"This time is 'not different'. The only difference will be what triggers the next valuation reversion when it occurs. If the last two bear markets haven’t taught you this by now, I am not sure what will. Maybe the third time will be the 'charm'."
The current market process certainly seems far more similar to the 60-70’s than most people would like to admit. The only question is how long will it take for the “intelligent asininity” of the bullish proletariat to finally wear thin.
Historically speaking, it is unlikely that with reported earnings early in the reversion process that we will see a sharp recovery in the second half of the year as currently expected by the majority of mainstream analysts. As long as the Fedremains accommodative, the deviation between fundamentals and fantasy will continue to stretch to extremes. The end result of which has never “been different this time.”
The central bank already missed the “window of opportunity” for normalizing rates in a manner that doesn’t hamper the recovery. While the big news for the market was the release of the April 27th FOMC minutes which once again suggested the Federal Reserve may be on a path to hike rates sooner rather than later. The reality is simple, with the markets hovering on critical support, a Presidential election just around the corner and no real evidence of economic recovery, the likelihood of a rate hike in June is approaching zero.
"If we have borrowed more from our future than any time in history and markets value the future, we should be selling at a discount, not a premium to historic valuations... Overconfidence and over valuation always extract a terrible payback."
The “bullish case” is currently built primarily on “hope.”Hope the economy will improve in the second half of the year; Hope that earnings will improve in the second half of the year; Hope that oil prices will trade higher even as supply remains elevated; Hope the Fed will not raise interest rates this year; Hope that global Central Banks will “keep on keepin’ on.” Hope that the US Dollar doesn’t rise; Hope that interest rates remain low; Hope that high-yield credit markets remain stable.
Although money supply growth remains historically strong and investors are desperately chasing returns in today’s ZIRP world and are therefore evidently prepared to take much greater risks than they otherwise would, an extremely overvalued market is always highly vulnerable to a change in perceptions. In a sense the rebound may actually turn out to be self-defeating, as it will increase the Fed’s willingness resume tightening policy.
The middle class in America forgot all about the importance of savings and frugality and instead bought into the lie that one’s future would be “taken care of” if only it threw its money into the stock market.