Stock Market a Bubble?

If you have not heard this book, 1929: The Inside Story of The Greatest Crash in Wall Street History by Andrew Ross Sorkin, you are likely to hear it soon. It was published just a month ago but already a bestseller. This is not surprising since many wonder if we are witnessing a bubble right now. Although earlier I had seen several interviews with Sorkin, I had not watched them in full or rushed to read the book. There are two reasons. First, I am familiar with Andrew Ross Sorkin, one of three anchors on CNBC Squawk Box. Among the three anchors, Sorkin is left-leaning, less knowledgeable, and tends to exaggerate a little. Second, conventional wisdom says that the 1929 stock market crash caused the Great Depression. Such a myth has long been debunked by great economist Milton Friedman. In fact, I wrote a few short articles during the 2000 dot com crash, 2008 GFC, and the COVID stock market crash. I argued that these would not deteriorate into depression. According to M Friedman’s analysis, the 1930s depression was not due to the stock market crash, instead it was due to wrong policies by the government, including the Fed Reserve. It is unlikely, if not impossible, to repeat the same mistakes. 

From the praises of this book I have seen, 1929 is well-written. As you can see in the above, I might not have to read it, at least for months if not for years; I have too many things on my plate. Sorkin gave an interview on CNN GPS last weekend. After watching it, I decided to write about it. Although the interview was not long, it covered all important points (I believe). I recommend you to watch it. 

A famous quote is “history does not repeat itself but it rhymes.” It is often attributed to Mark Twain but probably was first by an English politician. Ancient philosopher Heraclitus said: “No man ever steps in the same river twice, for it's not the same river and he's not the same man.” You should be able to tell the difference between these two quotes. If you think deeper, you might find unexpected conclusions. This may lead to profound knowledge of political science and economics, which I will not elaborate here (I may have to come back to this point in the future). What I want to say here is that so far we need not worry about the stock market bubble, at least not yet. 

This is a big statement. But why? Recall “history does not repeat itself but it rhymes.” One might have numerous ways to compare this market with previous ones. The closest comparison of the current market with previous ones is the internet bubble of the year 2000. There is one fundamental difference: the AI has already shown profitability and productivity increase (see my previous writeups). 

However, there is one potential catastrophe: the US government debt. This was discussed in Sorkin’s interview. In my previous writeup, I also mentioned this. I learned about the debt trap one year ago. It was 36T, now it is 38T. Democrats still want to add 1.5T so that medicaid to illegal immigrants can be funded and the shortfall of Obamacare can be supplemented. Some experts estimated that 40-50T would enter the danger period. I think what they meant is that other crises may induce a confidence crisis in the US government debt.