One of our consistent themes here at Peak Prosperity is that gigantic credit and liquidity-fueled bubbles allow us to know the price of everything but the value of nothing.
The stock market continues to power higher — which is either a signal of great underlying or soon-to-arrive economic strength, or a misbegotten wander up an icy slope. Once upon a time, the stock market was known as ‘the great discounting machine’; meaning that it was sorting and weighing all the prospects of the companies involved, the final sum of which gave us the headline index value.
Today the stock market is really just a liquidity gage. If there’s ample and expansive liquidity, it goes up. If not, it goes down. All I can gather from today’s stock market is that liquidity has continued to go up.
For example, we might notice the GDP has climbed between 9% and 14%, depending on whether we measure from the peak or the trough in 2007/09:
By those same time measures, the S&P 500 has either climbed by 37% from the 2007 peak or by 188% from the 2009 low. In other words, the S&P has vastly outrun the torrid pace during the 2007 bubble highs before the crisis struck.
Are we to believe that things are really that much better today with the future even more certain and bright than it was back in 2007 before the crisis struck? Or are we to think that, perhaps, the stock market isn't concerning itself with a fundamental relationship to economic output?
My view is that the stock market is simply pegging itself to the idea that the central banks have backed themselves into a corner and that there’s no other option but to keep the liquidity spigots open. I cannot fault that view, as it has been right for the past 6 years.
by cmartenson 
