Is the stock market in a bubble? The answer is yes, absolutely, you bet it is. The interesting part is that it is not the only asset class that is in a bubble. In addition to the stock market, real estate is also in a bubble, and these prices have absolutely been influenced by FOMC policy. Although I'm not making observations outside of the United States, the policy of central banks to inflate asset prices using a tool invented, it seems, by Ben Bernanke certainly has reshaped economic conditions, and thus far, they have prevented a Greater Depression. But before the stimulus packages were enacted, back when the credit crisis made everyone concerned about the economy, I was warning about something that no one wanted to hear. I pounded the table in 2007 (and before) suggesting that in December of that year, the beginning of the third major down period in us history would become official. My findings using my macroeconomic tool The Investment Rate suggested that the economy would continue to weaken naturally, based on the societal norms that govern investment and spending patterns of individual investors. Digging a little deeper, these observations suggested that although the market and economy had overshot to the downside late in 2008 and early 2009, the bounce back that would occur would also be short-lived and eventually the natural weakness in our economy would put pressure on asset prices again. Interestingly, and although weakness started to happen in 2011, the policy of the FOMC to inflate asset prices (the wealth effect) prevented that dire prediction from becoming a reality. To my chagrin, the policy of the FOMC to inflate asset prices made my macroeconomic model appear less than accurate after 2011. Because my model is based on natural investment inflows into the economy, something I have calculated beyond 2030, and because the capital being injected into the economy over the past couple of years was not natural, the direction of the economy diverged from what my analysis suggested. It is important to note here that my macroeconomic tool is a demographic analysis using societal norms and lifetime investment patterns to identify longer-term economic cycles. Over the years, it identified strength in the economy by seeing that more and more new money was naturally available to invest in the economy, and conversely times in which fewer and fewer new investment dollars were available to invest naturally. That is, as of December 2007, where we exist on a naturalized basis in today's economy. The twist is that FOMC policy has caused us to diverge from that natural condition. According to the FOMC, they will officially end their bond-buying program in the next meeting unless extraordinary circumstances arise. My analysis to clients suggests that the net real stimulus in the financial system is already negative when the operations of the U.S. Treasury are included, but everyone can see that the stimulus program is ending, and as it comes to an end, the economy is again allowed to operate on a more natural basis. The question I pose to you is if the economy actually would have been weakening over the past few years on a naturalized basis as my analysis suggests, but instead it has been supported by capital injected by the FOMC to inflate asset prices, what do you think will happen when the money flows stop? My answer to clients, and now in this public forum, is that the economy will revert back to its naturalized condition, which is much weaker than it is today, suggesting that both the stock market and real-estate prices will contract, and according to the differential I have provided to clients, that means a crash is looming. We are absolutely in an asset bubble today, there is no question about it in my mind, and it is the result of FOMC policy. The only way to avoid a crash is to continue to pump money into the system and support an economy that is, in every sense of the word, addicted to stimulus. After last week's FOMC-induced rally in the Dow Jones Industrial AverageDJIA, -1.54% the conservative investors out there still believe in the never-ending rally, but ask investors in the small-cap sector the same question, and they will tell you a different story. The Russell 2000 RUT, -1.60% has gotten hammered over the past few days, and there is a clear divergence between the Dow and the Russell. I would even lump the Nasdaq COMP, -1.94% in with the Russell to suggest that the higher-beta stocks as a whole are all flashing danger signs, and there may actually be a flight to safety happening in front of our eyes. Importantly, the Dow would need to break down, too, in order for there to be even a meaningful amount of concern out there, but if it does, the Russell 2000 and the Nasdaq may already be much lower. Article