How Financial Bubbles Fester And Burst – Even As The Fed Says Not To Worry

By David Stockman

In today’s post Wolf Richter offers some solid insights on the dynamics of financial bubbles which merit further comment. The starting point is to recognize that once they gain a head of steam, financial bubbles tend to envelope virtually every nook and cranny of the economy, creating terrible distortions and destructive excesses as they rumble forward. In this instance, Wolf Richter explains how Silicon Valley has once again (like 1999-2000) been transformed into a rollicking capital “burn rate” machine that has spawned a whole economy based on striving for bigger losses, not better profits.

This latter development—- currently exemplified by 44 VC start-up companies in the IPO pipeline with a valuation of more than $1 billion each, despite no earnings and scarce revenues—-is indicative of late stage bubble dynamics. Say January 2000!

Needless to say, our monetary central planners remain hopelessly bubble blind—- still professing to see no significant speculative excesses because they are looking in the wrong place. Janet Yellen, for instance, keeps insisting that stock valuation multiples are still well within “historic ranges”. So do not be troubled.

Well, she’s talking about the global big cap stocks represented in the S&P 500 and is buying the Wall Street ex-items hockey stick that projects $125 per share next year (15.8X) after you exclude recurring “non-recurring” losses; and also after setting aside various asset write-offs that reflect the penchant for capital destruction (job restructurings, plant and store closures and excess purchase price or goodwill charges) that has become epidemic in big company C-suites during the era of bubble finance.

So the bubble blindness starts here. The very last thing you can believe is Wall Street’s version of the so-called broad market multiple—especially near the end of a Fed money printing cycle. When the S&P 500 peaked at 1570 in October 2007, for example, Wall Street’s forward-looking ex-items hockey stick was about $115 for 2008—-or hardly 14X. Nothing to worry about there. It was all good and in the historic range.

Until it wasn’t… Continue reading at Zero Hedge