Asset Bubbles And Term Premiums

Since nobody can seem to agree on what is an asset bubble, it’s that much more difficult to try and estimate its end. A bubble stops being a bubble only when the people participating decide to question the rationalizations they’ve invented to keep them complacently inside of it. It’s most often just that vague sense the world isn’t turning out the way everyone was just the day before so sure it would. Combine that with ungodly valuations, it’s an ugly prospect.

The (Dow) registered a record high on January 14, 2000. Bulls were encouraged by the confirmation it provided the tech sector from traditional economic quarters. Closing at 11,722.98, the index would, however, decline sharply over the next few trading sessions. By January 20, it was being pulled lower by “old economy” stocks like Alcoa (NYSE:), Procter & Gamble (NYSE:), and General Electric (NYSE:).

Analysts were confused:

Citing no fundamental reasons behind the sell-off, analysts linked the Dow’s plunge to big losses in several of the 30 firms that comprise the narrow index. Only seven Dow stocks rose.

The bond market began to disagree with that sentiment. Stock jockeys could find no “fundamental reasons” for the reverse, but the US Treasury market had been displaying severe unease for months by then. The yield curve had collapsed under pressure from below by the Greenspan Fed’s inflationary scenario, one they had invented for themselves which the market was clearly rejecting.

January 20 marked the end of the yield curve buildup and the beginning of its inversion. It was this market throwing in the towel and uncertainty, declaring enough was enough.

The Fed, as they always do, kept going anyway regardless of that market signal as well as others from the stock market which joined in mere weeks later. The Dow

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