How to Ride a Bubble Bath

Focus: STRATEGIES

Jack Ablin Image Jack Ablin CIO & Executive Vice President, BMO Private Bank

The market has been riding high and a decline could be steep, says Jack Ablin, who shares a few plays he feels are less likely to explode later this year.

Jack, it's great to have you with us. Tell us where we are in the global recovery, and where you see value or maybe pricey markets today.

Sure. You know, we've come a long way since we've been talking in 2008 and 2009, and the markets have really surged forward, largely on the fact that interest rates are so aggressively low.

When we started the year, I pegged the S&P 500 fair value for year-end 2013 at about 1,520. We pretty much blew past my year-end target by the first week of February, and we haven't looked back. While I think that perhaps the market has probably moved beyond fair value, eventually it's going to be a concern that perhaps we could turn some of this froth into a bubble, if we're not careful.

You think that could happen this year?

It's certainly possible. I mean, here the Fed is hell-bent on keeping aggressively easy monetary policy as long as the unemployment rate is higher than 6.5%. I guess my question to Bernanke and Company is, what happens if the S&P 500 goes over 1,700 and the unemployment rate is still 7%? What do you do then? It's hard to know what they'd do.

Well, they're going to keep dropping money out of helicopters.

That's it. I think they want to err on the side of inflation, even if it means asset inflation and bubbles.