Where will the bubble burst?

In addition to Metodi Tsanov's wonderful article about the controversial policy of the Federal Reserve in the US, we decided to show you what was happening with the S&P 500 stock index during the boom before the global financial crisis and during the subsequent recovery.

The euphoria surrounding the sharp rise in US stock prices and strong economic growth reached even the general public in the months before the crisis. A year later, words like greed and irrationality reigned in the media around the world, and everyone united around the opinion that the crash was unpredictable. A brief look at what is happening now will show us that the current bubble is larger in scale.

The growth of the S&P 500 index, which includes the 500 largest companies in the United States, before the crisis reached 96.0% over a period of 5 years, while during the same period the economy grew by 14.5% in real terms. In the last 4 years and 3 months alone (the period after the 2009 bottom) the S&P500 grew by a whopping 144.4%, while the growth of real GDP of 8.5% for the period was far more moderate and unsatisfactory.

So, stronger growth in the stock market in the absence of a recovery in the labor market and noticeably weaker GDP growth? The answer to this riddle, as you have already guessed, lies precisely in the Fed's monetary policy. The huge amount of funds ($ 85 billion per month) that fall into financial institutions in the US create artificial demand for high-yield securities. As Metodi very accurately noted - "we have a complete discrepancy between prices and fundamentals in conditions of easy money."

This phenomenon will be present until the Fed decides to stop flooding the financial sector with liquidity. This was indicated by the sharp decline in US indices in the last two weeks after Bernanke's statement, in which he hinted at the possibility of reducing quantitative easing due to the improvement in the labor market.

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