The revaluation that is underway now is beyond the simple scope of corporate earnings valuations, going to the very core of the system itself. Just like the equity pricing regime (and investor expectations for equity assets) needs to adjust to the twelve-year-old bear market reality, pricing within the global banking system as a whole needs to adjust to the reality that the artificial growth of the economic textbook is not replicable. The economic truth of 2012 is that much of the science of economics, and the foundation that gives to finance and financial pricing, was a temporal anomaly befitting only those specific conditions of that bygone era. In other words, the entire financial world needs to reset itself outside the paradigm of pre-2008. The secular bear market in US equities is one strand of this changing landscape, perhaps the first stirring of the collapse of the activist central bank experiment. In the end, the potential selling pressure of the dollar shortage is irresistible, no matter how “cheap” stock prices are to earnings, but none of it may matter in the grander scheme of a dramatic reset to the global system. The inability of that global system to escape this critical state, to simply move beyond crisis and function “normally” again, demonstrates conclusively, in my opinion, the foundational transformation that is still taking place well beyond the stock bear. Everything is a locked feedback loop of negative pressures in this age, no matter how much we want to see “value” where and how it used to exist.
Paradigm shifts are rarely orderly, but there are warning signs.