The Next Big Economic Bubble Is About to Pop

February 25, 2014 | Guardian
By Ha-Joon Chang

According to the stock market, the U.K. economy is in a boom. Not just any old boom, but a historic one. On 28 October 2013, the FTSE 100 index hit 6,734, breaching the level achieved at the height of the economic boom before the 2008 global financial crisis (that was 6,730, recorded in October 2007).

Since then, it has had ups and downs, but on Feb. 21, 2014 the FTSE 100 climbed to a new height of 6,838. At this rate, it may soon surpass the highest ever level reached since the index began in 1984 — that was 6,930, recorded in December 1999, during the heady days of the dotcom bubble.

The current levels of share prices are extraordinary considering the U.K. economy has not yet recovered the ground lost since the 2008 crash; per capita income in the U.K. today is still lower than it was in 2007. And let us not forget that share prices back in 2007 were themselves definitely in bubble territory of the first order.

The situation is even more worrying in the U.S. In March 2013, the Standard & Poor 500 stock market index reached the highest ever level [4], surpassing the 2007 peak (which was higher than the peak during the dotcom boom), despite the fact that the country's per capita income had not yet recovered to its 2007 level. Since then, the index has risen about 20 percent, although the U.S. per capita income has not increased even by two percent during the same period. This is definitely the biggest stock market bubble in modern history.

Even more extraordinary than the inflated prices is that, unlike in the two previous share price booms, no one is offering a plausible narrative explaining why the evidently unsustainable levels of share prices are actually justified.

During the dotcom bubble, the predominant view was that the new information technology was about to completely revolutionise our economies for good. Given this, it was argued, stock markets would keep rising (possibly forever) and reach unprecedented levels. The title of the book, Dow 36,000: The New Strategy for Profiting from the Coming Rise in the Stock Market, published in the autumn of 1999 when the Dow Jones index was not even 10,000, very well sums up the spirit of the time.

Similarly, in the runup to the 2008 crisis, inflated asset prices were justified in terms of the supposed progresses in financial innovation and in the techniques of economic policy.

It was argued that financial innovation — manifested in the alphabet soup of derivatives and structured financial assets, such as MBS, CDO, and CDS — had vastly improved the ability of financial markets to "price" risk correctly, eliminating the possibility of irrational bubbles. On this belief, at the height of the U.S. housing market bubble in 2005, both Alan Greenspan (the then chairman of the Federal Reserve Board) and Ben Bernanke (the then chairman of the Council of Economic Advisers to the President and later Greenspan's successor) publicly denied the existence of a housing market bubble — perhaps except for some "froth" in a few localities, according to Greenspan.

At the same time, better economic theory — and thus better techniques of economic policy — was argued to have allowed policymakers to iron out those few wrinkles that markets themselves cannot eliminate. Robert Lucas, the leading free-market economist and winner of the 1995 Nobel prize in economics, proudly declared in 2003 that "the problem of depression prevention has been solved." In 2004, Ben Bernanke (yes, it's him again) argued that, probably thanks to better theory of monetary policy, the world had entered the era of "great moderation", in which the volatility of prices and outputs is minimised.

This time around, no one is offering a new narrative justifying the new bubbles because, well, there isn't any plausible story. Those stories that are generated to encourage the share price to climb to the next level have been decidedly unambitious in scale and ephemeral in nature: higher-than-expected growth rates or number of new jobs created; brighter-than-expected outlook in Japan, China, or wherever; the arrival of the "super-dove" Janet Yellen [5] as the new chair of the Fed; or, indeed, anything else that may suggest the world is not going to end tomorrow.

Few stock market investors really believe in these stories. Most investors know that current levels of share prices are unsustainable; it is said that George Soros has already started betting against the U.S. stock market [6]. They are aware that share prices are high mainly because of the huge amount of money sloshing around thanks to quantitative easing (QE), not because of the strength of the underlying real economy. This is why they react so nervously to any slight sign that QE may be wound down on a significant scale.

However, stock market investors pretend to believe — or even have to pretend to believe — in those feeble and ephemeral stories because they need those stories to justify (to themselves and their clients) staying in the stock market, given the low returns everywhere else.

The result, unfortunately, is that stock market bubbles of historic proportion are developing in the U.S. and the U.K., the two most important stock markets in the world, threatening to create yet another financial crash. One obvious way of dealing with these bubbles is to take the excessive liquidity that is inflating them out of the system through a combination of tighter monetary policy and better financial regulation against stock market speculation (such as a ban on shorting or restrictions on high-frequency trading). Of course, the danger here is that these policies may prick the bubble and create a mess.

In the longer run, however, the best way to deal with these bubbles is to revive the real economy; after all, "bubble" is a relative concept and even a very high price can be justified if it is based on a strong economy. This will require a more sustainable increase in consumption based on rising wages rather than debts, greater productive investments that will expand the economy's ability to produce, and the introduction of financial regulation that will make banks lend more to productive enterprises than to consumers. Unfortunately, these are exactly the things that the current policymakers in the U.S. and the U.K. don't want to do.

We are heading for trouble.

Outsourcing the Drug Industry

As "Blockbuster Drug" Bubble Bursts, Big Pharma Takes Jobs Overseas

by MARTHA ROSENBERG

It is no consolation to the roughly one out of 600 families who lost their homes in the U.S. but Wall Street made a lot of money slicing and dicing mortgages it knew would implode, while hiding risks. Financial giants, like AIG, are still buzzing along and neither penalties or new laws will prevent a future crash, say financial analysts, because the risky business models have not really changed.

A similar Big Pharma bubble, leavened with risky blockbuster drugs that also blew up, is now bursting. Like Wall Street’s bundled high risk loans, the “tide” created by Big Pharma’s high risk drugs raised many ships during the 2000s from advertising, public relations and medical communication agencies to TV and radio stations, medical journals and doctor/pitchmen who shoveled in its marketing budgets. But now the joyride is over and Pharma is shedding jobs and settling billions in claims without changing its risky business model, like Wall Street.

In Europe, governments are no longer willing to pay the high prices for drugs that they once did say published reports and some countries are drafting laws making drug makers “prove their drugs are effective or risk having them dropped from the coverage list, or covered at a lower rate.” Imagine.

Germany has already saved 1.9 billion euros in 2011 by refusing to pay higher prices for drugs unless they are clearly superior to existing medicines, and Pharma worries that other countries will also get tough and want scientific proof for drug effectiveness instead of marketing and spin. 

In the U.S. and elsewhere, a drug only needs to be superior to no drug (placebo) to be approved by regulators–yet “new” is conveyed as “better than any drug to date” in advertising.  Some clinicians say Haldol, an inexpensive antipsychotic and lithium, a similar affordable bipolar drug are better than blockbuster antipyschotics and bipolar drugs that created Pharma’s 2000′s bubble.

Before the Vioxx scandal and major settlements over blockbuster drugs like Zyprexa, Bextra, Celebrex, Geodon and Seroquel, being a Pharma rep was probably the next best thing to working on Wall Street. Direct-to-consumer advertising did your pre-sell for you, and all you had to do was show up with your snappy Vytorin tote bag and samples case. Some Pharma reps had their own reception room with ice water, swivel chairs, and laptop ports at medical offices, and most waltzed in to see the doctor right in front of waiting and sick patients. (It didn’t hurt that reps were usually “hotties,” both men or women).

But, by 2011, the bloom had fallen off Pharma reps’ roses. The number of prescribers willing to see most reps fell almost 20 percent, the number refusing to see all reps increased by half, and eight million sales calls were “nearly impossible to complete,” reported ZS Associates.

Blockbuster drugs that were found to be unsafe after their big sales push or even withdrawn altogether, did not help the reps’ credibility with doctors. After the aggressively marketed hormone therapy was linked to high incidences of cancer, stroke and heart attack, Wyeth (now Pfizer) announced it was eliminating 1, 200 jobs and closing its Rouses Point, New York plant where Prempro products were manufactured.

As government and private insurers increasingly say, “You want us to cover what?” about expensive, dangerous drugs that are not even proven effective, Pharma bubble jobs are evaporating. Almost 20,000 jobs have vanished at AstraZeneca, Novartis and Pfizer in the last 12 months alone. (AstraZeneca scrapped 21,600 more since 2007). Meanwhile, Pharma is outsourcing more of its operations to poor countries.

Workers and people willing to be trial subjects are both a bargain in poor countries where many can’t understand drug risks or refuse them if they did (and most can’t afford the very drugs they help sell). In January the Argentinian Federation of Health Professionals accused drug maker GlaxoSmithKline of misleading participants and pressuring poor families into joining a trial for the Synflorix vaccine, which the company says protects against bacterial pneumonia and meningitis, reported CNN. In 2010, 10 deaths occurred during Pfizer and AstraZeneca drug trials at the Bhopal Memorial Hospital and Research Centre which was ironically built for survivors of the 1984 Bhopal gas disaster, reports MSNBC. 3,878 workers perished in Bhopal when chemicals leaked at a Union Carbide pesticide plant.

Outsourcing drug manufacturing to cheap venues also contributes to Pharma’s cascade of “quality control” problems in which drugs are mislabeled, contaminated or otherwise made dangerous. It is speculated that Johnson & Johnson’s CEO William Weldon “was pushed to retire because of all of the quality issues at McNeil as well as with the company’s hip implant products, which have resulted in a raft of litigation,” reports FiercePharma.

Like the Wall Street bubble, the Pharma bubble was built on products that industry, but not the public, knew were risky, sold for quick profits. Now regulators are examining some of these “assets” more closely and with disturbing findings. The FDA now warns that bestselling statin drugs like Lipitor and Crestor, even approved for children, are linked to memory loss and diabetes associated with. The equally well selling proton pump inhibitors like Nexium and Prilosec for acid reflux disease (GERD) are now believed to increase the risk of bone fractures by 30 percent.

In March, the FDA even rejected a Merck drug that combines the active drug in Lipitor with the active drug in Zetia and Vytorin, a drug that Forbes calls Son of Vytorin. Vytorin (the father) was advertised to treat both food and family “sources of cholesterol” until results from a study that Merck and Schering-Plough appeared to withhold from regulators showed the drug had no effect on the buildup of plaque in the arteries (believed to correlate with heart attack and stroke). There was such a gap between marketing and science, Sen. Chuck Grassley (R-Iowa) asked the General Accounting Office to investigate why the FDA was approving “drugs that appear to have little to no effect in protecting lives and increasing health.”

Yet even as clouds develop over Pharma’s top-selling drugs, some say the FDA is too hard on new drugs, not too easy. “The FDA is impeding useful innovations in the U.S.,” says former FDA deputy commissioner Scott Gottlieb in the a Wall Street Journal oped, and lagging behind other countries. Former FDA commissioner Andrew Von Eschenbach, also writing in the WSJ, agrees. The FDA should improve U.S. drug competitiveness by allowing drugs “to be approved based on safety, with efficacy to be proven in later trials,” while the public is already taking the drugs. Isn’t that what’s happening now? (Insane!--jef)

The Granddaddy of All Bubbles?

April 14, 2011
World markets are frothing like shaken Champagne, and doomsayers argue that today's bubbles need to be deflated now before they get dangerously large
By Peter Coy and Roben Farza, Bloomberg

It's as if 2008 never happened. Once again the world's investors are pumping up bubbles that will probably explode in their faces. After the popping of a real estate bubble led to the first global recession since the 1930s, world markets are frothing like shaken Champagne. Pundits claim to have spotted price increases that are unsupported by economic fundamentals in assets ranging from U.S. farmland to Israeli biotech to Australian housing to Chinese cemetery sites. Commodities have soared. Global junk-bond issuance hit a record in the first three months of the year. And Yale's Robert Shiller calculates that the Standard & Poor's 500-stock index is trading at 23 times earnings normalized over the past 10 years, compared with a historical average of 16. "I fear this is the granddaddy of them all, an almost-encompassing bubble right at the heart of monetary systems," says Doug Noland, senior portfolio manager of the Federated Prudent Bear Fund.

Cassandras, pointing to the bankruptcies, taxpayer-financed bailouts, and joblessness caused by the last bubble, argue that today's bubbles need to be deflated now before they get dangerously large. Many blame the Federal Reserve for keeping interest rates too low and pumping out a flood of money in search of yield that feeds bubbles around the world. Chinese authorities want the Fed to raise rates to relieve inflation in China. On Apr. 7 the European Central Bank raised its benchmark lending rate a quarter-point, to 1.25 percent. In the U.S., "What we've created is beyond moral hazard," laments Brian Wesbury, chief economist at First Trust Advisors, a Wheaton (Ill.) fund shop. "People are coming to think that the market cannot go higher if the Fed isn't helping it."

Not everyone is in the grip of bubble-phobia, least of all Fed Chairman Ben Bernanke. The central bank remains committed to keeping rates ultralow until the economy shows more staying power. In an Apr. 11 speech in New York, Fed Vice-Chair Janet L. Yellen didn't say anything about bubbles. But she rejected the contention that Fed policy is responsible for commodity price inflation, blaming the runup in oil and food prices largely on "rising global demand and disruptions in global supply." She's right: Commodities aren't being hoarded, as they would be if investors were speculating on them. Inventories have fallen since last summer.

Some economists such as Jaume Ventura and Alberto Martin of Barcelona's Universitat Pompeu Fabra go so far as to argue that bubbles are the price we pay for vigorous growth. They say the optimism reflected in sharply rising prices can become a self-fulfilling prophecy: Rising prices induce more hiring and investment. That generates the growth that justifies even higher prices, and so on in a virtuous upward spiral. Of course, eventually the bubble pops and causes a mess. Yet however jarring a boom-bust economy may be, they say, it's better than an overregulated economy stuck in perpetual underperformance. "The bubble has costs. But you prefer the world with the bubble over the one without the bubble," says Ventura.

James W. Paulsen, the bullish chief investment strategist at Wells Capital Management in Minneapolis, happens to think the Fed should raise interest rates a bit now—but, he says, "It's comical that we think we can regulate away future recessions or crises. It's scary to the extent that if we do, we will crush the essence of capitalism, which is basically greed and animal spirits."

Didier Sornette, a physicist who studies finance at the Swiss Federal Institute of Technology Zurich, sketches out six stages of bubbles:

1) the appearance of a new investment opportunity;
2) the expansion of credit;
3) euphoria;
4) distress;
5) revulsion;
6) panic. 

Ventura and Martin don't even assume euphoria. In their "rational bubbles," investors buy into a bubbly asset because they conclude that the overpricing can last for many years, and the chance they will still be invested when the bubble bursts is small. For all the people who sell before the bust, as well as all those who earn salaries from the sector while it's still bubbling, there's no downside, they note.

One reason it's hard to pick between the bubbles-are-bad and bubbles-are-O.K. camps is that bubbles aren't all alike. The best ones create assets whose value survives the crash. The Apollo program that put people on the moon, only to lose public support in the 1970s, was a "social bubble" in which over-optimism advanced science, Sornette says. Bad bubbles generate worthless assets such as exurban housing subdivisions that are taken over by squatters and mold. Other bubbles don't produce any supply response at all. The only impact of China's new mania for old wine—one bottle went for nearly $233,000 last year—is to transfer wealth to whoever was lucky enough to own the bottles before the Chinese got interested, notes Harvard economist Edward Glaeser.

When the tech sector gets bubbly, consumers are often the biggest beneficiaries, Glaeser says, because investors fund ideas that help the general public, from wireless communications to solid-state data storage to the Internet. So it was in the 19th century with the railroad boom. Today's speculation in tech is concentrated in social networking. The question is whether the new investments will live up to the greatest hits—and productive busts—of Silicon Valley's past.

Try Printing a Recovery

An Emerging Bubble Alert 

By MIKE WHITNEY

Counterfeiting is an effective way to stimulate the economy, but the costs can be quite high. For example, if trillions of dollars in fake cash was injected into the financial system (undetected), we'd probably see the same type of thing that we see when a credit bubble is inflating; asset prices would rise, unemployment would fall, economic activity would increase, and GDP would soar. But when people figured out what was going on, investors would panic, the markets would crash, and the economy would go into a deflationary nosedive.

So here's the point: Deregulation allows the banks to create as much bogus money as they want in the form of credit. When a bank issues a loan to someone who can't repay the debt, it's counterfeiting, which is the same as stealing. This is what the banks did in the lead-up to the Market Meltdown of '08; they issued trillions of dollars of mortgages to people who had no job, no income, no collateral, and a bad credit history. The banks abandoned all the standard criteria for issuing loans, so they could increase the quantity of loans they produced. Why? Because bankers get paid on the front-end of the transaction, which means that when they make a loan, they mark it as a credit on their books so they can draw a hefty salary and a fat bonus at the end of the year. In other words, there are powerful incentives for bankers to do the wrong thing, which is why they act the way they do.

Now that the economy has begun to stabilize, there are signs that the whole process is starting over again and another bubble is already emerging. Check out this clip from an article in The Tennessean titled "Auto lenders approve more subprime borrowers":

"As the auto industry continues to make a slow recovery from tough times of the past two years, lenders are finally loosening credit restrictions and approving car loans for customers with less than prime credit ratings. In the third quarter last year, for instance, the share of new vehicle loans to "credit-challenged" consumers rose 12.7 percent compared with the same period in 2009, said Experian, one of the nation's major credit reporting agencies. 

Loans to borrowers with subprime credit scores as low as 550 were among categories that grew the most....Credit restrictions were the biggest reason people stopped buying new cars during the recession, but "that's not a problem anymore," said Marty Horn, sales manager at Nashville's Crown Ford. 

"We're not having any trouble finding financing for anyone with a score in the 600s," he said. "We can get most people financed through Ford Credit, and if that's not available, we have other lenders ready to step in."... 

"We're seeing loans of up to 140 percent of value from some lenders, and Capital One is by far our best lender for the subprime customer, which is below a 620 score," said Michael Creque, general manager of Alexander Chevrolet-Cadillac in Murfreesboro." ("Auto lenders approve more subprime borrowers", The Tennessean)

Can you believe it? Auto finance companies are lending up to "140 percent of value" of the loan to "credit-challenged" consumers? And this is going on just two years after the biggest meltdown since the Great Depression.

Keep in mind, that the housing/credit bubble cost ordinary working people $12 trillion in lost retirement savings and home equity while the perpetrators on Wall Street have seen their profits skyrocket. Bubblenomics is not "innovation" and it certainly does not increase productivity. It merely transfers wealth from one class to another via credit manipulation.

Consider the recent reports about improvements in the economy. While it's true the data is looking better (retail sales, personal consumption, manufacturing, car sales etc) it's also true that the credit cancer is spreading again. Consumer demand is still weak because unemployment is nearly 10 percent and wages remain flat. So the only reason spending is up, is because credit is expanding. But that means more lending to people who are incapable of repaying their loans which will inevitably lead to another bust. Here's an excerpt from an article titled "Zero-down mortgages endure in rural areas" from bankrate.com which proves my point:

"The zero-down mortgage is still alive in the form of the USDA home loan....People buy houses without down payments or mortgage insurance under the Department of Agriculture's rural development housing program. The catch? The property must be in a designated rural area. The surprise? Some eligible properties are in places that most people would not consider rural.... 

The borrower pays an upfront guarantee fee of 3.5 percent of the loan amount, which most opt to roll into the loan. Under some first-time buyer programs, borrowers can have their closing costs paid....Unlike most low or no-down-payment loans, Defngin points out, USDA loans do not require mortgage insurance...... USDA does not set a minimum credit score, and lender minimums vary." (bankrate.com)

So a mortgage applicant can purchase a home with no down payment, no mortgage insurance, and no minimum credit score from the USDA? What the heck is the USDA even doing in the real estate business? This is just a sneaky way of creating another asset bubble. It's just more counterfeiting.

Now take a look at this from torquenews.com. Same thing. It shows that the big auto manufacturers are jumping on board the credit bandwagon, too. Here's a clip:

"Major auto makers and dealers will start the day after Christmas by pushing their zero percent down deals and hopes toward more year-end car sales....TorqueNews' screening of five top U.S. and Japanese automakers' year-end offerings shows all of them having some type of zero down deals to attract more car shoppers.... 

The U.S. luxury automobiles are offered with zero down year-end sales deals. All of the GM's products on its website are offered at with zero percent down-payment. GMC has no monthly payment until spring and $1,500 total allowance if the shopper finances with Ally. The 0% APR apply to qualified buyers on any GMC...." (torquenews.com)

"Zero down"; Weeee! "No monthly payment until spring", Weeeee! "$1,500 total allowance if the shopper finances" with us; Weeeee! Free money, never pay, borrow your way to prosperity; Weeeeeeeeeeee!

Haven't we seen this movie before? Is Congress really so lazy and corrupt that they're willing to let the economy drop back into the shi**er just so some shifty bankster can buy a few more baubles at Tiffanys?

Then there's this from yesterday's news: Allstate vs. Bank of America. Allstate wants to get its money back from B of A on toxic mortgage-backed securities. Here's the drift from the LA Times:

"The case pits insurer Allstate against Bank of America and Countrywide, the giant mortgage lender that Bank of America bought in 2008. The suit claims that Countrywide misrepresented the risks posed by the bundles of mortgages it sold to investors such as Allstate, which sank $700 million into the securities from 2005 to 2007. After the housing bubble burst, the mortgages in those securities started defaulting at a torrid pace, causing the value of the securities to plummet. 

.... A Bank of America spokesman suggested that Allstate was "a sophisticated investor....looking for someone to blame." But Allstate's examination of a sample of the mortgages in each bundle found that Countrywide's disclosures consistently understated such important indicators as the percentage of mortgages with low down payments or with no proof of the borrower's income (so-called liar loans). And by Allstate's analysis, Countrywide's disclosures weren't off by a little bit. For example, in 11 securities that were supposedly free of "underwater" mortgages, up to 14% of the loans turned out to be larger than the value of the house."

("Housing Shocks", editorial, Los Angeles Times)

The "sophisticated investor" defense is an excuse that fraudsters use when they've just ripped you off. They say, "I thought you were smarter than that. I thought you were a "sophisticated investor."...which just dumps a little salt in the wound.

The truth is, Countrywide clipped Allstate for $700 million in garbage loans and now claims that it procured the money "fair and square". Right. But they do have a point. In a system where there are no rules, anything goes. Allstate might lose their suit simply because the laws now mainly protect the interests of the predators rather than the victims. The banks are free to whip-up their junk debt-instruments (comprised of liar's loans etc) and peddle them to anyone who is gullible enough to invest their money. It's a con-game.

One last example. Many people have noticed that there was a slight uptick in credit in the Fed's latest report. That's good, right? But, as it turns out, the only area where credit really improved was student loans which grew about 80% year-over-year, or roughly $120 billion. So why the sudden and explosive growth in student loans? The answer appeared on an economics blog called benzinga.com via firedoglake. Here's an excerpt:

"The Federal Family Education Loan program (FFEL) allows private financial institutions to provide students with loans, but the government assumes the risk of default, and pays the financial fees while the student attends college. This amounts to privatized gains combined with socialized loans.... 

Under the FFEL program, financial institutions like Sallie Mae, Bank of America, National Education Loan Network, JPMorgan Chase, Wachovia, and Wells Fargo would originate these FFEL loans with students, and then sell them on the secondary credit market. In 2008, the credit market dried up, and the private lenders had nowhere to sell these government guaranteed loans. So, the government stepped in to buy up these loans and protect a program that was already a massively wasteful corporate boondoggle.

The bailout was authorized with HR 5715 Ensuring Continued Access to Student Loans Act (ECASLA). The bill allowed for the Department of Eduction to produce three different programs, the Loan Purchase Commitment Program, the Loan Participation Purchase Program, and a buyer-of-last-resort Asset-Backed Commercial Paper Conduit. 

This purchase program — which amounted to the department of education buying privately-originated student loans that were intended to be securitized but now could not be — was radically expanded in 2009 and 2010, with a purchase amount target of about (you guessed it) $120bn. ("The hidden message of the consumer credit release")

So, there is no improvement in credit. Not really. It's just more backdoor bailouts that are dolled up to look like things are getting better. But things aren't getting better; we've simply restored the same crisis-prone wholesale credit system ("shadow banking") with trillions of dollars of government subsidies, bailouts, stimulus and guarantees, and now we are speeding towards the next big collision. That's not what I'd call "economic recovery". I'd call it stupidity.

Next bubble: Corporate bonds...and stocks

by Jonathan Stempel
NEW YORK | Jun 9, 2010

(Reuters) - Tulip bulbs. Florida real estate. The Nifty Fifty. Gold. Japanese real estate. The Internet. Housing.

History is littered with asset bubbles where investors piled into the next hot thing, only to lose much or all of their investments once the bubble bursts.

One leading strategist said the next bubble could be in something more mundane -- high-quality corporate bonds -- as investors burned after U.S. stocks fell by half from late 2007 to early 2009 flock to perceived safety.

And then, perhaps down the road, it could be the turn of some equities to become overheated again.

"Retail investors buying bonds today, at a time when the supply of corporate bonds is shrinking ... they're chasing a bubble," Tom Lee, chief  U.S. equity strategist at JPMorgan Chase & Co, said Wednesday at the Reuters Investment Outlook summit in New York.

"We had a credit bubble, a mortgage and housing bubble, and that caused equities to collapse," Lee said. "I wouldn't rule out equities as the next area where bubbles could emerge, but I don't think it's going to start in 2010."

Many speakers at the Reuters Investment Summit have said individual investors remain cautious on stocks, despite a 13-month run-up that ended in April, saying net U.S. domestic stock fund inflows have been roughly nil.

In contrast, bonds are attracting bushels of cash. The intermediate-term bond fund Pimco Total Return, the world's largest mutual fund, has some $227.9 billion of assets, according to Morningstar Inc. And the average high-quality corporate bond yields 4.5 percent, a level last seen in 2004.

The love for bonds might not last, Lee said.

"Have Americans ever been satisfied with earning a steady rate of return?" he said. "What we have in American history, I think in capitalism, is rolling bubbles, whether it's real estate, commodities, land speculation, emerging markets, time shares.... Basically, savers chase the next bubble, and then when that bubble shifts, they will move to the next one."

"NO BRAINER" FOR STOCKS

Lee said prices on 10-year Treasuries and high-grade corporate bonds appear rich relative to the price-earnings ratio of companies in the Standard & Poor's 500 .SPX.

Treasuries trade at about a 33 multiple, or the number of years it takes to earn $1 from $1 of principal, while corporate bonds trade around a 20 multiple, he said. But more than half the S&P 500 stocks trade below a 10 multiple, he said.

"Corporate balance sheets are pristine today, so the bond multiples are justified," he said. "But the equity multiples are ridiculously low."

Lee said the average yield on corporate bonds is just 2 percentage points higher than the S&P 500 dividend yield, the smallest differential since 1967.

"Corporate bonds are already (trading) at 108" cents on the dollar, he said. "If they were at 130, what would you do if you were General Mills (Inc)? Buy back all your bonds, and issue new bonds at 3 percent. And then what does it mean for your stock? All of a sudden, maybe you de-equitize by 30 percent, because your cost of capital can justify it."

General Mills bonds have risen in price. Its 5.65 percent notes maturing in 2019, sold in January 2009 at 99.91 cents on the dollar, traded Wednesday at 111.76 cents, yielding 4.03 percent, according to the bond pricing service Trace.

Kirstie Foster, a spokeswoman for the cereal maker, declined to comment, citing a "quiet period" before General Mills reports quarterly results.

Lee said improved corporate credit quality historically heralds increasing stock prices and could do so again.

He expects the S&P 500 index to rise roughly 20 percent by year end to about 1,300, saying it could easily support a price-earnings multiple above 14, compared with about 12 now.

"I think you get the no-brainer to buy stocks for the next decade, unless you just thought we were going to have the world economy shrink," he said, "or if we're Japan."