cannot be conclusively identified while they still

exist.

Only once a bubble has popped can we be sure

that it was ever there at all.

There are, however, two necessary if not sufficient

conditions for the existence of a bubble.

The first is an accelerating increase in prices

that forces valuations near historical highs.

The second is increasingly speculative and insane

behaviour among investors.

In the US stock market we clearly

have that first box ticked.

Here is the Nasdaq index, which is heavily

weighted towards technology, the sector where valuations

have been the frothiest.

It has risen 40 per cent this year

despite the small matter of a global pandemic

and an accompanying weak economy.

Crazy behaviour?

There's plenty of that going around, too.

Perhaps the ripest example of investor insanity

is a barely profitable electric car

company that has seen its share price octuple this year.

Here is a chart of Tesla shares.

There was a two-day period a couple of weeks

ago in which Tesla added the entire market value of the Ford

Motor Company twice over.

Or how about the rocketing price of an asset

that, depending who you talk to, may have

no underlying value at all?

The cryptocurrency Bitcoin.

Now, the argument that there is not

a bubble in the American stock market

is that stocks have to be so expensive because government

bond yields are so low.

That is to say while stock prices are high,

the premium that investors receive

for owning stocks as opposed to bonds

is actually at the low end of the historical range.

Here is a chart of the 10-year inflation

adjusted or real yield.

The great investor Jeremy Grantham

says that justifying the high prices of stocks

by pointing to historically low bond yields

is nothing more than justifying one asset bubble by reference

to another.

He may have a point.

But the fact remains that the Federal Reserve

can keep bond yields low simply by buying

more and more Treasuries, that is,

unless inflation spikes and the situation

gets out of the Fed's control.

The question of whether we have an asset bubble in the US stock

market is nothing more or less than the question

of whether we have been too complacent

about the possibility of inflation.

If you own stocks, keep a close eye on the prices of everything

else.