugman notes, who then asks why you’d believe any such thing:
The Fed normally cuts rates when unemployment is high and inflation is low — which is the situation today. True, it can’t cut rates any further because they’re already near zero and can’t go lower. (Otherwise investors would just sit on cash.) But it’s hard to see why the Fed should raise rates until unemployment falls a lot and/or inflation surges, and there’s no hint in the data that anything like that is going to happen for years to come.
There are several reasons for the bubble fears, but one may have something to do with what he describes as a “deep hatred” for U.S. Federal Reserve Chairman Ben Bernanke “and everything he does.” ….”
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