Wednesday, February 13, 2008

Perma Bear Says "Great Depression" might be near

It seems that we are really at a true bottom when this guy is saying that the banking and housing sector might cause another Great Depression.
"Avoiding a depression is, unfortunately, going to have to involve
either a large, quasi-permanent increase in the budget deficit -- preferably tax
cuts -- or restoring overvaluation of equity prices," Connolly said on
Monday.


"If conventional monetary policy is not enough to produce that result,
the government may have to buy equities, financed by the Fed," Connolly
said.

The problem is that the P/E ratio of the DJIA in 1929 was 32.6 while the P/E ratio of the DJIA today is only 15.22. So you could make a case that equities were overvalued in 1929 while they are only slightly overvalued today since the 100 year historical average PE is 14. So I'm not sure where he comes up with stocks are so overvalued that the US government needs to prop them up by deficit spending in order to buy equities? I guess this Connolly guy is short the market or long gold or something or is just generally all-around bearish.

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