ZIRP Policy & Asset Valuations
The conditions in so many asset classes are unsustainable from a price perspective once interest rates rise even under a “new normalized rate environment†and the longer rates stay at ZIRP status these unsustainable price levels continue to move in the wrong direction from a sustainability standpoint, i.e., the underlying fundamentals apart from ZIRP policy would not support said asset prices in a natural price discovery process.
Janet Yellen Always One Step Behind
Janet Yellen threw a bone to the valuation crowd with her brief discussion about certain parts of the market being overvalued, “Valuation metrics in some sectors do appear substantially stretched—particularly those for smaller firms in the social media and biotechnology industries, despite a notable downturn in equity prices for such firms early in the year”. This is an obvious canned response since this question is routinely asked of the Chairperson in any question and answer session these days, “Do you see a bubble in markets?†And her previous canned response was according to our metrics of valuations….blah, blah, blah…..asset prices aren`t out of line with historical standards to paraphrase.
Social Media Bubble – Historically High Risk Reward Plays
Let me just say right here that forget talking about bubble conditions in Bio-Techs or Social Media as high valuations are pretty commonplace for these sectors in market history and investors know what they are getting into given their historic volatility and boom and bust cycles both in terms of stock prices and business sustainability.Â
Treasuries Aren`t Supposed to Get Bubbly Conditions as an Asset Class
Treasuries on the other hand haven’t had a history of speculative fervor in regards to ‘Bubbly’ conditions. Investors have always considered these safe places to hide out in terms of market turmoil and uncertainty and a very conservative asset class historically. It takes quite a feat to take a conservative asset class and turn it into a bubble!Â
