Most people — certainly most governments and economists — define inflation as a general rise in prices. But this is wrong. Inflation is an increase in the money supply, of which a rising general price level is just one possible result — and not the most common one.
The S&P 500 made another milestone this week by closing over 1800 for the first time. The Dow Jones Industrial Average also hit a milestone by closing over 16,000 to end the week at 16,064.80.
As usual we are hearing many claims regarding market valuation, mostly that stocks are undervalued based upon future earnings projections. We are also seeing a lot of headlines about stocks being in a bubble. Using twelve-month trailing earnings for the S&P 500 Index, we find that stocks are overvalued, but not in a bubble.
The minutes of the Fed’s last FOMC meeting, released this week, confirm that the Fed believes it must begin to taper back its stimulus soon. At this point, the longer QE continues the greater the risk of asset bubbles forming, the bursting of which would destabilize the economy and make it even more difficult to exit.
The rosy eurozone growth estimates of a few months ago have bitten the dust already with the possible exception of Germany.