Dear Fred,
freddyv wrote:
> 6 months ago I felt that we were getting close to having to face
> these issues (leverage, debt, dishonesty, corruption...) but now I
> see that we have probably years to go before we can even begin to
> drag ourselves up from the slime pit we are living in.
I don't think it will take years. The fact that a genuine
generational stock market crash hasn't happened yet doesn't mean that
it's not coming.
In fact, I heard an analyst on tv say that "capitulation hasn't
occurred yet," referring to the fact that most money market funds
haven't yet been sold off.
I believe you said something similar a few days ago -- that there's
so much lying going on that the collapse will be all the greater.
In August 2007 I posted the article "The nightmare is finally
beginning," expecting the crash to occur within a few weeks.
Instead, the Fed and Treasury have found use one "liquidity
injection" after another to prop up some financial institution, in
order to head off a chain reaction.
Throughout all this time, there was one statistic that I could count
on to predict where the market was going in the short range: The P/E
ratio -- I mean the "real" P/E ratio, as shown in the chart on the
bottom of the home page of this web site.
The P/E ratio stayed at 18 for almost 4 years, from which I inferred
that computerized buy/sell programs were programmed to maintain that
valuation. Not that there was some conspiracy going on, but that
they had all been programmed with roughly the same algorithms, one of
which was to honor the valuation of 18.
A year ago, valuations started rising into the mid-20s, and I was
expecting them to fall to 18 again -- and they did in September. That
made sense to me.
But I never, NEVER dreamed that what's happening now could happen --
starting in January, as Q4's negative earnings were coming out, the
P/E ratio indexes shot up to 60, and then the whole fabric of lying
and deception began.
What I infer is this: That this change has caused all the buy/sell
programs to be reprogrammed to ignore the real P/E and use the Ouija
board version computed by Birinyi Associates and published by WSJ.
This insanity is so great that it's hard for the mind to grasp.
Your conclusion is that it's going to take years for reality to set
in again.
But I look at it the opposite way -- that the increasing insanity is
like stretching a rubber band to its limit, and when it snaps back,
it will snap back much faster and harder than it would have
otherwise.
Stein's Law: If something cannot go on forever, then it won't.
I know I keep saying this, but I just can't believe what's going on
in Washington and on Wall Street. Even as cynical as I am about the
lethal combination of Gen-Xers and Boomers, there is absolutely
nothing in my experience that prepares me for this and allows it to
make sense to me. Things are spinning so rapidly out of control that
it makes me literally dizzy and sick when I think about it.
Sincerely,
John