John Hussman has a very nice "open letter" out to the FOMC this morning, and it should be required reading not only for The Fed (which probably will ignore him and not read it) but also, far more-importantly, by anyone who has exposure to the market.
He makes a very clean argument that our market is currently in a massive bubble, and backs it up with facts and figures. But there is one point that he is pounding the table on that I have made for the last four+ years and yet it has been resoundingly ignored.
That is the fact that it is not The Fed that has powered the rally -- it is the fraud in valuations that was made possible by Kanjorski's hearing in 2009 during which FASB was basically told to allow mark-to-unicorn "or else."
The problem with pumping up a bubble through bogus valuations is that unlike doing it with "liquidity injections" the destruction of the former is assured since the valuations are fantasies. What's even worse is when you allow people to believe that it is "liquidity" that led to the behavior and valuation change when you know, or should have known, that was utter crap either because you are scared of the truth becoming known or worse, you start believing your own press releases.
Unfortunately as John points out after-tax profits compared against GDP are at utterly ridiculous levels -- by a near double. This strongly implies that simple mean-reversion, without any sort of overshoot and without any multiple contraction at all, cuts the market in half.
So the question becomes, are these "profits" sustainable or even worse, are they real?
We're going to discover the answer to both of those questions in the coming months, and I suspect that we're not going to like the answer one little bit.
Hussman's Open Letter: http://www.hussmanfu...c/wmc131125.htm
Karl's insightful rant : http://market-ticker...r...cker&page=3
This current market WILL EASILY be cut by 50%, and probably by 70% before its all over.
