In short, I feel greater confidence drawing inferences from that chart than any that leaps to mind. That way, when this index shrinks fifty percent, it is a strong indication that the global value of equities has done just that. During the seventies the limited DJ index actually disguised market breath declines by somewhat riding above them all.
We have been treated to two different bubble economies over the past decade. The first was a pure equity bubble, modestly influenced by access to credit and known as the dot com bubble. It was a bubble like most others. Those who played could get destroyed or perhaps get rich. It transferred speculative funds into a slew of start up propositions and in so doing, encourages economic growth even with the many individual failures.
I like to remind the socialists among us that a single Google or Amazon pays for a thousand flops that still gainfully employ tens of thousands of our best and brightest. Today the socialists are been persuaded to bail out GM at taxpayer expense while a few millions of dollars down the street is in the business of putting the global automobile industry out of business by replacing it all with something far better. Who do you want to bet on? Read my blog if details interest you.
The second bubble kicked off in 2003 with the advent of cheap money and has been purely a credit creation bubble that indirectly lifted the markets for the next five years. The creation of this credit bubble was terribly flawed in as much as it quickly ran out of credit worthy borrowers. Once that was apparent, the proper response from the fed was to lift interest rates back to the competitive levels that history has proven will work for decades. I do not understand to this day why this was done. At the time I understood the rational for a short term drop in rates. Inside of a year, I was waiting in vain for a lift in rates. Had that happened, the bubble would have been aborted. And we are not talking about anything but a restoration of a classic three and six percent rate system where good banking can be done and good investing can be done.
It is noteworthy that the index shows us that the markets are operating at a pricing structure that is prebubble for both bubbles. It should stay in the present channel until the foreclosure inventory is completely resolved.
The reason for this is that cheap money is not solving the problem this time around. It is enriching the rest of the world as they finance needed infrastructure and join us in the twenty first century. It is not enriching us because we can not use credit yet to sponge up properties and rent them out at an immediate profit. This is coming since the administration will clearly be doing nothing except blame it all on history.
Most likely our banking system will stay moribund until the foreclosure wave has completely matured and passed through the system. This will likely be by the end of 2010. Once everything has been foreclosed that is going to be foreclosed, it will be possible for cash to cut deals with some sense of confidence that the locked prices will hold. So yes we get to wait and do all this the hard way.
The US government will have to continue replenishing the banking industries capital base until it is all back to a twelve to one ratio. Then these banks will start working off inventory at whatever bottom pricing structure we have arrived at. A couple of years of that and the inventory will evaporate and we may discover that America now has the highest percentage of homeowners ever. Not the way it was originally planned, but what did they expect.
The problem of course, is that modern consumer will be as frugal as the depression generation and not an eager participant in flawed investment strategies like the ones they presently wear.