Few deny that US stocks are grossly overvalued, or that historically low bond yields could help justify such estimates (or that central banks are blowing bubbles and others can't do anything about it).

Robert Schiller, a Nobel laureate in economics and bubble expert, noted that stocks should, at a minimum, outperform bonds. Thereafter, Jeremy Grantham, founder of fund management company GMO, announced that US stocks had reached a bubble comparable to that of the South Sea Company, the 1929 stock market crash, or the dot-com mania. He attributes this mainly to signs of non-standard behavior. At the same time, it is extremely difficult to determine the timing of the end of the bubble.

What is a bubble and how is it different from an expensive market? In his book Manias, Panics and Crashes, Charles Kindleberger listed the prerequisites: easy money and attractive terms that will get people to invest. A bubble occurs when a valuation becomes overvalued and investor behavior is dominated by trying to sell shares at a higher price, rather than common sense and rational valuation. This is what economist Hyman Minsky called the "Ponzi phase." At this point, even the smallest disruption to the flow of easy money can end the fun.

We have cheap loans. We have compelling stories for some of the tech sectors. Where is the non-standard behavior? For starters, let's take Bitcoin, which just exploded last month. Strong Bitcoin price surges tend to intersect with inflection points in stock markets.

Comparison of the dynamics of bitcoin and the S&P 500


Source: Bloomberg

Cryptocurrency is a new phenomenon. For many years, the chief strategist of Citigroup Inc. For US stocks, Tobias Levkovich tracked the panic / euphoria index, which includes the following components: percentage of short positions on the NYSE, margin debt, daily volume of the Nasdaq as a percentage of NYSE volume, aggregate bullish sentiment index of Investors Intelligence and the American Association of Individual Investors, retail funds money market, put / call ratio, CRB futures price index, gasoline prices, and put / call premium ratio. According to this indicator, the euphoria is the strongest in history, even exceeding the technology bubble.

On the verge of a bubble
Another quantitative indicator is the cash ratio of BofA Securities Inc. held in institutional portfolios. This is the lowest level since the firm began to measure it, which means that fund managers are not in dire need of reserves.

Now, if you look at the expectations of analysts regularly surveyed by BofA Securities, they are higher than the long-term average than they have been since the start of the global financial crisis. And if this does not mean the existence of a bubble, it means that it is very close.

Plus, the lack of profitability seems to be an advantage again. This has already been the case for a short period of time at the top of the technology bubble. James Bianco of Bianco Research has released a chart showing the performance of the Goldman Sachs Group Inc. tech stock index, which has yet to make a profit.

Goldman Sach Technology Unprofitable Index


Source: Bloomberg

If it's not scary enough, you can think of the weirdness around Tesla Inc. It is now the sixth largest company in the United States and by far the world's largest automaker by market capitalization, although many other companies still sell many more vehicles. Again, stock analysts' expectations were overstated. The charts, compiled by Anastasios Avgeriou of BCA Research Inc., show a shift in expectations for five-year earnings per share growth for the S&P 500 and the consumer sector since Tesla was included in the index last month.

Adding Yahoo Inc. had a similar impact in 1999, although not as severe. Amazon.com Inc., which entered the S&P 500 in 2005, had little or no impact. Tesla could be a great investment. But adding it to the index, by itself, was enough to make Wall Street's estimates of five-year earnings growth more optimistic than ever. Of course this is crazy.

Amid rising stock prices and a frenzied Reddit crowd enriching the bank accounts of corporate shareholders and other investors, no one complains when the bunch moves from one goal to another. However, as prices begin to plummet, sentiment also changes rapidly: institutional investors and corporate insiders are demanding that Reddit turn off the pumping and dumping sub-forums, just as the crowd urged Twitter to suspend Trump's account after the storming of the Capitol. This is all a lot of fun, as is the case with GameStop, until someone gets hurt, and in today's changing culture, the means that

to silence opponents are obvious: people go to the platforms first.

A real bubble also involves overvaluation. They are difficult to measure globally. Rob Buckland, Citi's chief global stock market strategist, charted price action and valuation three years before the previous big bubbles. On this basis, the Nasdaq looks overvalued compared to the bubble in China that burst in 2007, but it is much smaller than other large bubbles.

Looking for an alternative
There are warning signs in global equity markets. Longview Economics shows forward returns in equity markets, with marginal gains from the 2008 peak and almost entirely driven by Trump's corporate tax hike in late 2017.

It turns out that if the US stock market bursts, then outside the US, investors will not have any automatic protection. If there is a market that looks cheap, it is the UK. According to Citi, the dividend yield in this country is higher than that of gold at any time since the war.

Jim Reed of Deutsche Bank included other major Western European economies and Japan as well as the United States in the study, comparing cyclically adjusted price earnings yields to bond yields. On this basis, the United States is by far the least attractive, with the UK generating the most interest, followed by Germany.

The sectoral structure of British indices confirms this picture. The FTSE-100 is dominated by banks, oil and mining companies, and multinational corporations, with little to no technology sector. This is an almost perfect list of companies that have fallen into disgrace. A BofA survey of fund managers has shown that commodities are once again popular.

Brexit will almost certainly lead to economic costs. And although they are quite real and may turn out to be very significant, the extremely negative trends in the behavior of the British currency and the stock market indicate that these costs have already been taken into account.