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**verdo** · January 17, 2014, 03:27 PM

Re: Has anyone been paying attention to the Nasdaq? It's at a 13 year high...

That was an interesting read Prodigy, thanks for that. It does confirm many things that I have also been thinking

**Jam** · January 17, 2014, 03:37 PM

Re: Has anyone been paying attention to the Nasdaq? It's at a 13 year high...

Perhaps a new trend with slower growth rate?
NASDAQLOG1971-2014wtmk_arw.jpg

**jpetr48** · January 17, 2014, 03:50 PM

Re: Has anyone been paying attention to the Nasdaq? It's at a 13 year high...

Originally posted by gwynedd1 View Post

I treated JNJ, ETN, MMM like bonds. The only bond fund I held was quality junk VWEHX, not adding or even reinvesting for about 3 years. All the others are just at minimums to keep the account open. I used to have a perpetual chunk of $ in GNMAs but that era is over.

But my best investments ROI wise was brewing equipment, industrial nut crackers, grinders, canning equipment and so on. I invested in my own industrial capital. The gourmet food I like to eat and drink is expensive. That and just refinancing and beating down the principle.

what is your reasoning for brewing equipment, industrial nut crackers, grinders, canning equipment?
joe

**ProdigyofZen** · January 17, 2014, 04:19 PM

Re: Has anyone been paying attention to the Nasdaq? It's at a 13 year high...

Originally posted by EJ View Post

Great charts. As a follow up to this boom in tech the last 15 years (with a downturn in the middle), the median income for Palo Alto is now 220k and SF is basically a city of people whose income is around 100k annually.

http://www.businessinsider.com/silic...et-maps-2014-1

Oakland, CA has a concentration of people whose rent is as much as 166% of their income. (which apparently is a problem you can solve with roommates)

When does it end? Even Godet has to admit that it must end at some point and can't keep going on!

Everyone knows that the tech gold rush in San Francisco and Silicon Valley is driving up real estate prices. But it is not until the data is visualized in a map, neighborhood by neighborhood, that you can see just how distorted the market has become through tech-driven gentrification. The residents of Palo Alto alone appear to be living in a black hole of staggering wealth, sucking in the neighborhoods around it � all the way up to San Francisco � and driving rent prices through the roof, at least as depicted on these charts.
The poor, meanwhile, are being pushed out to Oakland and the more inconvenient suburbs. The context here is that "poor" means people earning less than $100,000. The average household income in the U.S. in 2011 was about $50,000.
We got these wonderful maps from Kwelia, a company that provides competitive intelligence on the real estate market.
This map shows median income distribution by neighborhood, with all the rich people living near Palo Alto.

Note that the median income � the middle income, basically � approaches $220,000 around Palo Alto. San Francisco is now basically a city of people whose income is around $100,000 annually. And the rich have also moved to larger houses out in the Eastern suburbs.

Kwelia

All that wealth has had a distorting effect on the local real estate market.

Rent is now over $3 per square foot around Palo Alto, but prices have really been driven up in San Francisco, where rent is now $4-$5 per square foot. That would make a small, 600-square foot apartment cost $3,000 a month.

Kwelia

This map shows the people who can, and cannot, afford to live in Silicon Valley.

People whose rent exceeds their income are show in red, and people whose income exceeds their rent in cooler green/gray colors.
Note that around Palo Alto, people's income is far greater than the rent they're paying. Yet over in Oakland, a traditionally more working class part of the Bay Area, there is a concentration of people whose rent is as much as 166% of their income. (A problem you can only solve with roommates.)

Kwelia

Kwelia's maps are interactive, so if you head on over to its site you can get data from individual neighborhoods, including your own

Read more: http://www.businessinsider.com/silic...#ixzz2qh1kijF5

**gwynedd1** · January 17, 2014, 04:36 PM

Re: Has anyone been paying attention to the Nasdaq? It's at a 13 year high...

Originally posted by jpetr48 View Post

what is your reasoning for brewing equipment, industrial nut crackers, grinders, canning equipment?
joe

Lots of black walnuts , oaks , fruits in this old neighborhood. I can make a bottle of wine for pennies from wild grape and crab apple which is as good as it is fun.

http://www.foxnews.com/health/2013/0...ting-benefits/

People walk right by this stuff in the park. I like to brew it with dolgo crab apples into cider.

That's just a small batch. I often brew gallons of cider and 3 and 6 gallons of various country wines like wild grape, crab apple , dandelion etc...

Stuff like that. Better than Whole foods when you know what you are doing...

**Southernguy** · January 17, 2014, 07:06 PM

Re: Has anyone been paying attention to the Nasdaq? It's at a 13 year high...

MMMM... John Hussman quite convincing. Somehow not in accord with EJ's graphs, particularly logarithmic one.
Let's wait for EJ's parlance on the matter.
Shorting becomes...er...tempting

**jpetr48** · January 17, 2014, 08:43 PM

Re: Has anyone been paying attention to the Nasdaq? It's at a 13 year high...

Yes thank you for the counter view. I am not saying dive all in. However diversification with a neutral stock weighting (e.g. 25%) after a pullback may not be a bad idea- as long as the the fed keeps interest rates low. Today, the only problem for most inc. me is stock picking based on value now that the momentum game is changing. Before all boats rose with the tide now it will be select sectors like financials technology energy and industrials and then finding the right stocks. I have taken some of my funds and sent them over to PFS in recognition that i need outside support and diversification with funds like Eastham besides PM.

**Forrest** · January 17, 2014, 09:51 PM

Re: Has anyone been paying attention to the Nasdaq? It's at a 13 year high...

Originally posted by gwynedd1 View Post

I treated JNJ, ETN, MMM like bonds. The only bond fund I held was quality junk VWEHX, not adding or even reinvesting for about 3 years. All the others are just at minimums to keep the account open. I used to have a perpetual chunk of $ in GNMAs but that era is over.

But my best investments ROI wise was brewing equipment, industrial nut crackers, grinders, canning equipment and so on. I invested in my own industrial capital. The gourmet food I like to eat and drink is expensive. That and just refinancing and beating down the principle.

Yup...me too! My aim in this difficult time is to reduce expenses in every way I can and maintain my high quality of life. As you are, I am becoming my industry. Best of all, everything I invested in has skyrocketed in cost, but I don't need to buy it now.

**gugion** · January 17, 2014, 11:49 PM

Re: Has anyone been paying attention to the Nasdaq? It's at a 13 year high...

Originally posted by Fox View Post

ah, ic, that does answer a bit of a question, but it raises two others.

1) If money switches from bonds to equity does that not mean higher interest rates which would crush everything?
2) With aging population and the baby boomers retiring, how much of that money can actually flow out of bonds and fixed income targets still be met?

as an additional to 2; with a historical (bubbly) high on the bull/bear ratio, should there not be more money coming out of bonds? With everyone and their grandmother screaming "Buy stocks now", why does grandma still have money in bonds? Is the "Great rotation" actually broken now from the baby boomers?

oh, I just noticed this

hmm, so grandma doesn't actually have any money.
Is it just me, or if all the "action" is hedgies in "alternative investments" doesn't that mean we're not dealing with a bubble, but a time bomb?

It's important to understand something. This theory about the "great rotation" (aka money moving from bonds to equities and vice versa during different cycles) is complete nonsense. Why is it nonsense? Because every asset, at all times, must be held by someone. For every asset transaction, there is a buyer and seller. If John Doe, who has been sitting in bonds since 2009, finally capitulates and sells his bonds and moves his money into stocks, that is not "new money". What he has done is sold his bonds to a willing buyer, probably a professional, who has probably sold their large stock market gains after being long since the 2009 low. There is no such thing as a "great rotation". The only thing there is the willingness of a buyer and seller to buy/sell at certain prices. Selling bonds and moving that cash from that sale into stocks does not create new demand for stocks as no new net financial assets have been created, only an asset swap.

**ProdigyofZen** · January 18, 2014, 06:07 PM

Re: Has anyone been paying attention to the Nasdaq? It's at a 13 year high...

Originally posted by jpetr48 View Post

yes thank you for the counter view. I am not saying dive all in. However diversification with a neutral stock weighting (e.g. 25%) after a pullback may not be a bad idea- as long as the the fed keeps interest rates low. Today, the only problem for most inc. Me is stock picking based on value now that the momentum game is changing. Before all boats rose with the tide now it will be select sectors like financials technology energy and industrials and then finding the right stocks. I have taken some of my funds and sent them over to pfs in recognition that i need outside support and diversification with funds like eastham besides pm.

pfs?

EJ · January 19, 2014, 01:20 PM

Re: Has anyone been paying attention to the Nasdaq? It's at a 13 year high...

Originally posted by ProdigyofZen View Post

Most managers have capitulated and thrown in the towel. Look at this research note from Casey Research:

"Stock Market Bears are on the Verge of Extinction" (They have a quote in here from Keynes that EJ posts often)

Even the most steadfast bears are throwing in the towel.

In November, two famous and successful contrarian money managers�Jeremy Grantham and Hugh Hendry�capitulated. Both admitted that while soaring stock prices make no fundamental sense, betting against them is unwise.

They hopped on an already-overcrowded bandwagon: depending on which survey you consult, bullish sentiment is either at multiyear or all-time highs.
You don't need me to tell you that such universal bullishness is a classic signal of a market top. When everyone's a bull, there's no one left to buy. Bullish sentiment last peaked in 2007, and before that in 2000, which tells you all you need to know about bullishness as an indicator.

John Hussman is also a successful contrarian fund manager, one of the few who haven't capitulated. And he won't. Not because he's a permabear: John was a bull in the early 1990s and in 2003, and captured the stellar stock market gains of those eras.

It's just that today, his firm's proprietary models�which have predicted past stock market inflection points quite accurately�indicate zero justification for sky-high stock prices.

What's worse, John believes we're setting up for another crash. Of today's stock market, he says:

"We are observing overvalued, overbought, overbullish extremes that are uniquely associated with peaks that preceded the worst market losses in history (including 1929, 1972, 1987, 2000 and 2007)."

Read on to find out exactly why John Hussman is still bearish, what would make him change his mind, and which group of investors is in the most danger if stocks do disappoint over the next several years.

Dan Steinhart
Managing Editor of The Casey Report

The Elephant in the Room

By John P. Hussman, Ph.D.

"Being wrong on your own, as Keynes described so eloquently in Chapter 12 of the General Theory, is the cardinal crime of an investment manager. The management of career risk results in very destructive herding. Investors should be aware that the U.S. market is already badly overpriced�indeed, we believe it is priced to deliver negative real returns over seven years [GMO estimates fair value for the S&P 500 at 1100]. Be prudent and you'll probably forgo gains. Be risky and you'll probably make some more money, but you may be bushwhacked and if you are, your excuses will look thin. My personal view is that the path of least resistance for the market will be up."
�Value investor Jeremy Grantham, GMO, November 18, 2013

"I cannot look at myself in the mirror; everything I have believed in I have had to reject. This environment only makes sense through the prism of trends. You have got to be in things that are trending. Crashing is the least of my concerns. I can deal with that, but I cannot risk my reputation because we are in this virtuous loop where the market is trending. I may be providing a public utility here, as the last bear to capitulate."

�Hedge fund manager Hugh Hendry, Eclectica, November 22, 2013

"I am out of justification to fight the uptrend. Up until now, I have had what I thought was compelling evidence to believe in the bearish case, but it has now been revealed to have been insufficient for the task. I am without ammunition to bet on the bears. I don't like it, because I see the market as overly dependent upon the Fed's largesse for its upward continuation. I see this as a bubble, but a bubble that is continuing higher even though it should not. I plan to ride the bubble for a while, and will hope to be able to succeed in reading the right [exit] signs."

�Market technician Tom McClellan, November 26, 2013

In a classic case of not only locking the barn door after the horse is loose, but removing its best opportunity to return home, we're seeing a capitulation by investment managers across every discipline, from technical, to value-conscious, to global macro. Historically extreme overvalued, overbought, overbullish conditions were in place even ten months ago, and my impression is that every further extension worsens the payback that will inexorably follow.

Investors Intelligence reported last week that the percentage of advisory bears has plunged to 14.4%, lower than at the 2000, 2007, and 1987 peaks, and every point in between. I'll spare a full review of the overvalued, overbought, overbullish extremes we observe here (see A Textbook Pre-Crash Bubble)�it's clear that over the past year, even the most extreme variants of these conditions haven't "worked," having already appeared in February and May of this year to absolutely no effect.

I have no question�at all�that the market has simply climbed a higher cliff from which to plunge, but I learned in 2000 and 2007 that there's no hope of convincing many investors of this sort of thing�despite the fact that these reckless speculative peaks seem so "obvious" after the market collapses. Even when investors listen, at least some of the tears they would have shed after the plunge are substituted for tears they have to endure while missing the final advance.
We're faced with a speculative advance that seems unstoppable, despite the absence of any reliable mechanistic link between quantitative easing and stock prices�only a combination of superstition and yield-seeking that has repeatedly ended badly. What's driving capitulation here is not evidence, or even the faint memory of cycles as recent as 2000 and 2007�but pain, impatience, career risk, and the demand that all discomfort must arise from conventional behavior.

As John Maynard Keynes wrote in the General Theory:

"Human nature desires quick results, there is a peculiar zest in making money quickly, and remoter gains are discounted by the average man at a very high rate� It is the long-term investor, he who most promotes the public interest, who will in practice come in for most criticism, wherever investment funds are managed by committees or boards or banks. For it is in the essence of his behavior that he should be eccentric, unconventional and rash in the eyes of average opinion. If he is successful, that will only confirm the general belief in his rashness; and if in the short run he is unsuccessful, which is very likely, he will not receive much mercy. Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally."

Keep in mind how investment bubbles work. A bubble always starts with some real factor that takes on increasingly exaggerated importance in the eyes of investors. The bubble expands not on facts but on untethered imagination. People imagine that X will result in ever-increasing prices, and assume that an endless crowd of buyers is still behind them�dot-com stocks, technology, housing, "tronics" stocks in the '60s, the Nifty Fifty in the '70s, quantitative easing, tulip bulbs.

Regardless of whether the mechanism underlying that concept is fictional, and regardless of how tenuously it is linked to reality, a bubble advances as long as the adherents it gains are more eager than those it loses. What stops the bubble is not the concept itself hitting a brick wall, but the pool of new adherents being exhausted. Once everyone is in, who's left to buy from all those holders with their fingers hovering over the sell button? The question, once the moment arrives, is always the same: Sell to whom? And that's why markets crash.

With the percentage of advisory bears at the lowest level in a quarter-century, the following bit from mid-2007 is a useful reminder of how all of this works.
"The U.S. stock market now stands at its highest level ever. By most measures, it is as pricey as '29, or '68, or 2000. Upon this sea of easy cash and credit, practically every stock market on the face of the planet floats higher and higher.

Even some of the greatest and most experienced market observers � have finally given up fighting 'em. They've decided that this really is a New Era of New Capitalism and that this is the time to join 'em. This worldwide bubble is more worldly and more bubbly than any in history, they say. It may get much, much bigger. And they have good reasons to think so� all those trillions of new money. How can they help but blow this bubble up even bigger�so big even the moon will have to get out of the way.

But wait � isn't there an old market adage: The bull market is over when the last bear throws in the towel? Are there more bears still out there? We don't know. But there can't be many of them."

�Bill Bonner, The Daily Reckoning, June 25, 2007

On that subject, for anyone waiting for me to capitulate, it's important to understand that my views shift when the data shifts. Capitulation is the luxury of those who invest by the seat of their pants. To the extent that I have any latitude to capitulate, the most that one can expect already happened months ago, when we allowed for a "blowoff" in response to the Fed's decision not to taper�a decision that many of the Federal Reserve's own members have openly described as a close call, a borderline decision, a missed opportunity, and a threat to the Fed's credibility.

We continue to allow (though not rely on) the potential for a further blowoff in the S&P 500. My opinion about this isn't driven by the preponderance of historical evidence, which is already strikingly negative, but by the characteristic log-periodic behavior we're observing in prices (see A Textbook Pre-Crash Bubble).

The associated "singularity" may yet be a few weeks away. As Didier Sornette has observed, numerous past bubbles in financial markets and commodities have featured this signature, which I've described in terms of increasingly immediate impulses to buy the dip. The pattern was already extreme enough back in April/May of this year, and pushing that singularity further has required the price advance to become even steeper and corrections even shallower and more frequent. The pattern that pushes out to January is the most extreme variant we can fit, but more recent price behavior is more consistent with a mid-December singularity (see last week's comment).

Frankly, I don't think we can rely on markets following math, but the fidelity to these patterns is creepy, and consistent with what Sornette described in Why Markets Crash.

In any event, I don't actually expect investors to retain any of these potential gains even a couple of months from now, nor would I encourage any meaningful exposure to market risk. Still, modest exposures in index call options can have a useful contingent profile since strike prices can be raised even in the event an advance is purely temporary.

The Elephant in the Room

Our focus has always been on outperforming the market over complete market cycles (combining both bull and bear markets), with smaller periodic losses than a passive investment approach. In pursuit of that objective, we've always been willing to accept periods where we don't track the market. By 2009, it was easy to demonstrate the success of that discipline.

I was a fully leveraged raging bull in the early 1990s; was defensive well before the 2000 bubble peak, and was more than absolved by prospering during a market plunge in 2000-2002 that wiped out every bit of total return in the S&P 500, in excess of Treasury bills, all the way back to May 1996; shifted to a constructive outlook in early 2003 as a new bull market took hold; warned loudly about an oncoming credit crisis and severe market losses in 2007; and navigated the crisis well in the 2007-2009 plunge as the S&P 500 lost 55% of its value, again wiping out every bit of total return in the S&P 500, in excess of Treasury bills, all the way back to June 1995.

I've been as comfortable being an aggressive bull as I am being a raging bear today. I can hardly wait for the opportunity to change species when the evidence presents itself. But it is purely a function of the data that I've been generally defensive in a period where stocks have been so overpriced that the S&P 500 has scarcely achieved a 3% nominal annual total return in over 13 years, and even then only because valuations have again been driven above every pre-bubble extreme except 1929.

What obscures perspective and shakes confidence is the elephant in the room�our disappointing "miss" since 2009. My sense is that many investors are inclined to ignore the objective warnings from a century of evidence because our own subjective experience since 2009 has been disappointing. Before investors dispense with evidence that may very well define their investment future over the next several years, or even the next decade, they may be well served to understand that most of that miss had little to do with the overvaluation and extremely overbought, overbullish conditions that concern us at present.

As in 2000 and 2007, my concern is deepest for investors who have relatively short horizons until their funds are needed, who don't have a great number of years ahead in which they'll be adding to their investments, and who have allocations to stocks that don't recognize that equities have a duration of 50 years here (so an investor who needs the funds in 5 years should really have no more than 10% of assets in stocks, particularly at present valuations).

We presently estimate a nominal annual total return for the S&P 500 over the coming decade somewhere between zero and 2.2%. We are observing overvalued, overbought, overbullish extremes that are uniquely associated with peaks that preceded the worst market losses in history (including 1929, 1972, 1987, 2000, and 2007). Speculators are now leveraged to the greatest extent in history, with NYSE margin debt surging last month to a record high in dollar terms, and 2.5% of GDP in relative terms (a level previously observed only at the 2000 and 2007 extremes). Our challenges of the past few years�most of which trace to a single decision�should not encourage investors to ignore evidence that is specific to the markets.

I believe that more than half, and perhaps closer to all, of the market's gains since 2009 will be surrendered over the completion of this cycle. Investors will do themselves terrible harm if they ignore the objective warnings of history based on our subjective experience in this unfinished half-cycle. That subjective experience is far more closely related to my 2009 stress-testing decision than many investors recognize.

The "stress-testing" problem was to develop an alternative way of estimating return and risk that was robust to complete market cycles across history, including not only post-war data, but also Depression-era data, as well as holdout data that was not used as part of the research process. It's very easy to simply "back fit" a model to historical data. The actual requirements of validating against holdout data are much more challenging, but until we were certain we could distinguish market conditions in the most extreme circumstances, we worked to solve what I called our "two data sets problem."

Even after we had addressed that problem in mid-2010, there was a smaller issue still to be addressed. The subtlety is that valuations have a very strong effect on long-term returns, but since the long term is just a sequence of short terms, valuations still feature heavily in estimates of expected market return/risk over shorter horizons, even when market action and other factors are included.

One cannot simply ignore an overvalued market when trend-sensitive measures are favorable. While favorable market trend-following measures do result in further market advances for a while, this tends to continue only until an advance becomes so extended that a syndrome of "overvalued, overbought, overbullish" conditions emerges. At that point, prices are typically so elevated, relative to any threshold that might provide a reasonable exit, that a great deal of ground is typically lost in one fell swoop at the very end. The key to overvalued markets is to embrace favorable market internals only until those overextended syndromes emerge, but no longer. Greed really is punished over time.

By April 2012, we addressed that subtlety by incorporating further criteria to limit our defensiveness, even when our return/risk estimates are negative, provided that our measures of market internals are favorable and overvalued, overbought, overbullish syndromes are absent. While this modification is not actually required over the complete market cycle, it does have the effect of improving the capture of returns in markets that are already substantially overvalued.
What our investment discipline has not done is to encourage us to speculate in the face of the unprecedented and uncorrected overvalued, overbought, overbullish conditions driven by investor faith in QEternity during the past year. Investors who wish to rest their financial security on quantitative easing are entirely free to roll those dice on their own.

That said, hardly a week goes by that we don't look into some factor that might convince us to take a more constructive approach toward QE or the associated advance. My belief that the present situation will end very badly is driven by the lessons from a century of evidence, and the absence of a single testable monetary, economic or technical factor�aside from blind faith in QE�that would have helped to capture gains during the past year without worsening the results of our discipline in past market cycles throughout history.

Given that our approach spans a century of available data, I have no expectation of reliving such stress testing in any future market cycle, and every reason to expect the resulting approach to outperform our pre-2009 methods in future cycles, not to mention the completion of the present one. Both our 2009-early 2010 miss, and the missed post-correction advances in late 2010 and late 2011 are unfortunately casualties of the credit crisis and the resulting stress testing.
I'd like to have a better answer to the past year of QE-induced gains other than noting their resemblance to the confidence in dot-com stocks. The fact is that every strategy we've tested that might have embraced these gains also fails spectacularly in historical data, largely because some of the worst market losses in history emerged from overvalued, overbought, overbullish extremes that were less extreme than what we observe today. There's no denying that the present overvalued, overbought, overbullish extremes have endured longer than they have historically, but I'm not inclined to believe that the end result will be sweeter.
I've got a very uncomfortable sense that some investors are disregarding objective evidence here, and assuming that extreme overvalued, overbought, overbullish conditions can easily be ignored, on the argument that we've had a difficult time of things since 2009.

As investors place all of their valuation hopes on the "Fed Model," comparing the market's value on "forward earnings" with the 10-year bond yield and resting their financial security on the confidence that the Federal Reserve provides a "put option" to protect them against loss, I'll end with a reminder from the last time the same beliefs carried such weight, just before the stock market lost more over half its value:

"I've done my best to warn loudly, I've put the data out there, and have analyzed this thing to pieces. The Fed Model has no theoretical validity as a discounting model, is a statistical artifact, would never have been materially negative except in 1987 and the late 1990s (even in 1929 or 1972), yet views the generational 1982 lows as about "fairly valued," is garbage in data prior to 1980, and vastly underperforms proper discounted cash flow models and normalized P/E ratios. If investors still wish to follow the Fed Model, my conscience is clear, and my hands are clean.

"There is no evidence that historically reliable valuation measures have lost their validity. Speculators hoping for a 'Bernanke put' to save their assets are likely to discover�too late�that the strike price is way out of the money."

�Hussman Funds Weekly Market Comment, August 27, 2007, Knowing What Ain't True

Their confusion is understandable. Today's environment is unique in the 100-year history of the Fed.

Proposed Fed tag line:

The Federal Reserve
"Crashing markets and sending the economy into recession since 1920."

Here's the Fed raising rates from 3% to 6% 1928 to 1929 and crashing the stock market in 1929. Commercial bank lending to stock speculator guaranteed a systemic credit crisis.

Here's the Fed raising rates from under 6% to 7.25% and inducing the 1987 crash. Quick action prevented macro-economic knock-on effects. However, inflation quickly took off from 4% to 6%. THe Fed panics and raises rates to nearly 10%. A recession and market correction follow.

Next up the tech bubble crash. Not on its own, of course. After the DJIA rises from 7500 to 10,000 from 1998 to 1999 the Fed quickly raises rates from 4.75% to 6.5%. The real action, not shown, is in the crashing NASDAQ. By 2003 the Fed drops rates to 1% as the DJIA gives back all gains since 1997. As inflation takes off the Fed quickly raises rates to try to head it off.

Next up the mortgage credit bubble. Fed raises rates from 1% to 5.25% to try to head off inflation that climbed quickly from 2% to 4%. Exposure of the commercial banks to mortgage credit guarantees a credit crisis and massive recession.

Today? Yes, the stock market is now in nominal and real terms above the 2007 level but only slightly higher than the year 2000 level in real terms.

Interpretation inputs:

1) The entire 1995 to 2014 period of rising stock prices is anomalous, juiced up by excessive leverage in the real economy and financial sector.
2) The Fed ends booms when it sees inflation rising too quickly AND unemployment is "too low." Neither condition exists today. Unemployment remains "too high" and inflation is trending down.

The stock market will not correct in connection with a recession in 2014. The lesson of the past 100 years of Fed history dictates that the Fed will not raise rates in 2014 but will continue to reduce asset purchases, albeit slowly. If the operation is successful the stock market trades sideways to slightly up in 2014. If not successful the bond market corrects and takes down the stock market.

Wildcard: China Crash. This will bring on a new round of asset purchases and fiscal stimulus.

**ProdigyofZen** · January 19, 2014, 02:39 PM