Earlier this week, Nouriel Roubini had a column in the Financial Times warning that an asset bubble is forming. He asserts that investors are taking advantage of low interest rates and a weak dollar to speculate on assets, driving up prices. I think he's probably right. He worries, then, that this is forming yet another bubble. That might be true as well, but I need a little more convincing that this asset bubble will be as severe as Roubini appears to believe in the U.S.
Really, Roubini's argument is more about global assets, but let's consider what might specifically happen in the U.S. Here's some of what he says:
Since March there has been a massive rally in all sorts of risky assets - equities, oil, energy and commodity prices - a narrowing of high-yield and high-grade credit spreads, and an even bigger rally in emerging market asset classes (their stocks, bonds and currencies). At the same time, the dollar has weakened sharply, while government bond yields have gently increased but stayed low and stable.
. . .
But while the US and global economy have begun a modest recovery, asset prices have gone through the roof since March in a major and synchronised rally. While asset prices were falling sharply in 2008, when the dollar was rallying, they have recovered sharply since March while the dollar is tanking. Risky asset prices have risen too much, too soon and too fast compared with macroeconomic fundamentals.
I've argued something similar myself -- that the stock market, in particular, can't be an accurate reflection of what the recovery will look like. It's not going to be nearly as steep a recovery as the climb of the Dow would indicate.