What's in a Bubble? - David Rosenberg, Gluskin Sheff

Of course, before you can address this file, you have to have a definition as to what is a bubble. Everyone has their own definition. Or as Alan Greenspan liked to say back in the day, you can only tell if something was in a bubble after the fact (nonsense). Well, we gave it a strict definition based on price only, and whether the asset class in question was at least one standard deviation away from its historical norm. 

Investor complacency is definitely in a bubble in terms of extreme low levels of volatility. Then again, this is a product of the Fed (and other central banks) applying massive doses of sedative to the marketplace. So the VIX which measures the price of downside protection in the stock 
market has a normalized value of -1.1 (values of standard deviation, above or below 1 is bubble like); and in the bond market, the comparable score for the MOVE index is -1.5. 

The S&P 500, you would be surprised, is well within normal bounds on a price-to-earnings basis, thanks mostly to cost-cutting and share buybacks (though Rosenberg only looks back to 1990 on the chart). But on a price-to-sales ratio basis, the current normalized value of 1.2 is in bubble terrain, according to this one standard deviation definition. 

As for the Fed, talk about a bubble. The normalized real Fed funds rate is -1.3. The real bubble is in Fed policy, and anything that is priced off it (which pretty well includes the entire fixed-income market). For example, 10-year U.S. Treasury note yields net of inflation have a normalized 
value of -1.1, so the answer is yes, Virginia, Treasuries are either in some sort of bubble or at least a giant-sized sud. 

High-yield bonds actually are close but not quite there yet — at a -0.7 normalized value for spreads, the group is very expensive, but is not as much as bubble as plain-vanilla government bonds are at the present time. Actually, when looking at high-yield corporate debt in the context of a still-low corporate default rate, spreads are right in line with the historical mean (which would otherwise bode well with ‘relative value’ spread strategies as opposed to going long the bond outright). 

We field questions repeatedly on the Canadian housing market. Interestingly, when looking at home price-rent ratios, or home price-income ratios, we aren't talking about a one standard deviation event but a near two standard deviation excess, which is huge, but because carrying costs are so very low, the housing affordability ratio is actually well within the bands of normality. But the message here is that if mortgage rates were not as exceedingly low as they are, any mean reversion in Canadian home prices could imply one heck of a corrective move down.