Still no signs of a bubble

Friday’s rally out of the gate followed the publicly stated opinion from Minneapolis Fed President Kocherlakota that the Fed hasn’t lowered real interest rates sufficiently.  Surprisingly, there are some policy analysts who agree with Kocherlakota that the Fed still has room to loosen monetary policy even more. 

For instance, Ramesh Ponnuru and David Beckworth, writing in the May 20 issue of National Review, assert their opinion that Fed monetary policy as measured by nominal income (i.e. the size of the economy measured in dollar terms) is actually “too tight.”  While that assertion may be debatable, few will argue with the authors’ statement that households are “nonetheless continuing to deleverage, rather than to add to their net borrowings.”  This, as the authors rightly point out, “suggests that this is not a bubble economy.” 

Not only is the U.S. economy not a bubble economy, neither is the equities bull market if we use various gauges of investor psychology to measure it.  The latest release of the AAII sentiment poll shows that bullish sentiment remains rather muted in the face of a series of all-time highs in the major indices lately. 

This week’s AAII results showed that 38% of respondents were bullish versus 29% bearish.  Unbelievably, there hasn’t been anything close to a 50% or higher bullish reading – the bellwether for a “bubbly” market sentiment – since January.   Presently the cumulative bull/bear sentiment gauge is only slightly above the mean for the last couple of years.  [Excerpted from the May 17 issue of Momentum Strategies Report]