It’s possible that bond prices account for today’s stock market valuations. But that raises another question: Why are bond prices so high? There are short-term explanations: the role of central banks, for example. But is there a compelling reason for prices of stocks and bonds (and maybe houses, too) to remain high indefinitely?
I’ve looked for untraditional answers. Perhaps today’s prices have something to do with anxiety about the future. I suspect that after the financial crisis, working people are much more worried about their future pay. Many are concerned that they might lose their jobs to cost-cutting, or that they might eventually be replaced by a computer or robot or website. Such anxiety might push them to try to make up for these potential shortfalls by investing in stocks and bonds — even if they worry that these assets are overvalued.
Extrapolating from a theory of Robert E. Lucas Jr. of the University of Chicago, one might well expect lofty stock prices amid such worries: When there aren’t enough good investing opportunities, people wishing to save more for the future may succeed only in bidding up existing assets even if they think they’re overpriced. Call it the “life preserver on the Titanic” theory.
I'd believe the increased inequality of the last 30 years adds to the Stock market over-valuation and also feeds other investment asset bubbles like antique cars, old guitars, art, farmland, etc.
The is a lot of money ricocheting around the economy. The FED has been priming the pump for several years now. If that money lands in the hands of the lower percentile consumers, the people who need stuff, they buy things with it, cars, TVs, computers, clothes, food, appliances, vacations, etc. driving the overall economy up. However, in our current state of inequality, that money lands in the hands of the top 20%-ers, (10% or 1%ers maybe), and well,... they already have all of the stuff they need so they use it to chase and bid-up the price of investment assets like land, art, antique cars, and stock markets etc.
In short, inequality routes the cash to the people who inflate the investment markets not to those who inflate the overall economy.
'via Blog this'
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