Thanks to Trond for the document, I shall try to understand it next week, when an hour or two might present themelves.
As a non-economist who has much to do, and would therefore rather play at crystal balls, I posit this as the near future. Anyone else wanna play?
(1) investing spare money in the stock market is essentially an investment in other investor' impressions of other investors' impressions. Doug quotes Keynes along these lines in his book somewhere. Trond's suggestion that salient bulls may be deliberately affecting the market by way of their public pronouncements is pretty tenable.
(2) earnings projections do have an effect on this. A successful euro, a recalcitrantly depressed SE Asia, and a depreciating Yen (and the chance of all three occurring together is a reasonable one, as they are interconnected) would seriously affect both an already entrenched US current account deficit and the earnings projections of export dependent sectors.
(3) If I were a corporation, I'd already be borrowing in Yen, in the rational hope the Yen will go down (after all, Japan has a stagnant domestic economy, a banking sector in trouble - in an economy which depends much on its banks, an economically lousy region, and, as Dennis reminds us, is gonna take a bath on loans to that region). A low Yen confronts SE Asia with competition they can't handle and even less Japanese demand. And by Dennis's compelling logic, the Euros have the strategially superior exposure in the region, and are enjoying the benefits of larger scale and lesser transaction costs. All this adds up to fewer US exports and more US imports (many from Japan), I reckon - and lower earnings and a worsening current account deficit.
(4) the question is not when this will happen (even if), but when (and if) a couple of big-league managers decide treasury paper looks a better immediate risk as a consequence. After that, we're back to point one - and the mass hysteria that took the DJI up, will take it down. But unprecedented massive popular involvement might mean short-term losses aren't to be borne as stoically as the big boys might have borne them in the past. The demographically predominant baby boomers are close to retirement, they'd suddenly take notice, and they can't afford to hang in for any possible recovery in the long run. They'll take what they can get when the confidence goes.
(5) The consequent correction will become a crash if production decisions, borrowing-for-speculation, borrowing-for-real estate, and consumer borrowing decisions then prove to have been made with exclusive reference to recent stock market levels (begging the question, upon what else would people base their decisions - isn't Wall Street the face of the economy?). Because then bad debt hits the scene and catalyses correction into crash.
As I don't know the figures for (5), I won't be so daring as to foresee a crash. But 10% will go, because Greenspan has been telling us for two years he's gonna push the interest rate button if he has to. The threat hasn't worked, so the button'll have to do the job if (5) is to be avoided.
So my prediction is 10% correction within a couple of months, or crash of huge proportions when (2) and (4) bite. And I reckon that bite will originate in Japan - and possibly within Trond's one-year period.
Waddya reckon?
Cheers, Rob.