Yves Smith writes the blog Naked Capitalism. She is the head of Aurora Advisors, a management consulting firm, and the author of “Econned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism.”

It’s hard to understand how anyone can see the U.S. stock market as in anything other than bubble territory. But it can still go higher before the fat lady sings.

Experts ranging from economist Robert Shiller, who famously called both the dot-com and housing excesses, and the mega fund managers Bill Gross of Pimco and Larry Fink of Blackrock have applied the “b” word to the stock market. And it’s hardly a mystery why.

As workers see, we are only technically in recovery. Only investors have seen housing gains. Price ratios grow and only the Fed sustains the market.

The Fed’s policies of super-low interest rates and quantitative easing, which have lowered yields on Treasury and mortgage bonds, have sent investors scrambling for returns. And the Fed’s efforts have been compounded by similarly aggressive policies in Japan and China, and even a willingness to be more accommodative by the normally tight-fisted European Central Bank.

Market trading has been driven by anticipation of Fed action rather than economic fundamentals. Perversely, good economic news often leads to a flat or weaker stock market, since that means the central bank might withdraw support sooner.

The bulls’ case appears increasingly strained. One argument is that there is enough talk of bubbles that there can’t possibly be one. But in fact, in the dot-com era, there was plenty of discussion of frothiness of the tech stocks, back to the Fed Chairman Alan Greenspan’s famed “irrational exuberance” remark in 1996. Greenspan remained a skeptic until late in the game, capitulating three months before an explosive final rally. Similarly, contrary to popular perceptions, mortgage industry insiders were concerned about the subprime market starting in 2005, with every conference featuring a panel on whether that market was getting out of hand.

And at least those overdone bull markets were built on the back of solid fundamental growth. By contrast, the U.S. recovery is more technical than real, with headline unemployment failing fully to capture the dire state of labor conditions. Estimates that include underemployment give near-Depression levels in the upper teens. College grads face an unprecedentedly hostile job market and many are also mired in student debt. Not surprisingly, consumer confidence has fallen over the past seven months.

And the supposed bright spots don’t look so good when examined more closely. The housing recovery has stalled with the Fed’s talk of tapering quantitative easing, revealing how dependent it was on cheap money. An analysis by Josh Rosner of Graham Fisher shows that housing price gains were entirely in investor-owned properties. The appreciation in the median sales price of primary residences in 2012 was a mere 1 percent, which is a decline in real terms.

Other signs of unwarranted enthusiasm are apparent: a flurry of low-quality initial public offerings; stunningly robust valuations, with the Russell 2000 index of small-cap companies at over 30 times earnings; the Tobin Q ratio (market value/book value) at 2.5x, when over 2 is considered overinflated; and the median price to sales ratio of the Standard & Poor's 500 higher today than in 2000. And to complete this picture, the S&P index has risen sharply over the last six quarters, when operating margins have been flat to down. Investors have chosen to overlook the fact that the improvement in net margins is the result of lower interest charges and tax rates.

But the Fed’s highly accommodative interest rate policy is keeping this market aloft. With incoming Fed chairwoman Janet Yellen on the record that she does not see the stock market as overheated, it’s an open question as to when we’ll see the market fall to more realistic valuations.



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