Politics & Policy

Perfectly Rational Exuberance

A boom, not a bubble.

 

After flirting with record closings for more than a week, the Dow Jones Industrial Average surpassed its all-time close of 11,722.98 on Tuesday, ending the day at 11,727.34.

 

Some say this new Dow territory merely puts us back where we were five years ago. But this argument misses the point. We’re not back where we were five years ago. Five years ago, the markets were working their way out of a bubble; this time it’s the real thing.

 

A financial bubble is much like a soap bubble. It occurs when the value of something increases, but inside that increase there’s a good amount of air. Over time, the skin of a bubble grows thin, and eventually the bubble either breaks or deflates. Bubbles are, by definition, hollow.

 

The current boom, however, is different. It is driven by something tangible — profits. As the above chart shows, since the full implementation of the president’s tax cuts in 2003, both profits and stock prices have been rising. In fact, stocks have not yet caught up with the underlying fundamentals of profit growth.

 

From companies to shareholders, those who bet on the Bush boom have done well. Those who bet against it, lost out.

 

– Jerry Bowyer is an economic advisor to Blue Vase Capital Management and the author of The Bush Boom.

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