WHEN CREDIT EXPANSION ENDS

http://www.prudentbear.com/articles/show/2024 Doug Noland Credit BUbble

"I’ll suggest as well that we’ve entered a dangerous period of Bubble-on-Bubble Excess. Despite several years of significant stock market inflation – three-year gains of 46% for the Russell 2000, 51% for the S&P400 Mid-Cap index, and 40% for the Wilshire 5000 - liquidity abundance has nonetheless nurtured a fanciful view that U.S. equities remain “undervalued.” The S&P500 this week traded back to year-2000 record highs, with the bulls keen to note that earnings have risen markedly since then (corporate profits have doubled since 2000 in total from the National Income and Product Accounts, and similarly for S&P500 companies).

So the bulls today trumpet the case that U.S. stocks are cheap in real terms (S&P500 at “only” 18 P/E) and relative to global equities prices. The reality of the situation, however, is that years of U.S. Bubble excess have significantly inflated “fundamentals” such as corporate earnings and cashflows and personal incomes, along with global asset prices generally. Bubble-on-Bubble excess today inflates the perceived reasonable bounds for valuation to extremes - on top of an earnings base that is acutely vulnerable to a post-Bubble collapse. Yet perceptions hold that market risk is today much lower than during the 2000 Bubble.

As we now witness, financial excess inflicts its most seductive distortions to underlying “fundamentals” during the late phase of Credit Bubble excess. There is an argument that lingers to this day that stocks were not overvalued in the late twenties. And while P/E ratios were modest right up to the ’29 crash, underlying boom-time earnings had become grossly inflated - and vulnerable. Similar dynamics are at play today. I fully expect corporate profits, personal income, and government tax receipts to all prove highly susceptible to the inevitable Credit cycle downside.

Some choose to define Bubbles as a divergence between asset prices and underlying “fundamentals”. I would instead stress how profoundly and surreptitiously late-stage Bubble dynamics distort fundamentals – as both Credit and asset prices lose their moorings to anything of stable value. It’s when the pendulum inevitably swings back and the market places cautious multiples on post-boom earnings (that can be abruptly sliced "in half") that create devastating losses for unsuspecting “investors.” I’m with Fan Gang on this: I find the current direction of things Scary."

**Many believe current housing CRISIS is beig under reported, true data manipulated to seem not as bad, when real economy shows its ugly head and people get cautious (as some banks already have) there will be a MAD RUSH FOR THE EXITS.

Are you up for another round of MUSICAL CHAIRS? REMEMBER LAST BEAR MARKET, BE CAUTIOUS

Duratek