Yellen’s Hot Springs

We continue to hear a lot about market bubbles. Red faced floor reporters and Fed officials are on the look out for Lawrence Welk. The post credit super cycle environment is not conducive to a widespread bubble, however. Smaller, regional pockets of appreciating air are popping up.

Real estate on the left and right coasts is tight. A bucket of head scratching equity issues rise in parabolic fashion. But, are the capital markets in a "bubble"? Is a Fed driving by forward guidance in any position do do anything about it?

Bubbles require, at their base, to occur when too much money chases too few assets. The concept of "too few assets" in a world of abundance rings hollow to us. Yellen does seem to be watching over an economic caldera. Significant pools of warm and idle water are regularly disturbed by a surface breaching pop. In short order, the "anxious calm" returns and markets stabilize. The Fed is groping back toward an interest rate regime, still off on the horizon. We expect the little pops to become more frequent as that process unfolds. We wouldn't confuse the turbulence with a crisis.


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