Radio Rallies & Reversals

So its no secret the Fed is deliberately trying to inflate asset prices. Higher asset prices make everyone feel wealthier. When you feel wealthier, you're more inclined to spend and consume. One of the problems with this sort of artificial wealth effect is there's a tendancy to think it's normal. Everyone adjusts their expectations accordingly. Governments, corporations, pensions, households; all set their revenue and expense budgets higher.

Adding to the problem is above-average profit margins. According to Jeremy Grantham "for long-term budgetary pruposes and for establishing fair value for global equities, variations in profit margins are an even more potent variable than are P/E ratios or inflation. The 70's had margins well below average and the 80's wer average, but since 1995, we have lived in an above average profit margin world as well as an above average P/E world. The fact that it has persisted for 15 years does not make it normal. It just guarantees that decision makers will think it's normal and act accordingly.

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