We’re in a Bubble…

… so how high can the markets go? Personally, I wouldn’t be surprised to see the FTSE hit 10,000 within two or three years. All the quantitative easing from the Fed, the Japanese central bank and maybe even soon the ECB is fuelling a bubble in shares. The banks have to do something with this new money and they are buying shares and other assets. We haven’t reached the mania stage yet where no one expects the markets to fall – they are still climbing their “wall of worry” – so there is quite a way to go before the bubble bursts. (The AAII sentiment survey is still showing bullish sentiment below the historical average). On the Price/Earnings ratio measure, stock markets are not overvalued, and could comfortably rise 50% before reaching the sort of valuations seen in the dot.com boom. As long as the US maintains positive economic growth, there will be talk of “recovery” which will be used to justify the rise in stock markets, but I cannot see the debt crisis doing anything other than getting worse. That means that the economy will not really heal as people will continue to feel squeezed by austerity measures. At some point the market will start to worry about major governments defaulting on their debts, which would wipe out banks reserves, and there will be a crash. The longer it takes, the bigger it will be.