I.C. Angles Investment Post….

Stocks are rallying nicely and fears of a bear market dissipating. That’s not surprising. Price gains can make folks forget underlying problems. And rather than focus on underlying problems, attention yesterday was on Fed policy, with the central bank deciding not to raise interest rates. That was seen as accommodative and a positive for stocks. But there is a dark side to central bank easy money. When rising stock prices aren’t accompanied by equally strong economic growth, the result can be an asset bubble. We’ve had a very strong stock market and a very weak economic recovery. That could very well be a recipe for disaster. An optimistic scenario is the economy strengthening and catching up with stock values, but we keep waiting for that to happen and there are few signs it will. Perhaps a more realistic scenario is stocks falling to reflect a weak or weakening economy. In fact, many investors could be far more exposed than they realize to the risk of bubble type losses, where portfolio values are cut more than in half. In particular, within the U.S. stock market there are two areas of particular risk.

(more…)