Is the market in a bubble?

As global growth recovers we expect equity markets to be buoyed by improvements in both earnings and dividends, with strong momentum over the quarter. There is much discussion in the media as to whether various markets are in a “bubble”. Little attention is devoted to the fact that bubbles can last for several years, and sometimes even decades. The main driver of both stock market bubbles and real estate bubbles is debt. Anna Schwartz, co-author with Milton Friedman of A Monetary History of the United States (1963) described the relationship to the Wall Street Journal:

If you investigate individually the manias that the market has so dubbed over the years, in every case, it was expansive monetary policy that generated the boom in an asset. The particular asset varied from one boom to another. But the basic underlying propagator was too-easy monetary policy and too-low interest rates …..

Currently, there is evidence of expansive monetary policy from the Fed, but the overall impact on the financial markets is muted. Most of the QE bond purchases are being parked by banks in interest-bearing, excess reserve deposits at the Fed. The chart below compares Fed balance sheet expansion (QE) to the increase in excess reserve deposits at the Fed.

US Household Debt

A classic placebo effect, the Fed is well aware that the major benefit of their quantitative easing program is psychological: there is little monetary impact on the markets.

Corporate debt (green line below) is expanding rapidly as corporations take advantage of the opportunity to issue new debt at low interest rates, but household debt (red) is still shrinking.

US Household Debt

There are pockets of concern, like the rapid recovery in NYSE margin debt, but risk of a Dotcom-style stock market bubble or a 2002/2007 housing bubble is low while household debt contracts.


Australian personal debt (included with household debt in the US chart) and corporate debt growth are both close to zero. Household debt, while also low, appears to have bottomed. Resurgence above 10% would be cause for concern.

RBA Household Debt