Biden’s bubble risk: A reckoning in markets as the economy recovers

After weeks of silence on the biggest union fight in the country, President Joe Biden released a video last night urging workers at an Amazon warehouse in Alabama to vote on organizing.

In the meme-stock frenzy, partly driven by devotees in internet chat rooms such as Reddit’s r/wallstreetbets, shares in troubled game retailer GameStop are still up nearly 3,000 percent over the last year even after a big crash earlier this month. The shares popped higher again late last week.

House prices, especially in certain attractive markets such as Miami and the suburbs around New York, have surged over the last year, fueled by low interest rates, more millennials moving into their homeownership years and buyers realizing they can work from anywhere following the Covid-19 lockdowns.

Data from on Feb. 20 showed median listing prices up 14.5 percent over last year, the 28th consecutive week of double-digit price gains.

After bottoming out last March during the initial Covid-19 lockdown, stocks have raced back to record highs with tech shares enjoying the biggest boost. The Nasdaq is up more than 90 percent since its Covid-era low.

The question is whether some or all of these bubbly assets could come crashing down in ways that would challenge the economy and present questions about whether Washington lawmakers should be doing more to intervene.

The House held a hearing recently on meme stocks and the Robinhood trading platform but little is expected to come from it. SPACs remain very lightly regulated. Key stock indexes remain near their lofty records.

But stock and bond markets are starting to show signs of significant stress and fear. The Dow sank 1.8 percent last week while the S&P 500 fell 2.5 percent and the Nasdaq plunged 4.9 percent.

The culprit: sharply higher yields on Treasury securities such as the 10-year note, suggesting the bond market sees potential inflation ahead that would cut into American’s buying power and possibly force the Fed into rate hikes that would drain money from the system and cut into the housing market boom.

The yield on the 10-year note, used as a benchmark for many loans, rose as high as 1.6 percent last week — the highest level since before the Covid-19 pandemic began — before finishing at 1.42 percent.

Bond investors are now suggesting they believe the confluence of easy-money policies from the Fed and other central banks, massive stimulus from Washington and a potential boom in consumer demand — coupled with lower supply — could lead to an inflation spike later this year.

And fears about bubbles are percolating throughout the financial world. Results of a recent survey by investment management firm Natixis of institutional investors found that 41 percent expect a correction in real estate prices and 39 percent foresee corrections in tech stock and cryptocurrency values.

Powell and other Fed officials, meanwhile, are eager to see slightly higher inflation and continue to believe a spike in prices as Covid-19 wanes will only be temporary. They remain far more focused on healing a damaged labor market than they are worried about inflation.

“We’ve shown that we can, over the course of a long expansion, we can get to low levels of unemployment, and that the benefits to society — including particularly to lower- and moderate-income people — are very substantial,” Powell said in congressional testimony last week, while stressing that he did not anticipate inflation reaching “troubling levels.”