Investors Think Things Will Return to the Way They Were in the Bubble Epoque

What a great recovery!

No jobs…

No credit…

No sales…

But look at those stocks!

And oil! And gold! And even London property!

Real estate agents in London say they are sold out…as prices go to records. Well, asking prices…that is. As for sales prices, that is another story.

Still, London is driven by finance…and finance seems to have gotten out of rehab. It’s party time again.

The Wall Street Journal is talking about a “full recovery” in luxury goods sales by 2011. And Wall Street itself is pricing stocks as if the record profit margins of ’05 and ’06 were just around the corner.

In other words…investors’ expectations have not changed. They think things will return to the way they were in the Bubble Epoque.

How could that happen? A full recovery implies a number of things…

..that the ‘Son of Bubble’ will be as big as his dad…

..that all those people without money or jobs will somehow find the wherewithal to spend again…

..and that the baby boomers will stop saving for their retirements and begin to party like it was 2006 again…

Remember, Bubble Epoque spending, sales and profit figures were made possible by borrowing. People spent every penny they earned…and then “took out equity” from their houses in order to spend more.

What they really got was a house with a bigger mortgage – without moving!

At the height of the bubble period, if we recall correctly, Americans were taking out more than $500 billion per year. Now, they’re putting back nearly $500 billion a year in savings.

We don’t like to be party poopers here at Markets and Money. But there is no way to get a rerun of the Bubble Epoque on those numbers.

What we see happening is a typical post-crisis bounce…powered by easy cash and credit from the feds. How long can it go on? How far can it go? No one knows. But if you want answers, we’ll go way out on a limb:

It won’t go on forever. And it won’t go to the moon.

And most likely…it won’t be long before the whole thing comes to a crashing end.

Here’s noted analyst John Hussman:

“The stock market has never been this overbought.”

Hussman says that the only time stocks were this overbought was on Nov. 28th, 1980. That was the last rebound in the great bear market that had begun in 1966. Afterwards, stocks fell another 30% before finally hitting bottom in August 1982.

That’s why we have our Crash Alert flag flying over the headquarters of Markets and Money. We put it up two weeks ago. No crash so far. But it can’t be too far in the future.

And more thoughts…

While champagne and caviar is served out in the speculative economy of bankers and hedge fund managers, its bread and branch water for the poor folks stuck in the real economy.

First, we have some figures from the Center for Responsible Lending. Nearly 3 million houses are expected to be foreclosed in 2009. And there are 8 million still to go!

Yes, we’ve crossed the foothills of sub-prime already. But the Rockies of Alt-A, jumbos, and other salacious mortgage instruments are still ahead.

Bill Bonner
for Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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