The Midwestern Bubble

John Mauldin is discussing financial bubbles, and points out corporate bonds and Midwestern farmland:

Another bubble that is forming and will pop is agricultural land in many places in the United States (although agriculture in other countries can be found at compelling values). The bubble really started going once the Fed started its Code Red policies. Land prices in the heart of the Corn Belt have increased at a double-digit rate in six of the past seven years. According to Federal Reserve studies, farmland prices were up 15 percent last year in the most productive part of the Corn Belt, and 26 percent in the western Corn Belt and high plains. Iowa land selling for $2,275 per acre a decade ago is now at $8,700 per acre. As you can see from Figure 9.2, the increase in farmland prices beats almost anything the United States saw during the housing bubble. A lot of banks in the Midwest will have problem with their lending.
Why are we seeing so many bubbles right now? One reason is that the economy is weak and inflation is low. The growth in the money supply doesn’t go to driving up prices for goods like toothpaste, haircuts, or cars. It goes to drive up prices of real estate, bonds, and stocks.
Excess liquidity is money created beyond what the real economy needs. In technical terms, Marshallian K is the difference between growth in the money supply and nominal GDP. The measure is the surplus of money that is not absorbed by the real economy. The term is named after the great English economist Alfred Marshall. When the money supply is growing faster than nominal GDP, then excess liquidity tends to flow to financial assets. However, if the money supply is growing more slowly than nominal GDP, then the real economy absorbs more available liquidity. That’s one reason why stocks go up so much when the economy is weak but the money supply is rising.
It is also why stock markets are so sensitive to any hint that the Fed might ease off on QE. Real players know how the game is played. You can listen to the business media or read the papers and find hundreds of “experts” saying that stock prices are rising based on fundamentals. You can take their talking points and change the dates and find they are essentially the same as 1999 and 2006–2007. (More on the implications of this in Part II when we talk about investing.)
The rise in real estate, bonds, and stocks does not count toward any inflation measures. On the desk in his office at Princeton, Einstein once had the words “not everything which can be measured counts, and not everything which counts can be measured.” Inflation happens to be one of the things that counts but can’t be measured (except in very narrow terms). Excess liquidity flows from asset class to asset class.

While the Fed has had a lot to do with the farmland price bubble, ethanol policy and rampant fund speculation in commodities has also had a very big effect.  The grain markets were really boominb in 2007 and 2008, and that was before the financial crisis and extraordinary measures by the Fed (although it is true the Fed's low rates in the run-up of the housing bubble drove inflation fears and the fund speculation in commodities).  Most farmland bubbles are based on market and policy imbalances, and this one was no different. 

Mauldin is going to make the case for a bubble in stocks, and while I can't argue with him, all I can say is that I've been expecting farmland prices to decrease ever since I bought land in 2007, and prices are up about 75-80% since then.  I've been pointing out the farmland price bubble intermittently since I started this blog almost 3 years ago, and it still hasn't poppled.  Before that, I was talking about outrageous stock prices in 1998, and that didn't pop until 2000.  After that, I was calling a house price bubble in 2002, and that one didn't peak until December 2006.  So while there is likely a stock price bubble, we could still see some serious price appreciation in the short term.