It's certainly a possibility - I'd put the odds at 50-50 -that we see something like the Dow at 50,000, equivalent in valuation to 5,000 today. But that implies something like a tenfold increase in nominal earnings driven entirely, or more than entirely by rising prices. There's nothing stealth about it and it's not like anything we currently observe happening. Shiller PEs are going up not down, earnings are going down (at least in the fourth quarter!) not up, overall debt levels continue to rise driven by the federal deficit. Asset prices are rising, the nominal currency value of the underlying cashflows are not. It's just a supposition, but I think we'll come to a moment where the Fed must decide whether to cross the Rubicon and deliberately gun inflation expectations beyond what is currently considered normal, or be forced to let asset prices meaningfully correct. The obvious thing to say is they'll continue to inflate but there might yet be a surprise on this score. The Fed's real mandates are after all to protect the banking system and the government's solvency, to the extent a 50% market plunge doesn't directly threaten these the Fed may well judge intervention to not be worth the risk.
Wholly agree this could happen -- though to my mind that would qualify as a "Minsky Moment" in which a new worse-than-2008 crisis is upon us. For the Fed to go "nuclear" we would likely need to see the return of economic recession, bordering on outright depression, as such that the stability of the global banking system is again threatened. But if we get to that point with long bond yields below 3% or even 2.5% -- as bonds will surely have pushed to new heights in such a malaise scenario -- then the Fed is up shit creek without a paddle. What happens when you've cranked the defibrillator up to 10 and still no patient response? If you imagine a scenario where the economy is deflating and the Fed is out of bullets -- other than pulling out the nuclear option -- too hard of a "deliberate inflation" push could finally be the straw that breaks the bond market's back (while sending precious metals over the moon). A fear of total breakdown in the system could lead to treasury bonds collapsing in the midst of a Felix Zulauf "inflationary depression" mentality, as the odds of paper currency getting debased to confetti get priced in. This is the outcome where unemployment hits GD levels and gold goes to $10,000 per ounce. We could get from here to there... I just imagine it would be a process, for ex. a multi-month or multi-quarter deterioration, not a sudden event. All idle speculation of course... p.s. Correction -- what I described there was a Fed with its back against the deflationary wall. You were referring to a pre-stage event to that, more of a 1937 scenario, where the Fed decides to withdraw support even as the economy stumbles. I rather doubt this will happen, as Ben Bernanke knows the lesson of 1937 and fears deflation more than inflation. But if it does, and the underlying economy is as weak as the macro bears say it is, we would still wind up in the Minsky place I described. p.p.s. Ironically, for the economy to successfully withstand the blow of a 50% market drop and full Fed withdrawal, the underlying state of things would have to be stronger than all the permabears believe, which in turn circles back around to the bullish argument that things aren't as bad as they appear. Just give me the charts thanks...
Here's a question - why does europe matter? The S&P is based on the earnings of US stocks, not European ones. 2nd question - in 2, 3, 4, 5 or 10 years from now, will S&P earnings be higher or lower than today? So, given present PEs, will stock prices be higher or lower?
how many of these companys trade internationally to answer your 1st ques... http://www.forecasts.org/info/dow30.htm
Lots of reasons: * The global banking system is global. U.S. money center banks have major potential exposure to a European credit event. * Trade is global. Significant economic deterioration in Europe hurts multinational profits, potentially destabilizes China, and increases the risk of trade war (all bad for multinationals). * If the euro plummets on a credit event or "nuclear" ECB response to such, the $USD skyrockets. This directly impacts multinational profits and hurts U.S. exports. * Capital flows are global. The system is linked, and significant turmoil in one area of the system eventually impacts others in ways large and small. Europe as a collective economic entity is not small. As for the second question, there are so many unknowns and moving variables you might as well ask who will win the Superbowl or the Masters in 2015, 2020 etcetera.
This guy typifies the current institutional mindset imho -- i.e. "if nothing goes wrong, we go higher:" http://www.businessinsider.com/blackrocks-bob-doll-talks-tail-risk-2012-3
Charles Ellis is such a douche. "If you choose a money manager, choose one you will stay with for 20 years -- and not because of performance..." BWAHAHA I love that he wrote "The Loser's Game" in 1975, about the time Soros, Steinhardt and others were just cranking up their monster performance-crushing runs, and still believes that EMT bullshit to this day: http://www.collinsward.com/Articles/CWCM_The_Loser's_Game.pdf
was referring to the first guy pete bernstein, they are both smarter than i am, pete had forgotten more than i will ever learn
Bernstein (RIP) has written some great books -- Against the Gods, Capital Ideas, Power of Gold -- but was a little too immersed in MPT for my taste. Very thoughtful individual but not too much value add for traders.