Paul Krugman, "Bernanke, Blower of Bubbles?": Is the Stock Market Due for a Major Correction?

Is the stock market due for a major correction?

In his latest New York Times op-ed entitled "Bernanke, Blower of Bubbles?" (http://www.nytimes.com/2013/05/10/opinion/krugman-bernanke-blower-of-bubbles.html), Paul Krugman writes:

"O.K., what about stocks? Major stock indexes are now higher than they were at the end of the 1990s, which can sound ominous. It sounds a lot less ominous, however, when you learn that corporate profits — which are, after all, what stocks are shares in — are more than two-and-a-half times higher than they were when the 1990s bubble burst. Also, with bond yields so low, you would expect investors to move into stocks, driving their prices higher.

All in all, the case for significant bubbles in stocks or, especially, bonds is weak. And that conclusion matters for policy as well as investment."

Krugman makes the connection between interest rates and bond prices:

"Well, the interest rate on long-term bonds depends mainly on the expected path of short-term interest rates, which are controlled by the Federal Reserve. You don’t want to buy a 10-year bond at less than 2 percent, the current going rate, if you believe that the Fed will be raising short-term rates to 4 percent or 5 percent in the not-too-distant future.

But why, exactly, should you believe any such thing? The Fed normally cuts rates when unemployment is high and inflation is low — which is the situation today. True, it can’t cut rates any further because they’re already near zero and can’t go lower. (Otherwise investors would just sit on cash.) But it’s hard to see why the Fed should raise rates until unemployment falls a lot and/or inflation surges, and there’s no hint in the data that anything like that is going to happen for years to come."

Surprisingly, however, Krugman does not make the connection in his opinion piece between interest rates and stock prices.

Stocks can remain high as long as there are no viable alternatives allowing persons to obtain a reasonably secure rate of return on their investments, i.e. as long as interest rates remain low.

Will there be any change in interest rates at any time soon? Here I agree with Krugman: Probably not. We're still in the midst of what Krugman terms "the greatest economic crisis since the 1930s — a crisis from which we have yet to emerge."

However, should there ever be a hint that interest rates are about to be raised, beware! It will not be pretty.

Me? I don't invest in stock market indices, but rather in companies offering disruptive innovation and managed by people I trust, like and admire.

C'est tout.