Wednesday, 31 March 2004

The stock market bubble and the Federal Reserve

That there was a stock market bubble in the late 1990s is not in doubt. What has been in doubt is the role the Federal Reserve played in fomenting the bubble.

The stock market bubble in the late 1990s was primarily an Internet bubble. But non-internet stocks too were swept in the euphoria, such that long after the bubble burst, valuations of most stocks in the United States remained excessive. This was a point I repeated in a few articles -- Market rebound: Looking in the right market, What's the economy got to do with stocks?.

Many people have blamed the Fed for encouraging the bubble. I happen to be one of those who believe that the Fed played a major contributory role in promoting the bubble. I gave my reasons in Alan Greenspan and the stock market bubble and An asset bubble adds to deflation risk.

To this day, Fed chairman Alan Greenspan continues to reject criticism that he contributed to the bubble. I suspect history will not agree with him.

Sunday, 28 March 2004


Back in 2001, the US dollar was riding high and many analysts seemed to believe in the political rhetoric espousing the strong dollar.

But to me, it was a source of great amazement. In April 2001, I wrote in The US dollar: Another bubble that the strength of the US dollar was reminiscent of the stock bubble that had just burst. I suggested that the US dollar was overvalued. I continued on the same theme in Reaction to Fed cuts shows fundamentals are all wrong for the US dollar, contrasting analysts belief in the currency's strength with the pessimism over the Singapore dollar, despite the latter's better current account situation.

I developed the Singapore-dollar subject further in The MAS versus the Singapore dollar bears, A rising capital account deficit poses a challenge to the MAS and MAS fails to convince doubters. In these three articles, I wrote that the MAS should be able to hold the value of the Singapore currency.

By the time I wrote New paradigm for the US dollar? in May 2002, it had become apparent to more analysts that the US dollar was overvalued, although there were still some holdouts, as mentioned in Analysts risk overestimating the value of the US dollar. But one year later, the idea that the US dollar was overvalued had clearly become mainstream opinion. Over the previous year, the US dollar had fallen against most currencies, including the Singapore dollar. The ranks of the doubters had shrunk to just a few, some of whom I mention in US dollar dragged down by trade deficit.

In October 2003, I discussed the US dollar again in Falling US dollar and its impact on stock markets, but the focus this time was on the falling dollar's effect on stock markets rather than on the currency itself. And earlier this year, in Weaker dollar may help US economy but is no panacea, the weakness of the US dollar has become clearly manifest.

Except for the occasional political rhetoric, the concept of a strong US dollar has become history. And about time too.

New Weblog

I created this blog site for my musings on economic and financial matters. I actually have a blog at and a homepage at where I post my more formal articles.

My first few blogs on this site will most probably be a re-cap of some of my more notable articles and themes at the Geocities site which I did not post on -- I started posting articles in 2000 whereas I only started blogging in March this year.

So watch this space.