Excerpts:
Rather, the question that should be on everyone’s mind is whether the reflation in the prices of stocks and lower-quality bonds is a false-positive error, one born of excessive credulity. If the markets in risky assets are correct in forecasting a sustainable economic recovery enabled by a smoothly functioning financial system, that prospect has already been priced into the markets with the Shiller PE pushing a “bubble territory” 20 times earnings.
If, on the other hand, the current financial and economic episode is not a run-of-the-mill, post-World War II business contraction but rather the aftershock of a massive credit bubble that went into overdrive post-2000 , a Shiller PE of 10 is not out of the question. Having read daily summaries for the last seven months of the feature stories in the Wall Street Journal for the corresponding day in 1930, two conclusions jump off the pages: First, for every pound of wheat there were 10 pounds of chaff and, second, the focus was so much on the short term and so deeply influenced by the herd instinct that virtually no one saw (nor did the market discount) the onrushing Depression tsunami until it overwhelmed them. The ongoing exercise is almost surreal—like reading a murder mystery having already seen the end. You turn page after page, incredulous, as the characters miss clue after clue. It reads so much like today.
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The future hinges on forces not easily seen among all the news clutter. Like the 1930s, the “experimenters” in Washington
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Related link: News from 1930