The Imagination Trade, or the Tinkerbell Market 2.0

I’ve refrained from discussing the stock market for quite some time, in part because this is not an investment website and in part because I find the netherworld of credit more interesting. But a big reason of late is that the stock market has become so utterly unhinged from fundamentals that anyone opining on it, other than momentum trades and technicians with particularly good crystal balls, is likely to look silly.

We seem to be in a toxic replay of what I called the Tinkerbell market in 2007 and 2008: if the officialdom can get enough people to applaud, the economy will live. They weren’t too successful back then, but the crisis has appeared to have upped the game of the Powers That Be in talking up the price of financial instruments. And having the Fed at ready to provide boatloads of liquidity should anything go awry appears to have put much of the world in “don’t fight the Fed” mode.

Market action is looking a tad manic, yet the dot-com mania proved that unwarranted optimism can persist far longer than cooler heads deem possible. Hedge fund leverage, for instance, is allegedly back to pre-crisis highs. And various market commentators are pointing to worrisome echoes of dot-com type preferences, where stocks amenable to fantasy, or what Bill Fleckenstein calls “imagination” are preferable to ones with clearly better prospects. From his commentary last Friday:

Yesterday, I was discussing how speculative the market had become and I believe the reaction to the results of those two companies [Intel and JP Morgan] illuminates that further.

Chipping Away at Intel Starting with Intel, it beat estimates and said it would increase capital expenditures, which sent pulses racing in semiconductor equipment stocks, while Intel’s stock (after being higher last night) was sold, losing 1%. The reason Intel’s results were not good enough, even though it trades at a modest ten times earnings, is because in this speculative atmosphere, people want motion, just as they did in the last stock bubble. They will chase any manner of Chinese Internet, tablet, or cloud computing stock, as well as poorly positioned companies like Micron or Research In Motion, but they don’t want to buy a company like Intel, let alone Microsoft…

As for JPM, it is a variation of the same theme, because financials have an imagination component in the same way Internet stocks used to. You can believe anything you want, because the numbers are no good. Thus, JPM’s results were lapped up and that stock gained 1.5% initially, before selling off a bit later in the day.

When you have a speculation-driven, money-printing frenzy, there is no telling what sort of ideas will be latched onto. If you need a reminder, go back and read the newspapers from 1998 through 2000…

I also don’t mean to imply that I know when this frenzy will end, because I don’t. If history is any guide, it is liable to get far crazier before it exhausts itself. I certainly hope that’s not the case. I really thought after all we’ve been through, especially in 2008 and 2009, we would not have another out-of-control stock market for at least a generation.

David Rosenberg, who has had the misfortune to make astute calls on the fundamentals but miss how liquidity-addled investors would react, also takes up the imagination theme in his note of last Friday (hat tip reader SF):


If the name of the game was to revive investor “animal spirits”, it has worked wonders so far
How can it be all bad? After all, the Fed’s “Beige Book” did highlight that all 12 districts have reported an improvement in the pace of economic activity. In the previous Beige Book, which covered the month of October and early November, there were 10 who reported the same…

No doubt a lot has happened to generate the newly-found optimism…In August, we had Ben Bernanke verbally hinting that more central bank balance sheet expansion and liquidity were on its way. If the name of the game was to revive investor “animal spirits”, it has worked wonders so far even if Treasury yields are up around 100 basis points from the lows. I’m sure Ben would gladly accept 100bps on the 10-year note for a 10% runup in the S&P 500..

And let’s face it. The incoming economic data have not looked that bad at all…

Nobody should be reading this and jumping to the conclusion that my fundamental views have changed over the contours of this post-bubble-bust economic recovery. The economy remains on government-assisted life support, and the government has been very successful in creating the illusion of economic prosperity. It is doing this to buy time and help preserve social stability as the adjustment towards housing deflation, consumer deleveraging, and chronic unemployment takes its toll on the growth rate in organic final demand.

And in case you think there is good reason to believe the recovery is on, there is plenty of contradictory information. Federal fiscal stimulus is not all that large and will be offset, and perhaps overwhelmed, by state and local government belt-tightening. Consumer spending plunged in early January. Energy and food price hikes have the potential to put any recovery into reverse, and a super La Niña would intensify both pressures. And that’s before we get to the usual worries: the drag of an unresolved foreclosure mess on housing prices, the odds of Euroworries producing a full bore crisis, and rising inflation in China pressuring the officialdom to dampen growth, which skeptics believe will burst its bubble, or let prices rise, which runs the risk of increasing social unrest.

Even former believers are getting a tad edgy. For instance, Morgan Stanley warned at the end of last week that corporate profit increases were due to become a thing of the past. From the summary of its note “The Coming Flattening in US Profit Margins”:

Earnings deceleration despite economic acceleration: We think earnings growth will slow significantly despite a moderate US economic acceleration in 2011. The culprit: A coming flattening in profit margins due to slowing output growth abroad, fading operating leverage, and an end to the decline in interest expense.

Four reasons margins have soared: 1) Strong growth abroad, especially in the booming EM economies, that lifted results of US affiliates abroad; 2) capital discipline that enabled companies to exploit their operating leverage and boost ROICs; 3) strong control over balance sheets that has kept a taut rein on interest expense; and 4) hiring discipline that reduced total compensation, especially the fixed costs of healthcare benefits.

Four sources of flatter margins in 2011: 1) Growth in overseas output is likely to slow somewhat; 2) operating leverage will fade as fixed costs like depreciation start to catch up to sales; 3) declines in interest expense will end; and 4) for some companies, rising commodity prices will foster margin compression.

But for now, the answer is obvious, which is play the imagination theme to the hilt. Thus a Financial Times comment gave very bad advice to Facebook’s Mark Zuckerberg, telling him to give up his hoodie and dress like a proper CEO. Nonsense. The youthful look is as much part of his brand as Steve Job’s signature black T-shirts, and key to the fantasy that social media as eternally youthful, and therefore with continuing growth prospects.

So enjoy the ride while it lasts. As with the credit mania of 2007, investors will assume they can get through the exits when the party stops. And some did, but many were trampled in the ensuing panic.

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  1. attempter

    Everybody knows that JPM is 1. insolvent, 2. does nothing but manipulate and steal, 3. can do nothing unless permanently bailed out by the government.

    Therefore, a bet on JPM is a bet on the permanency of the Bailout America regime. It’s a bet on a command economy, a system based on looting backed up by power.

    Similarly, this piece provides an example of how a company like Intel has reached the point of drawing down the principal.

    As I commented at the time:

    But we can see both threats in the monopoly antics of Intel, whose latest gambit is to gobble up Infineon’s wireless outfit. (This is also a commentary on how the consensus seems to be that wireless is the real future of the Internet, not fixed line. Therefore this acquisition seems to be on the same wavelength as the Google-Verizon deal to gut net neutrality for wireless. Everyone who has the muscle is staking a monopoly claim on this pre-enclosed frontier.)

    We see the level of “entrepreneurship” and “innovation” and “competition” involved here:

    “Intel’s own efforts to build a wireless chip business through its Atom processors have faltered, analysts say. Intel has deals with LG and Nokia to provide wireless chips. Mr. Otellini has been seeking ways to get into this market and diversify the company beyond PC chips.”

    Unable to innovate or compete, Intel uses congealed wealth to buy, i.e. destroy, the competition.

    This is becoming true by now of the IT sector in general, as it already is of all other sectors. The future is intended to be calcified oligopoly enforced by power. Power, preferably economic and political, but if necessary brute force, is intended to prevent any discomfiture of the congealed rackets.

    It’s a kleptocracy and a command economy. That’s the intended future, and that’s what all bullish stock bets are betting on.

    1. Philip Pilkington

      “This is becoming true by now of the IT sector in general, as it already is of all other sectors. The future is intended to be calcified oligopoly enforced by power. Power, preferably economic and political, but if necessary brute force, is intended to prevent any discomfiture of the congealed rackets.”

      I think its been something like this since at least the turn of the 20th century – the whole free-market/entrepreneur thing was just a feel good fantasy; a fantasy that is awakened every time a dummy-company like Facebook comes along and a film is made about it to hype it up to the mentally deficient. To quote Karl Polanyi:

      “The form in which the nascent reality came to our consciousness was political economy. Its amazing regularities and stunning contradictions had to be fitted into the scheme of philosophy and theology in order to be assimilated to human meanings. The stubborn facts and inexorable brute laws that appeared to abolish our freedom had in one way or another to be reconciled to our freedom.”

      Zuckerberg and his tepid enterprise are today that shadowy image of ‘entrepreneurial freedom’ which allow us to reconcile ourselves to the actual reality: state-backed companies that don’t produce anything.

    2. William

      The stock market is a confidence game for insiders. Outsiders play the stock market at the risk of being played. Everything is rigged, from the earnings reports corporations cook up, to the credit ratings and, of course, the government stats, reports, and economic analyses. We still have no idea what the banks really owe (they continue to cook all their reports) and no complete understanding as to where the bailout money actually went. Just as in sales, advertising and marketing, there is no such thing as ‘truth.’ What prevails is secrecy, spin, lies, manipulation, exploitation, and fraud. With the MSM acting as the corporate state’s propaganda ministry, there is no chance for truth to emerge. Here’s an article that anyone interested in economic reality would do well to consider:,9

      1. Mike Bell

        Well said, William.

        As someone who has been trading/investing for 30 years, and a financial advisor for over 20, you are exactly right. Too often, similar opinions come from cranks, conspiracy theorists, paranoids, doomsayers, et al, which is unfortunate because the message gets lost.

        While I do wish we lived in a world of truth, it just isn’t going to happen in my lifetime. So, you have two choices: play the market while knowing and accepting what it is OR stay away from the casinos. I choose to “play”, but with extremely tight risk controls in place (which of course drastically limits my upside, though the after-tax return is still significantly superior to a portfolio comprised solely of guaranteed fixed investments).

        Why should the markets or government be any different than the vast majority of men and women on this planet? There are precious few who are interested in truth and who would sacrifice money for integrity. The message of society is clear: make money, at any price, at any cost, take care of yourself first, and scr3w the consequences. There’s not a damn thing we can do about it. On the bright side, despite all the bad things, it’s not a bad time to be alive. The middle class in North America certainly lives a privileged and wealthy life relative to any other time in history.

        I hope at some point in the future, things will change for the better, and things like TRUTH make a comeback. For now, I teach my children well (would make a great song title), and hope future generations “get it”, though it’s likely it’ll take hundreds of years.

    3. mannfm11

      Wireless might have its problems. I have a 4G service and it seems to work well, save for when it is raining or icy, at which time the reception drops substantially. If this is a problem, it won’t work. Could be where I was situated on those occasions, but I doubt it.

  2. hermanas

    That 9+ unemployed is the new normal is one more chair pulled from the floor and the music begins again.
    “Churn and Burn” is not new.
    The kids coming back from the wars say life is dull here.

  3. Procopius

    I can’t remember where, and it wasn’t the main topic of discussion, but just in the last day or so I read on one site that the average trade now takes 17 seconds, and that the market has become entirely the domain of algorithmic trading computers that react in nanoseconds to any movement. There simply isn’t any human reasoning going on any more, it’s all flying on autopilot.

  4. Tom Crowl

    Imaginary solutions have often been preferred but seldom beneficial.

    Easter Islanders built big stone heads instead of taking care of their island… we build phony markets. Both civilizations looked to fantasy and wishes to solve their problems.

    The Easter Islanders went extinct.

    P.S. re project I’ve occasionally mentioned here… and speaking of the devil… an Internet startup… though very unique I think:

    Patent #7,870,067 granted and published by USPTO on 01/11/’11

    For a brief description… as well as why it comes with some interesting potentials… see the post by Nancy Scola* as well as my comment here:

    What’s to Actually Like About “Obama’s Online ID”? CDT’s Aaron Brauer-Rieke Explains…

    (TechPresident/PersonalDemocracyForum founders now in my LinkedIn network… though I don’t mean to imply official support… so far.)

  5. K. Williams

    There is, literally, no argument in this post, merely unsupported assertions that the market is “unhinged from fundamentals.” The only fundamentals that matter to stock valuation are corporate profits, and those are exceptionally good. The market’s price/earnings ratio (which is at 13-14) is, by historical standards, average — as Fleckenstein himself points out, Intel is trading at just ten times earning and still doesn’t have investors bidding its stock up. US GDP is back to where it was in 2007, and no serious analyst believes that we’re going back into a double-dip recession. More important, more and more of the profits for S&P 500 companies come from abroad, and the world economy is actually growing at a reasonably brisk pace. That doesn’t mean we should expect stock prices to keep rising sharply. But the notion that we’re in anything resembling a bubble is patently absurd. And the fact that David Rosenberg keeps getting cited as an authority on the stock market (which is, in fact, how you’re citing him) is extraordinary, given how utterly wrong he’s been for the last 24 months. He’s the bear equivalent of David Lereah, that National Association of Realtors economist who kept insisting that housing prices were just going to keep rising.

    1. Stan

      The stock market is trading at a much higher multiple of current earnings than 13. Having alot of cash is great but it also demonstrates that companies don’t have organic sources of growth or they’d be investing. Which also intimates that earnings multiples over 16 aren’t justified by fundamentals. Everything I have been waiting to buy is trading at 24-26. I sold many things in late 2009 when they were trading at 18x current EPS. The historical normal earnings multiple range is 8-12. People forget that.

    2. Yves Smith Post author

      Sensitive, aren’t we?

      My contacts include hedge fund managers and technical traders who watch the ticks on the major indexes all day. The hedges, even one person shops, report how thin the market continues to be. Even one principal firms get calls from dealer desks pitching ideas on a frequent basis. They’d virtually never get calls pre 2009.

      The tape watchers report how manipulated the market is, the trading around technically important levels on the downside clearly indicates a concerted, or perhaps algo driven effort to hold technically important levels.

      And I indicated that Rosenberg has been right on the fundamentals, which you ignore, and wrong on market reaction. So for someone who likes to make criticisms, you seem to have a problem with reading comprehension.

      1. K. Williams

        “And I indicated that Rosenberg has been right on the fundamentals, which you ignore, and wrong on market reaction. So for someone who likes to make criticisms, you seem to have a problem with reading comprehension.”

        I know you “indicated” this, but it isn’t true. Rosenberg has not been right on the fundamentals, either. Let’s leave aside his insistence in March 2009 that a fair value for the S&P was 600 (predicated on the assumption that total S&P earnings were going to be just $50 a share — a woeful underestimate). Going into 2010, he predicted bond yields would fall to 2% as the economy slowed down — didn’t happen. In the summer of 2010, he said there was an 80% chance of a double-dip recession, which was completely wrong. He’s consistently underestimated corporate profit growth and GDP growth, the only fundamentals that matter to valuations. Now, of course, he keeps saying that it’s only because the Fed intervened that he’s been wrong, and that eventually he’ll be right. Maybe so — I doubt it. But there’s no disputing the fact that he’s compiled a dismal track record as a forecaster over the last two years.

        As for your “hedge fund” and “technical trader” contacts, there’s no reason to believe they have any profound insight into the market. In fact, the last people you should trust on the question of whether the market is fairly valued or not are technical traders. These references to what those in the know supposedly see is just inside-baseball mumbo jumbo. If the market is, in fact, in a bubble as you’re saying, then you should be able to show it by demonstrating that stocks are, on a discounted cash flow basis, massively overvalued. It’s not possible to do that — since they aren’t. So instead we get all this hand-waving about thin markets and imaginary technical manipulation.

        1. drac

          Great post. I’m dismayed how very smart people can so easily get sucked into making statements about the market without any kind of logical basis to back it up. I suppose its fashionable and soothes the ego to have an opinion on something so controversial as the markets.

        2. Belisarius6

          I with Yves here and have to disagree. The existing problems, as I see them, have not been addressed and are being hidden behind what appears to be deliberately false and misleading data. Hence the monikers “Tinkerbell Market” or “Imagination Trade”. You, on the other hand, appear to be accepting this same data as factual (i.e. “In the summer of 2010, he said there was an 80% chance of a double-dip recession, which was completely wrong.”). I’m feel Rosenberg has yet to be proven wrong. Time will tell. Until then I will err on the conservative side and keep away from things I don’t understand.

        3. Mike Bell

          Your comments are correct re: Rosenberg’s EQUITY predictions. Not that he needs me to defend him, but he has been right on other things during the past two years (gold, corporate bonds, CAD,…). But I fail to see the point. Had he been 100% correct he’d be no more valuable to listen to than had he been 100% incorrect. The idea that people who make predictions (guesses) are more likely to make an accurate prediction if their previous predictions proved correct is a totally FALSE one. If I guess “heads, tails, heads” and get all 3 guesses right – does it mean I have better than 50/50 odds of guessing the next coin toss outcome correctly? Of course not.

          Don’t listen to ANYONE as far as market predictions go. Nobody knows. Nobody.

          That having been said, market ACTION, is certainly very different than in the past. The market has changed forever. Anyone who has traded every day for many years can clearly see it. I don’t know if it’s the Fed, Goldman, or the Tooth Fairy. I don’t need to know. So Yves’ comments about the market being thin, and certain levels being “held”, is absolutely true. Those are facts. Not opinions or forecasts. What does it mean? Mainly that the little guy has even less of a chance of doing well going forward than ever before.

      2. Cedric Regula

        Also, on fundamentals, S&P earnings in 4Q and projected earnings for 1Q are flat. The level of earnings is high, for all the reasons discussed here and in the financial press, but Q over Q growth appears to be zero. Whether PEs are cheap or not depends very much on future earnings growth. Low growth companies tend to have PEs of 8-10, and need to pay out substantial dividends to command that level.

        Then, my favorite imaginary stock is big bank stock. Ben will wave his magic wand and allow them to pay out dividends, after first doing an obligatory mark to make believe stress test. Banks continue to use reduced loan loss provisions to add to profits, and also book imaginary mortgage payments from foreclosures as revenue, front the payments to the RMBS trusts, all with the confidence in recouping the real cash from eventual foreclosure sales. This creates the big present value bonus pool, and then we make the investors complacent partners in crime by assuaging any complaints over obscene bonuses by paying investors off with a dividend. Ben stands ready with the Wall of Liquidity in case anything goes wrong with The Plan.

        GS is probably writing a few hundred billion in overnight repos to HFT traders 20 minutes before market close everyday to insure Ben’s liquidity goes where it is needed.

        What a way to run a country.

    3. Philip Pilkington

      “The only fundamentals that matter to stock valuation are corporate profits, and those are exceptionally good.”

      I have quite literally never seen someone talk through their hole so blatantly before – excuse my French; but this is pallid nonsense.

      Prior to the ’29 crash corporate profits were at an all time high. Here (sorry for the random link – but I’m not digging through my books to find Galbraith):

      “From a high of $10.8 billion in 1929, corporate profits not only nose-dived as the depression unfolded, but turned negative in 1932 and 1933, an event that has never been repeated since.”

      Or, how about we be very academic and quote a book:

      “…but rising profit rates, as seen in the corporate sector in the late 1920s…”

      Here’s a graph-deely:

      Note that the profit rate kept going up until AFTER the crash because the market was ADDING TO SAID PROFIT RATE.

      Man… Yves, I enjoy your blog, but can we have a certain level of economic literacy to get to post here – I’ve seen some ignorance around here in the past few days that could do with some euthanising.

      As to the ‘theorist’ of markets I just responded to… back to your day job, son – which I’ll assume from your arrogant tone is trading your life away on Wall Street!

      1. K. Williams

        “Prior to the ‘29 crash corporate profits were at an all time high.”

        Okay, I agree with you. If we’re on the verge of another Great Depression, then the market is overvalued. Since we’re not on the verge of another Great Depression, and instead are coming out of one, I fail to see what the relevance of 1929 is.

        1. Philip Pilkington

          Give it up, man. You don’t get it – because you don’t want to get it.

          You claim that stock prices should be gauged on how profitable corporations are. Historically, this is not the case. 1929 is simply the most dramatic example – that’s why I gave it; to show just how ridiculous anyone who knows ANYTHING about economic history would find your assertion.

          If you bothered looking at the graph I sent you carefully and critically (no, of course didn’t – because you don’t think critically…), you’d see that prior to the 1987 crash corporate profit rates weren’t too bad either. Sure they weren’t quite as high in 1984 – but neither were they as low as in 1980.

          (Here’s the graph again:

          So, you see, the empirical evidence doesn’t suggest that there is a correlation between overly low corporate profits and market crashes. Your idea – sorry, that myth that you purported – has no historical evidence to back it up.

          To sum up – because I doubt you’re going to consider that argument in any meaningful way. Your argument – i.e. that stock prices are proper valuations as long as corporate profit rates are high – simply doesn’t hold water. 1929 showed this beyond a shadow of a doubt – evidence in more minor crashes confirms this; or, at least, doesn’t show that the two are in any way related.

          Market crashes ARE NOT CORRELATED to certain levels of profit-rate. Speculation can even reinforce current profit-rates – as it did in the 1920s. It doesn’t matter if this isn’t a 1920s style boom – that doesn’t affect my argument; but the fact that a bust can happen after record corporate profits DEFINITELY negates your argument…

          1. K. Williams

            “You claim that stock prices should be gauged on how profitable corporations are. Historically, this is not the case.”

            Well, how else should stock prices be gauged? On how unprofitable corporations are? In any case, my point wasn’t simply that corporate profits are high. It’s that they’re high relative to valuations. In 1929 and 2000, valuations were high, and price-to-earnings ratios were out of sight. That’s what you need for the market to crash — stock prices have to be outsized relative to future profits. There’s no evidence at all that this is the case now. If corporate profits were where they are, and the stock market were at 1700, then I’d say that’d be a sign of a bubble (although even then valuations would be much lower than in 1929). But given that profits are robust (and getting more so) and that valuations are still quite reasonable, the idea that we’re in a bubble is just absurd.

            Apple just grew earnings 78% year-over-year, and it trades — once you back out the cash — at about 15 times earnings. So the second-most valuable company in America, the one that everyone loves, trades at a massive discount to its earnings growth rate. That is simply not what you see during a bubble.

          2. Philip Pilkington

            A little bit of talking past one another here. You originally said:

            “The only fundamentals that matter to stock valuation are corporate profits, and those are exceptionally good.”

            That, to me, made no sense – it still doesn’t. Plenty of other things matter to stock valuations – for example, if (and I believe this is what Yves is arguing) these profits are being obtained through methods other than actual investment – and as for how analysts (yourself included) value stocks, its not down to PROFITS as such, which is what you said, but, as you went on to say just now, down to P/E ratios.

            I think you might have been conflating P/E ratios with profit – now that I look back on what you wrote, you seem to use the two terms interchangeably. This was why I thought what you were saying was absurd (it still technically is – although now I see what you actually meant).

            Profits and P/E ratios aren’t the same thing. The former is an absolute magnitude (i.e. a firm’s total revenue minus costs) – the latter, a relative magnitude (i.e. a firm’s PROFITS could be low but, if their share prices were very low, their P/E ratio could be okay). When I was talking about ‘profit’ I was simply talking about profit – you were talking about P/E ratios, I think.

            So, there seems to have been a slight bit of talking past one another – but that’s on you for saying ‘profit’ when you should have been saying ‘P/E ratio’.

          3. Yves Smith Post author

            Until the mid 1990s, a 16 multiple would be a peak of cycle type number, particularly for a big cap stock. Go back and see the huge multiple expansion that took place once the Greenspan put was well established.

            You are showing your age, or lack thereof, on another front: the way to values stock is either based on free cash flow or discounted dividends. Tobin’s Q ratio is also good for detecting extremes.

          4. Philip Pilkington

            Well, since that last exchange was entirely pointless, I might as well try to make myself useful. Here’s some interesting charts and quotes pulled from Robert Schiller’s book that, I think, highlight the strange and mysterious things happening in Wall Street land since the Greenspan-era (I believe this is what Yves is referring to when she wrote about the ‘huge multiple expansion)…

            So, here’s the stock market in historical perspective:


            Note that earnings kept pace, to a large degree, with stock prices until the mid-90s. Schiller writes:

            “S&P composite earnings grew very fast in the late 1990s before they crashed in 2000. But historically the earnings movements were generally less dramatic than the stock price movements. Earnings in fact seem to have been oscillating around a slow, steady growth path that had been persisting for over a century.”

            Schiller then goes on to say that this run-up is comparable to the 1920s if we adjust for scale (queue ominous music).

            Now here’s the price-earnings ratio we were(n’t) discussing earlier – with some minor tweaks to highlight the 16 multiple level and the big take-off after Policy Greenspan that Yves referred to:



            “What was extraordinary in 2000 was the behavior of price, not earnings. Part of the explanation for the remarkable price behavior between 1990 and 2000 may have to do with the unusual behavior of corporations’ profits as reflected in their earnings reports. Many observers remarked then that earnings growth in the five-year period ending in 1997 was unusual: real S&P Composite earnings more than doubled over this interval, and such rapid five-year growth of real earnings had not occurred for nearly half a century. But 1992 marked the end of a recession during which earnings were temporarily depressed. Similar increases in earnings growth following periods of depressed earnings from recession or depression have happened before. In fact, there was more than a quadrupling of real earnings from 1921 to 1926 as the economy emerged from the severe recession of 1921 into the prosperous Roaring Twenties”

            So, yeah – Schiller seems more concerned with price rather than earnings.

            Uh, that was exhausting – I’m going to watch The Mayfair Set…

          5. K. Williams

            “Until the mid 1990s, a 16 multiple would be a peak of cycle type number, particularly for a big cap stock. Go back and see the huge multiple expansion that took place once the Greenspan put was well established.

            “You are showing your age, or lack thereof, on another front: the way to values stock is either based on free cash flow or discounted dividends. Tobin’s Q ratio is also good for detecting extremes.”

            With the exception of the sentence about FCF, I disagree with all of this. The multiple expansion did not take place as a result of the Greenspan put — it happened after 1991, as a result of the fall of the Soviet Union, which essentially guaranteed that corporations would have the entire world as a market. That hasn’t changed, which is why, by 1929-1991 standards, P/E ratios have been “too high” ever since the early 1990s. The same is true of Tobin’s Q. Setting aside the essentially hopeless task of calculating a “replacement value” for companies whose assets primarily consist of intellectual capital and intangibles — what, for instance, is the replacement value for Apple’s assets? — Tobin’s Q has been above its historical mean since, yes, the early 1990s. As I said above, this would suggest that the market has been overvalued since 1991, in which time it’s more than tripled.

            I agree that any proper valuation of the market depends on future free cash flow, but unless you think that corporate earnings are a worse proxy for FCF than they used to be, the P/E ratio is a useful crude proxy. (And they’re not worse than they used to be — in fact, given companies’ better management of the cash conversion cycle and reduced capex, earnings generally predict FCF better than before.) In any case, as I said, P/FCF ratios don’t show the market to be significantly overvalued, either. I’ll just repeat myself: no market in which Apple, the market’s darling, is growing earnings 78% a year and trading at just 13 times free cash flow can be considered “manic” or unhinged from fundamentals.

          6. Philip Pilkington

            Dunno about that Soviet Union stuff – do investors really act like that? Were they really standing around banging their fists on the Iron Curtain until it fell and then went crazay? That sounds like, I dunno – a Reagan election ad or something…

            “I’ll just repeat myself: no market in which Apple, the market’s darling, is growing earnings 78% a year and trading at just 13 times free cash flow can be considered “manic” or unhinged from fundamentals.”

            Isn’t that exactly the point that Yves was – vicariously – trying to make in her post?

            “The reason Intel’s results were not good enough, even though it trades at a modest ten times earnings, is because in this speculative atmosphere, people want motion, just as they did in the last stock bubble. They will chase any manner of Chinese Internet, tablet, or cloud computing stock, as well as poorly positioned companies like Micron or Research In Motion, but they don’t want to buy a company like Intel, let alone Microsoft…”

          7. Doug Terpstra

            Philip, thanks for your tireless responses. The Wikipedia price/earnings chart should scare anyone away from this Goldman/JP Morgan market. But more scary than anything else, as so many commenters have noted is the fact that the Fed is pouring liquidity into this Hindenburg and never got it right with past bubbles, notably tech and housing.

            If QE2 is not immediately followed by QE3, to quote Bush in ’08, “this sucker’s goin’ down”. Absent such (finite) liquidity, there are so many macro overhangs that make this market mathematically impossible. Unemployment (stuck and fudged), student loans, commercial real estate, housing and unresolved foreclosure fraud, deficits, municipal and state defaults, pension fund losses, eternal wars, peak oil, and so on, all virtually guarantee a major reset, if not catastrophic collapse (or hyperinflation).

            Schiller has called this market pretty well I believe, as have Nicolas Taleb, Chris Whalen, and others, not just Rosenburg. I view this market with the same skepticism I did housing in ’05, when we sold our house. At that time, the Fed, Realtors, and mortgage bankers were saying things were fine. I didn’t believe them then and I certainly don’t believe them now.

          8. Philip Pilkington

            “The Wikipedia price/earnings chart should scare anyone away from this Goldman/JP Morgan market. But more scary than anything else, as so many commenters have noted is the fact that the Fed is pouring liquidity into this Hindenburg and never got it right with past bubbles, notably tech and housing.”

            Perhaps your skepticism is more than a little justified:


            “Goldman Sachs experienced a slowdown in many of its divisions in the fourth quarter, and earnings dropped 53 percent, to $2.39 billion, or $3.79 a share.

            While the per-share profit in the quarter was modestly higher than the $3.76 a share analysts polled by Thomson Reuters were projecting, it was a stark reminder of how challenging the markets had been for firms like Goldman during the last year. “

    4. john bougearel


      The market is always “unhinged from its fundamentals.” It never trades at some fictional level of “equilibrium.” The markets only concern is how high is high and how low is low. That is the only “discovery” that it cares to ever make. And so, like a pendulum it swings from one extreme to the other. While swinging to and fro, the market is certain to pass through so so-called “fair value” areas, but fair value is of no concern to it.

      While the baseline scenario for a muddle-through recovery may persist for many years as it did in the 2003-2007 era, that era was not a sustainable trajectory. The baseline scenarios going into the bursting of the housing bubble was that its overall effect on domestic economic activity would be contained and idiosyncratic.

      Turned out, the bursting of that unsustainable bubble poisoned the whole world with a toxicity that still sickens our domestic economy.

      When you quote todays pe at 13-14, you are quoting the forward p/e, which itself is flawed from the start because it is based on a set of forward looking assumptions.

      Further there is no safety in an “average p/e.” Market prices are not “normally” distributed. As and when the pendulum of the market swings from extreme optimism to extreme pessimism, look out below.

      Throughout much of this decade, the market has been undergoing a multiple compression from record highs. There is good reason for that to continue. P/E multiples reached record highs in the US was because fiscal and monetary policies have been too accommodating over the past decade. The trend of overly accommodating policies can’t continue forever…and when that trend ends, it won’t be possible to justify trailing p/es of 15-16 or higher.

      The trend towards further multiple compression in spite of the overly accommodating policies is likely to persist too, unless evidence of healthy organic and sustainable growth is achievable in the private sector without relying on the largesse of overly accomodative fiscal and monetary policies combined with aggressive cost cutting measures (laying off 8 million workers) to achieve these record profits and profit margins.

      As and when the domestic economy is weaned off unsustainable overly accomodative fiscal and monetary policies in 2012 and beyond, what then, brown cow?

      Speaking of GDP and inflation, consider the trajectory of China as a case in point. This morning, in a note to clients, I wrote “China’s GDP peaked in Q1 2010, so their monetary policy tightening is having a slowing effect on their economic activity if not their inflation. The official GDP growth rate still exceeds their inflation rate, which is good. However, the gap between the two are converging as we head into 2011. It is probably a good idea to watch this gap closely in 2011.”

      The gap between the global GDP growth rate and the global inflation rates are converging not just in China. Everywhere you look as global policymakers respond to increasing inflationary pressures. Just last week, economists forecast the BOE to be raising rates by the 3rd quarter of 2011 and the ECB cited inflationary pressures building. The ECB citation is a telegraph that they too will be raising rates sooner than later. So, as this gap between global GDP growth and inflation rates converges, both global profits and profit margins will decline. This in turn will be another contributing factor to the trend towards multiple compression.

      Now god forbid the forecasters overestimate the earnings growth rates for 2011 and 2012. Yves is correct in pointing out that their are significant offsets to the fiscal stimulus for 2011. And she is right that these drags may more than offset and “overwhelm” the said stimulus. If analysts overreach and actual earnings undershoot the earnings growth forecasts, the stock market will have to be undergo a revaluation to reflect the forecast undershoots.

      1. Philip Pilkington

        Clear, well-written – the writing of someone who works with this on a regular basis… thank you, I was really muddling through there with my highfalutin theory-jargon; so was Yves (sorry, Yves…).

        Anyway, just wanted to comment on this:

        “P/E multiples reached record highs in the US because fiscal and monetary policies have been too accommodating over the past decade.”

        I don’t think so – or, at least, I don’t think you’ve tracked it back to the ’cause’.

        WHY were fiscal and monetary policies so lax? – That’s the question.

        I don’t think blaming this on ‘The Greenspan’ really helps our understanding. There’s something far more fundamental going on here – a certain shift in how the economy as a whole operates; how its profits are derived; how its goods are sold…

  6. liberal

    “The only fundamentals that matter to stock valuation are corporate profits, and those are exceptionally good.”

    Except that they’ll probably mean-revert.

    “The market’s price/earnings ratio (which is at 13-14) is, by historical standards, average …”

    Definition of earnings used?

    1. K. Williams

      “Definition of earnings used?”

      Here it’s GAAP earnings, but you get the same result when you use FCF, too — the market’s not overvalued. And I don’t understand what you mean when you say profits will “mean revert” — the US economy is still very weak right now, so if anything the mean reversion should be up, not down. Or do you really think companies are going to make less money when the economy is growing faster?

      1. liberal

        No—are they leading or trailing? If trailing, how many years?

        “And I don’t understand what you mean when you say profits will ‘mean revert’ — the US economy is still very weak right now, so if anything the mean reversion should be up, not down.”

        Uh, profits are outsized considering how weak the economy is.

        1. Philip Pilkington

          “Large companies were disinvesting in the last expansion to produce profits.”

          Speaking of which, I was up till four in the morning last night watching this on my new TV:

          Remember the corporate raiders… oh, the corporate raiders – those lovable rogues. Anyway, that program deals with precisely what you’re talking about: nasty folk ripping apart companies and causing stock market bubbles (not the corporate raiders – although they may have – the film focuses on the British raiders in the 1960s; a story that often goes untold).

    2. Hugh loebner

      How about dividends? They are, after all, the raison d’etre of a stock. Own part of a corporation, the co. makes a profit, you as the owner get your share of the profit.

      What is the dividend the co. is paying? What is the risk of the dividend dropping/ending? What is the dividend on a “risk free” investment? That should give you the price of the stock -> dividend rate compared to the “risk free” investment.

      Owning in the hope the price will appreciate is just succumbing to “the greater fool theory.” See also “tulipomania.”

      1. Philip Pilkington

        Dividend growth is shown in the graph I cited:,_Earnings,_and_Dividends_1871-2006.png

        At a glance, it seems a reasonably meaningless measure for general stock market fluctuations. It seems – again, at a glance – to track earnings to a certain degree. No surprise, I guess.

        I have to say, though – and I think a few people said this above, its certainly what I’ve been getting at from the start:

        You CANNOT track the stock market from graphs and simple stats. You might as well read tea leaves or learn astrology.

        Large fluctuations in the stock markets are tied to changes in the macro-economy. These changes can be guessed at – but not measured precisely.

        If you can’t get down with that indeterminacy – well, try a job at as an actuary in a simple, single product company…

      2. Philip Pilkington

        Holy shit! Hang on a minute – you’re that guy that does that Turing test thingy…

        My God, and I started talking about indeterminacy. The irony – I swear, I didn’t even recognise the name.

        Can I just say: No stock market will ever be predictable from graphs or computer calculations or whatever… but neither will a computer be able to mimic complex phenomena.

        You Turing guys are WAAAAY off – its crap; these systems are too complex. But not just that… they contain a seed of COMPLETE indeterminacy that is simply irreducible. Aristotle called it ‘luck’ – Jacques Lacan called it ‘tuche’ – you can call it what you want; but it eats into determinate systems like a virus.

        Sorry, just wanted to get that rather obscure point off my chest…

  7. Amit Chokshi

    It’s really difficult to take permabears seriously, many of them use a lot of sharp language, tie in various conspiracies, and then discuss widely known and discussed aspects so that value of that information is null in so far as much of this is known/impounded by market participants.

    I believe we’re now in just a trading range until PEs compress to 8-10 for the SP500, we can either drop and/or have profits over time grow into the current valuation but 2008 was a combo of financial ecosystem imploding + economic/financial crisis. I think we can get grinders both on the up and downside, BFD…

    As for MU, I take personal exception there. MU is one of the biggest players in flash memory which is a key component in just about every tech device and the need for more flash/DRAM is going to increase. MU has taken its lumps (my fund/accounts bought in the $7s) ahead of expected bad news but the stock even at $9 is not expensive. Look at the tangible book value (in the $7s), this co generates solid cash flow, and has a solid outlook.

    So when INTC says they’ll be increasing capex, it makes all the sense in the world to switch to the more leveraged plays from a supply chain perspective (not financial leverage) where you can get more bang for your buck.

    There are cheap stocks out there. ZRAN was sub $7 recently, it had nearly $7 in net cash per share, has a successful and respect activist involved, and is in segment that is in a pull back but certainly won’t be in the doldrums for the next 12-24 months…the economy can be good or bad but the only thing that matters is valuation.

  8. K. Williams

    “And in case you think there is good reason to believe the recovery is on, there is plenty of contradictory information”

    Really? US Empire Manufacturing report today had the Employment Index at 8.4, up from -3.4 last month, New Orders at 12.4, up from 2.6, the future general business conditions index was up sharply, as were future new orders and future inventories. You would not get those numbers if the recovery weren’t on. Permabearishness in the face of actual improvement is exhausting.

    1. RalphR

      “Improvement” and sustained growth are two different things. The economy IS on life support and pressures are on for spending cuts.

      Nothing fundamental has been fixed. TBTF banks are still getting massive subsidies, bad debt has not been written off. The mortgage/foreclosure crisis is going to either drag down growth or just the banking sector.

  9. Paul Boughton

    The markets wont sell off until enough participants are found to distribute to,the stair step pattern up in the SPX since early December is baiting,these patterns always end badly and very quickly,Feb 11 is a date I have for an intermediate top in the SPX.

  10. grandiosity

    As always, the stock market is too broad a beast to talk much about. The banks are on life-support: just look at the Fed’s balance sheet.

    But IT, bio, and energy sectors are hugely active — simply because science and technology are accelerating in leaps and bounds. In the end, folks, its all about brains and learning and knowledge and freedom to develop and communicate.

    What we are seeing now is a historic convergence in the evolution of a global civilization – similar to the pre-Renaissance period in Europe after Marco Polo. It will be that way for a long long time to come – – barring any unfortunate civilization-stopping event, like nuclear war or climate disaster.

  11. Anastasia Beaverhausen

    All the tax breaks we got went straight to the health insurance company because of the latest round of drastic premium increases they bestowed upon us. It’s infuriating to read how Wall Street and the blood-thirsty banks keep getting government welfare by the trillions while everything on middle class balance sheets exponentially goes up, without any relief in sight.

    It’s disgusting.

  12. Jim Haygood

    In another of the world’s quantitative easing ghettos — the United Kingdom — inflation is looking bloody ugly:

    The consumer prices index rose to 3.7% in December, the Office for National Statistics reported. On a month-on-month basis, prices rose by 1% – the biggest increase on record. The retail prices index, the wider inflationary measure used in pay negotiations, jumped to 4.8%, its highest rate since last July.

    Unlike America’s BLS (Bureau of Lying Statisticians), the UK publishes reasonably honest inflation data. And it’s one of the better proxies for US inflation, since our own Soviet agitprop statistics (‘inflation is vanquished, comrades!’) aren’t reliable.

    Needless to say, if inflation is running nigh on 4%, holding short rates at zero (that is, a real rate of minus 4%) is nothing but a sorcerer’s-apprentice Bubble machine. As one would expect from the bank cartel administering this policy, it is designed to boost the FIRE sector, not the real economy.

    Both crude oil and food prices are at levels which — had the commodity spike of 2008 not desensitized us — would be considered dangerously unacceptable. Food and fuel prices are already causing social unrest in developing countries where such staples constitute a major portion of the consumer basket. But food and fuel are precisely the items excluded from the somnolent core CPI, meaning that US authorities will be blind to the rising pressures on Americans who are barely subsisting.

    Near daily media stories, including one in Bloomberg this morning, indicate that whether rates rise or fall, whether the economy accelerates or slows, the oblivious Fed cartel has no intention of stopping its reckless QE2 purchases of Treasuries using magic-wand, thin-air, pixie-dust reserves. Alarmingly, Chairman Bensane Bernanke has indicated his satisfaction that the flood of Ponzi liquidity is goosing stock prices.

    As Dr. John Hussman ably explains in his weekly column, high stock valuations today directly translate into weak prospective returns over the next decade. Pension plans succumbing to Bernanke’s stock touting will get burned, just as surely as did home buyers who took Greenspan’s ruinous advice to seek adjustable-rate mortgages in 2004, just before short rates were hiked 4.25 percentage points.

    Greenspan, Bernanke, and most of their accomplices and co-conspirators maintain that Bubbles can’t be identified in real time, and in any event, aren’t their problem. Wrong and wrong, I shriek.

    This is Bubble III, right here, right now. Although it is still acquiring its defining focus, so far it has featured a generational high in bond prices; record highs in gold, food prices, and several commodity indexes; crude oil over $90/bbl; and stocks at valuations equivalent to those accompanying the 1929 and 1968 secular market peaks.

    Out of control food and fuel prices already are creating havoc. When Bubble III pops, once again the economy will be mired for years in weak growth and surplus labor. This is the wholly predictable result of the excesses of Bubble III which the Federal Reserve’s central planners are feeding now.

    Given a Ponzi monopoly like John Law, these licensed fraudsters have acquired a messianic idée fixe that they can save the planet by expanding the scope of their depredations — which is, of course, the relentless ‘grow or die’ logic imposed by a pyramid scheme.

    Bensane Bernanke is a menace to humanity. The scope of Bernanke’s delusions makes this man appear a model of sobriety and probity by comparison:

    A nude tourist running into traffic and yelling he is “king of the world” was tased on Big Coppitt Key and jailed early Sunday morning.

    Richard Gervasi, 43, of Phoenixville, Pa., reportedly also said he is “made of steel” while he was taken into custody. He reportedly had been drinking and took LSD.

    Dispatchers received reports of a nude man running into traffic on U.S. 1. Deputy Becky Herrin says he attacked one of his friends when Malone arrived, then ran at the deputy. He refused to stop when told to do so, so Malone tased Gervasi. But that didn’t stop him and he pulled the prongs out of his skin, Herrin said.

    ‘QE must go on,’ he shouted at the oncoming traffic. ‘I am king of the world. I am made of steel! I have a trillion dollars in excess reserves!’

    1. Cedric Regula

      Shadowstats claims US inflation has been running close to 4.5% this past year, when calculated the way the government calculated it back in the 90s.

    2. Jim Haygood

      Dr. Lacy Hunt takes up my sequential Bubble theme:

      For the past twelve years the Fed’s policy response to economic problems has been to pump more liquidity. These problems included: (1) the failure of Long Term Capital Management in 1998; (2) the high tech bust in 2000; (3) the mild recession that began with a decline in real GDP in the fall of 2000; (4) 9/11; (5) the mild deflation of 2002-3; (6) the market crisis and massive recession and housing implosion of 2007-9; and now, (7) the lack of a private-sector, self-sustaining recovery.

      The Fed diagnosed each of these events as being caused by insufficient liquidity. Actually, the lack of liquidity was symptomatic of much deeper problems caused by their own previous actions. The liquidity injected during these events led to a series of asset bubbles as the economy utilized the Fed’s largesse to increase aggregate indebtedness to record levels. The liquidity problems arose as the asset bubbles burst when debt extensions could not be repaid and generally became unmanageable. Each succeeding calamity or bust reflected reverberations from prior Fed actions.

      QE2 is another example of flawed Fed policy operations.

      Those who cannot diagnose the past are condemned to repeat it.

  13. armand g eddon

    How much are ‘earnings’ inflated by liberal changes in accounting conventions that were designed solely for that effect? And how much does the answer depend on the business sector? What is the landscape here in regard to the thread’s topic?

  14. thepigman

    Can’t believe that it’s even debatable that the fed and
    at least some of the large primary dealers are kiting
    asset classes back and forth between themselves as the hedge
    funds simply tag along. Fundamentals are long gone….we
    left them back in 2009. Volume is at 1998 levels (70% of peak) and falling and insiders do nothing but sell. Been told a tale in Tokyo for years… when you ask a salaryman what he thinks about the Nikkei’s prospects, he will smile shyly and reply, “Ask the government”.
    Looks like we finally caught up to them.

  15. Jerry

    “Thousands took to the streets to rally against unemployment, high food prices, corruption and state repression.” These are the words from an article on Tunisia. They are words that can be applied to all countries including the USA. Are our state and federal politicians so nieve to think this will not happen in America when people find that neither party really represents the vast majority of Americans? Clearly it is time to think what kind of economy around the world will work for everyone as neither capitalism nor socialism work.

    1. Cedric Regula

      We’ll be there when the Treasury instructs the Federal Reserve to print food stamps directly. Maybe with a likeness of Obama on the front and a little saying on the back like “In Food We Trust”.

  16. Hugh

    Stocks and commodities have been mature bubbles for more than a year now. If you had to compare to the housing bubble, we just finished 2006 and are entering 2007. I have been predicting for two years now a crash in 2011. It could happen as early as April but personally I think August-October is more likely. I am acutely aware of the uncertainties in forecasting the break of a tulip fever and of Keynes admonition that markets can stay irrational longer than the rational can remain solvent.

    But Yves is right the fundamentals stink. Disemployment has been in the 20% range for over a year. The BLS has been dinking with its numbers so it may take another month or two to see where this measure which is based on those numbers is headed. We still have millions of Americans losing their homes with all the economic damage that represents but on top of that we have the specter of foreclosuregate which looks to ivalidate every mortgage made in the last 10 years. We have the ongoing insolvency of the banking sector. We have state budget cuts and are looking not only at direct job losses from these but indirect job losses from austerian regressive tax increases to make up for the budget shortfalls. Americans continue to carry heavy debt loads. Corporations aren’t investing. Commodity price inflation, especially that driven by financial speculation, is a further unnecessary drag. The Obama-Republican tax deal continues to steer large amounts of wealth to a rich unproductive rentier class. We still could see this year federal budget cuts from our two corporatist parties. And then on the international scene Europe or China could blow up, either of which would take us out.

    I wonder how anyone, not a looter, can not read the writing on these walls and then bulls like K. Williams show up. My question to them is are you guys just talking your book or are you doing an Irving Fisher for us? Speaking of books maybe a quick read of John Kenneth Galbraith’s The Great Crash 1929 would do you good. The machinations have become more sophisticated but the psychology is eerily the same.

    There is just so much their analysis, if I could even call it that, misses, the kleptocratic nature of our elites, the manipulated nature of the markets themselves, the massive inequality of wealth in the country, and all of the other negative economic factors previously mentioned.

    GDP is growing although the rate sucks. US corps are making lots of profits abroad. How does that help most Americans? They are not investing them nor are they using them to hire more people. Oh and did anyone mention margin compression? Most serious analysts say there will be no double dip recession. Would these be the same serious analysts who didn’t see the housing bubble, or that it would burst, who didn’t see the meltdown coming either? Are our opinions then to be discounted precisely because we did see them? They were wrong so trust them. Don’t believe us because we got it right. Got it.

  17. K. Williams

    “Would these be the same serious analysts who didn’t see the housing bubble, or that it would burst, who didn’t see the meltdown coming either? Are our opinions then to be discounted precisely because we did see them? They were wrong so trust them. Don’t believe us because we got it right. Got it.”

    No, your opinions are discounted because you keep saying the same thing over and over again, and are impervious to reality. You got the stock-market rally wrong. You got the end of the recession wrong. You got the ongoing recovery wrong. So we don’t believe you.

    It’s all so tiresome, reading the same litany day after day. The system is rigged. The markets are manipulated. The statistics are faked. Blah blah blah. And yet the profits that companies like Apple, Caterpillar, Deere, Boeing, and Ford are real profits. They don’t use mark-to-market accounting. They’re making tons of money in a weak economy. They’re going to make more money when the economy improves. If you want to believe that the country is going to hell in a handbasket, feel free. But your paranoid delusions about the system don’t make a market trading at 13-14x earnings a bubble.

    1. sandorgb

      read this and it may help you get a clearer perspective on stock valuations. the other thing you nonchalantly disregard is the fragility of the interconnected bank OTC derivatives (i.e. credit insurance) market. at the extreme ends of tail risk, a domino of margin calls (financial equivalent of rolling blackouts) can quickly bring the equity markets to their knees. there is too much leverage in the system. it is inherently unstable. regardless of prospects for overseas growth. and i actually think the markets ultimately make new highs in nominal terms, but drift sideways in real terms. e.g. the S&P is down 80% relative to gold in the past decade.

      40 million people are on food stamps in the USA. this is a Depression my friend. regardless of the stock market.

    2. sandorgb

      bonus round: observe the bank repo markets and the susceptibility of money to panic. it may help you preserve capital when the needle skips.

      and we do get your point on permabears. but appreciate the difference between borrowed growth and sustainable growth. you can’t tell the difference by digesting this quarter’s earnings call. you need to understand the structure of the balance sheet and the structure of the macro environment.

    3. Skippy

      K humor me for a moment if you will.

      The the stock market historically is a device to capture other peoples breath and increasing its speed and volume there by blowing tiny bubbles every where, the tickle in our collective champagne if you will. Now the problem historically seems to occur when a very small percentage deem that they are not payed well enough for their efforts and contrive to increase the wealth effect for *themselves* over all other considerations, and proclaim to be the well spring of it facto to validate their assertions.

      To boil it down all the way, we no longer have a functioning market. What we have is a Venturi Market with a bevy of hoses attached to it ie: Mark to fantasy, the Feds machinations QEII, ZIRP, TALF, the hole alphabet soup bucket shop, tax payer life support add infinity etc etc.

      Strip all these hoses off the device and you’ll be lucky to get enough social breath to budge a feather. Yet you proclaim all is well?

      Skippy…the Dow Jones and the SP&500 are just electron value added barometers and in my book a undesirable way to judge the well being of our fellow county men, women and children…eh. How many electrons are your kids worth, let me consult the broad market indicators…ummm…not much by the look of things.

    4. Anonymous Jones

      Have there been stock market crashes? Did people lose money in them? Were stocks grossly undervalued after the crashes? Did it matter if they were undervalued? Were people ruined anyway?

      Stocks trade at what someone will buy them. Spare me your omniscience about whether this particular market is over- or under-valued. You expose yourself as an idiot regardless of how the future unfolds. Make no mistake about that.

      What a waste of time and words. If you really had this much stock market knowledge, you would surely have something (or someone) better to do right now.

  18. K. Williams


    read this and it may help you get a clearer perspective on stock valuations”

    Ah, yes. John Hussman. Someone else who, just like Rosenberg, has been wrong for the last two years. Hussman persists in using a normalized-earnings metric based on the last ninety years, even though according to that metric the stock market has been overvalued since roughly 1991 — since which time the S&P 500 has more than tripled.

    Yes, there’s tail risk, and it’s real. That means if you’re risk-averse, you shouldn’t have money in the market. It does not mean — to get back to the original post here — that the stock market is a bubble or that investors are “manic.”

    1. sandorgb

      the entire global financial system is a massive debt bubble. that doesn’t mean that stocks won’t go higher in nominal terms. but it does mean that deflation and/or stagflation are likely. neither of which bodes well for stocks in real terms in the near term until the debt crises are resolved. after which i am all on board with you for global growth. but within the limits imposed by nature.

      i actually agree with you that stocks are a better place to be than cash or treasuries in the next 10 years, but that doesn’t mean your magical formula of stock market fair value based on a PE multiple of projected earnings will give you the right prices or the right times to get out and wait. or that you appreciate the true probabilities of risks to your growth forecasts. remain humble

      1. K. Williams

        “but that doesn’t mean your magical formula of stock market fair value based on a PE multiple of projected earnings will give you the right prices or the right times to get out and wait. or that you appreciate the true probabilities of risks to your growth forecasts.”

        I actually agree with this — I’m not saying that the market is undervalued, and depending on your risk tolerance, I can understand preferring not wanting to be in the market. What I am saying is that the market is not “unhinged from fundamentals” — on the contrary, it’s very easy to make a solid case based on fundamentals that the market is reasonably priced.

  19. Dirk van Dijk

    Lets look at a little real data on the market and earnings.

    the stellar earnings growth is mostly due to the continued expansion of net margins. Much of the year over year margin expansion is due to the Financials, were the whole concept of revenues is a bit different from most companies, and thus the concept of net margins is also a bit different. However, even if the Financials are excluded, net margins continue to march northward, at least year over year. For the S&P 500 as a whole net margins are expected to be 8.73% in the fourth quarter, up from “just” 7.28% a year ago, but down from 8.96% in the third quarter. If the Financials are excluded, margins are expected to rise to 8.20% from 7.95% a year ago but down from 8.75% in the third quarter.

    That is an excerpt from Earnings Trends, which breaks down the expected earnings by sector for the S&P 500. Lots of data to actually look at, and the data looks moderately bullish to me, sentiment is a bit too bubbly based on the AAII numbers, but more in the range that would suggest a 5% pull back or so in the relatively short term, then probably on to around 1400 on the S&P by year end.

  20. Hugh

    K. Williams calls recovery where there is no recovery. He hails a Fed blown bubble in a manipulated stock market as the wave of the future. The NBER calls the beginnings and ends of recessions. I called the 2007 recession a year before the NBER did. I worked prospectively. They work retrospectively. I think they completely missed the boat on calling its end. Despite K. Williams’ protestations the jury is out on whether that was anything more than a pause in our downward descent. By the way, I did call this as a pause. Nothing has been fixed or reformed. The same disastrous games are being played again. K. Williams just assumes this time there will be a different result. Einstein had something to say about that.

    It is easy to sling labels like permabear around. But what credibility do these people have who have already forgotten that their vaunted financial system blew up just over 2 years ago? They see Fed bubble blowing not as Fed bubble blowing but that they can vent the same noxious gas they did in the run up to the housing bubble burst and even more so going into the meltdown. They have learned nothing. They assure this time will be different. But they ignore the life support, the cons, and all the bad economic data. How can anyone trust what they have to say? We look at all the data. K. Williams only looks at the data that makes him/her feel better and maybe helps their book.

    I wonder if K. Williams was making these same confident assertions in 2007 before the housing market went splat or in 2008 before everything went kerblooey, because he/she sure sounds like those people who were dishing the same crapola then.

  21. T. Rex Bean

    Well, I have no idea who is right in this debate. I’ll just stick to my 60-40 mix of stock and bond indexes and hope I’ll find a job before my unemployment and emergency savings run out. But I will say this: Mr/Ms Williams is remarkably polite and even-tempered. Very refreshing.
    Let me just add that it’s damn ugly out here if you’re not a plutocrat. And I’ve been a very frugal and cautious ant, unlike a lot of people I know who did not prepare for bad times. I still wonder what it will take for the losers in this rigged rat race to get really angry — and how that anger will manifest itself. My guess is that the right will co-opt and direct it to its own ends, as it already has with the so-called Tea Party.

  22. 60sradical

    I like “we are all Tunisia now.” The mass media does not get how important the Tunisia Phenomenon will come to be. It has all Arab countries plus other authoritarian regimes getting more anxious by the day. There have been several copycat self-emulations already in other countries. American politicians will try to spin this as an Islamic thing. This suicide by a young desparate educated Tunisian
    will, IMO, turn out to be a seminal event. This is true class rebellion. This is food scarcity. This is brutality by the Plutocrats, Oligarchs, and Kleptocrats and, sooner or later, it’s headed for Omaha. This young Tunisian meant no harm to others. His sense of humiliation and hopelessness was acute.
    My hope is that many Americans will see this for what it is.

    1. fajensen

      I think that “they” will find a way to install a “Western-style democracy” on Tunesia. The kind where you get to vote all you like and express yourself till you collapse from exhaustion, yet nothing at all turns out any different!

      That will buy “the international community” another 20-30 years of comfy looting at least.

  23. Paul Repstock

    So.. you read this Yahoo Finance headline, which seems to be irrational and immoral, as well as blatantly illegal..
    “Citigroup dips into reserves to post 4Q profit”

    And you understand immediatly why the indexes are inversley coorelated to the currency.

    This is a no win situation. Even if you short till they can’t be bothered to maintain the pretense any longer, you won’t in because your counterparty won’t exist. The only possible ay to beat this is if you can leverage a short against an existing debt….Oh yea..hmmm, smebody already pulled that dodge, didn’t they??

  24. fajensen

    I think “you people” are getting too hung up on the fundamentals. I think other factors are at work here and that stocks could even go to P/E’s of 1000 or more, because it does not matter: There is just too much money flowing into a market too small to absorb it (and no scams are yet in place to suck up the excess).

    As an investor, one can buy bonds or stocks. The bond market is 1000 times bigger than the stock market. The main reason is that bonds are simple investments: Prices are relatively stable, a known interest is paid and return of capital is on a know date in the future.

    But, what if this is changing?

    What if the majority of the bonds you can buy are either government bonds paying no/negative interests or black-box “bond-like” derivatives that come with a suspect ‘AAA’ credit rating and a 500 page user manual?

    Stocks begin to look more attractive in comparison. Stocks are perhaps becoming “the simple” investment – You can check earnings via the IRS, you can learn what business the company is in, you can get an idea of what the stock is worth. With a CDO you are blind.

    It takes only a few % of the bond market moving to stocks to drive stock prices all the way to Jupiter. Whatever reason or “the fundamentals” say.

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