> I would say that for instance > 10% in a couple of hours
> is a crash. Would you call that a "correction"?
10%? I'd call that a buying opportunity! :-)
> I do not see a crash as an event so immense that it "resets" the
> price back to fundamentals (you seem to imply that that is my
> position), but more as an event that gives a shock to the
> market, changes the fundamentally optimistic mood to
> qualitatively more pessimistic, and possibly initiatites other
> events that may unravel the economy, like in 1929.
I think my point is that dips in the market _are_ now viewed as resettings; whether or not it is your position doesn't matter. It _is_ the position of the market participants. And it will dictate their response. A 10% one-day drop (though technically impossible these days given the circuit breakers) will, given the ongoing addition of liquidity, be erased in no time at all.
> I understand Doug to say that the mood now is *extremely*
> short-sighted (in the time horizon sense).
I think that, ironically, the large numbers of people participating in the market through 'untouchable' retirement funds has made the outlook much _more_ long-term. Young investors feel they have their entire lives to make up any short term losses brought on by volatility, while Baby Boomers are only gradually shifting out of growth stocks to income funds (replacing equity with debt as the principal holding; with low interest rates, debt is seen by corporations increasingly as a cheaper method of financing than issuing more stock -- see my previous comment about the shrinking supply of stock) because they don't want to miss the last bit of uptick. This has prolonged the bull and made significant shock to the system all the less likely.
>> I'm sure many would argue with you on this point; in particular,
>> the issues of supply and demand are still at play.........
>
> As long as you have a market, the issues of supply and demand
> are at play. This has no bearing on our discussion.
You said that earnings are the only thing left supporting high prices; I claim that supply/demand factor into this market at a rate that's unprecedented. This is one of the structural changes that has taken place since the '80s.
> If you by this means that the euphoric mood is starting to taper
> off, then the unavoidable process of culmination is developing,
> opening up for panics/crashes with increasing probability.
I don't think the euphoric mood is starting to taper off. I think it's got a long way to go before that's true.
> But surely there must be *some* limit to the share of American
> aggregate cash flows that can be allocated for the financial market?
This is, of course, the problem with trying to call a top. I'm sure there's a limit. Is it 5,000 DJIA points from now? Is it 50,000?
I have no idea.
> What will happen if a significant share of the U.S. population
> sooner or later loses a large chunk of their life savings,
> or - as a first step - starts to *fear* such a
> loss (which in itself is enough to start the process)?
I guess this brings my point back to focus: the engineering of this bull market has likely removed incentives for this to happen. The Fed policy on interest rates guarantees that you won't get more than 5% from a savings account; with inflation between 2 and 3%, this simply is not an alternative that most folks would settle for. Not given their recent experience in the stock market ...
> Of course you find different attitudes. But a growing crowd of
> media commentators and other pundits is sounding off warnings,
> recently among them the director of the Australian Fed.
I'd see more support for this if there was something structural about the current market environment that pointed to impending doom. But companies continue to announce earnings, wage inflation hasn't appeared. If a big selloff came about because of raw fear, the next day there would be more earnings announcements and everyone would realize that it was a false alarm.
It has been engineered as such.
> I think you contradict yourself here. When you say that a P/E
> of 57 is "hilarious", that statement must mean that you relate
> this ratio to some other level that is "reasonable".
Quite to the contrary, it goes to show that even a "reasonable" (in your eyes) P/E is an enormous leap of faith. If a company like Microsoft paid out every penny of earnings as a dividend, it would take 57 years to repay the amount that the stock costs. Because I believe that looking at this kind of transaction is so baseless, using P/E as a relative strength indication is foolish.
[ I'm not interested in using this forum as a stock-picking
exercise, but to fend off further questions I'll admit that my
own personal analysis is technical and not fundamental in nature ]
> You must not assume that anyone that has a recipe for making
> money through financial transactions are wasting their time if
> they choose not to.
I didn't mean to imply that you should trade for a living; actually, I was hoping that if you had sometihng to add to the field of measurement of risk in this market that you'd write a book and tell us all about it.
> How long can this state of affairs persist?
I think much longer than you (or your model) presume.
Because I think that something much more than a simple bubble is at stake: the domaintion of the world economy by the US.
/jordan