Visitors take a break as soap bubbles blow by in Piazza Navona in Rome, Italy (Photographer: Alessandra Benedetti/Bloomberg)

This Bubble's Got Legs

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(Bloomberg) -- The whole world is moving together and signs of a massive bubble that spans asset classes are becoming clearer. Yet, given the driver is cash printed by central banks, indications it could pop are scant.

A Credit Suisse gauge known as the cross-market contagion indicator -- which tracks price relationships in equities, credit, currencies and commodities -- shows different markets are influencing each other more than at any time since at least 2008.

Historically, very high correlations are associated either with a panic or a bubble. Extreme asset inflation tends to reach fever pitch partly because of what scholars call positive feedback, or where exuberance and herd mentality feed further investment.

Some of the biggest bubbles of the past century were marked by this spillover to all asset classes. But once one market pops, the rest deflate as well.

There are clear marks of a bubble in the current market.

Perhaps the best indicator is the so-called complacency index, which relates enterprise value (dictated by market prices for a company's debt and stock), Ebit (a measure of actual profitability) and the Chicago Board Options Exchange's Volatility Index, or VIX. The ratio between these three hasn't been this high since just before the 2008 credit crisis -- and the higher it goes, the more you should worry.

With  hindsight, it's usually easy to spot the asset class that starts things. In 2008, it was real estate; in 2001, dot-com companies. This time, it's cash. With all the central bank experiments in Japan, Europe and even the U.S., there's just too much money lying around.

Which poses the first dilemma. The dot-com bubble burst when it became clear many tech startups would never break even. The U.S. housing market popped after home prices detached so far from income it became obvious further rises weren't sustainable. How can a central-bank-led cash bubble burst when there's an ever flowing money hose?

The complacency index itself is also a leading indicator. It started to turn more than a year before the last bubble ruptured. So even if someone can figure out how to pop cash inflation, it alone is saying this bull has further to run.

Ultimately, the old market tenet still holds: Don't fight the Fed (or the Bank of Japan or the European Central Bank, for that matter). As long as central banks continue to print money, this bubble should keep inflating.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. The indicator assesses how much movement in one market is statistically explained by movement in another.

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