America's Bubble Economy

Finding Real Value

Discerning financial bubbles as they develop is difficult, but you can start by looking for inconsistencies between an asset’s real value and its marketplace price. For example, from 1982 to 2000 – as the technology stock bubble built – the value of blue-chip stocks increased ten times, but blue chips’ real earnings gained only three times their value. During this same period, real earnings and gross domestic product should also have increased significantly, but they did not.

Another traditional way to assess stock value is by evaluating the price-to-earnings ratios. Normally, you should see a causal link between a company’s stock price, and its profits or earnings. When price and profits disconnect, that is, when price accelerates but profits do not, you’ve spotted another symptom that may indicate that a bubble is forming.

Dealing in Asian-Owned Dollars

Very significant currency purchases by the Chinese and the Japanese have altered the value of the U.S. dollar. Over the past few years, the Japanese Central Bank purchased $1 trillion in U.S. dollars, while the Chinese Central Bank bought $800 billion. Those purchases keep the U.S. ...