it is not drastic...in fact it may well be overvalued at $20 by the time it hits it. the reason is that the unwinding of the U.S. asset bubble should result in a long drawn out global depression...growth will disappear and capital spending will be frozen for years. the S&P should bottom out with a 6-7% dividend yield eventually.
now, i know this sounds like the ravings of a madman, since we've all been conditioned by the stock market bubble...nobody remembers bear markets, dividends or value anymore. but when the pendulum swings the other way after a bubble of historic proportions pops, it tends to overshoot to the downside. between September '29 and July '32 the Dow fell from 380 to 42...a similar haircut between '99 and '02 would bring the Dow to 1,585 points.
impossible, right?
well, it seemed equally impossible in '29, after all productivity gains for the past decade had amounted to 43%, inflation was vanquished, a host of new technologies (automobile, airplane, radio, etc.) promised a bright future, corporate earnings were at all-time record highs and stock prices only went up, they had done so for years on end, and every pullback, and there were a few scary ones, was ultimately followed by a push to new highs.
anyone predicting that the Dow would fall by 86% over the next two years would have met with derision. the gloom-and-doomers had warned for years that stock prices were way out of line with fundamentals, and the market continuously proved them wrong.
but then, we know now that back then a speculative mania was underway, whereas NOW, we are in a NEW ERA.
the end of our new era will be just as spectacular as that of any other before it. the Fed has laid the foundations for a global financial and economic catastrophe with it's lax monetary policy. future generations will look back at the '90's and be just as amazed at our mania as we are wondering about prior investment manias.
having said that, it is probably high time we have the usual melt-up to new highs over the next few weeks.... |
