Nobel Prize-winning economist Paul Krugman says there’s a mania in the stock market. He also mentions that investors still haven’t grasped the severity of the economic slowdown brought on by the coronavirus.
During an appearance on CNBC, Krugman covered a variety of topics. However, he most notably gave his thoughts on the stocks market and what he sees as a “fear of missing out” that is driving stock prices higher.
“It’s very hard to escape the sense that there is a mania now, that this is a FOMO market. There are people who saw stocks go way up between late March and now… stocks which had plunged came roaring back and then people said “oh, stocks are good” and they piled in and it became a self-fulfilling prophecy for a while,” said Krugman.
He points to Hertz, the rental car company that saw its stock price rocket higher after filing for bankruptcy, as evidence of a mania in stocks.
“You look at the way that people have piled into the stocks of bankrupt companies like Hertz. There’s clearly something, a bit of mania going on… with each passing day as the news about the economy gets worse, and stocks keep rising, I become more convinced that there’s something crazy going on.”
The stock mania has created multiple bubbles according to Krugman, and he says even the S&P 500 could be a bubble right now.
“There are almost surely multiple bubbles out there. Maybe the whole thing, maybe the last 15% on the S&P 500 is a bubble. But I don’t know that, but it seems plausible because you know in a bubble, as Robert Shiller famously pointed out, a bubble is a natural Ponzi scheme. People buy in, they make money because the next wave of people buys in and for everyone it’s great until you finally run out of suckers. And this has that feel to it, definitely.”
Krugman also warns that stock prices are a terrible indicator of economic health. He also says investors today are making a mistake trying to connect the two.
“The stock market has never been a good indicator of what’s happening in the economy at large. And now in particular, it’s really a poor indicator,” said Krugman. “The link between stocks and other things like jobs is always weak. I have the sense that investors have still not taken on board just how bad the COVID-19 news is.”
Many blame the trillions of dollars printed by the Federal Reserve for inflating the bubble. Meanwhile, Krugman says he can’t blame the Fed.
“I don’t see what else the Fed could have done. They could not have stood by and allowed a financial crisis on top of the viral crisis. So this is what had to happen and if there’s some mania in the markets, well that’s what happens.”