http://www.debtdeflation.com/blogs/

Excellent insights from the man down under...

The problem comes when that debt is used, not for consumption smoothing (purchasing an abode, car, etc.) or business turnover or investment purposes, but to finance speculation on asset prices. The former uses are akin to the generation of carbon dioxide by the planet’s endogenous carbon cycle; the last is rather like humanity’s unintentional addition to CO2 levels by the burning of fossil fuels.

Just as we are now learning, via Global Warming, that we have to limit our production of CO2, we must learn that we have to control the financial system’s proclivity to produce debt. If that can be limited to the debt demanded for consumption smoothing and business investment, then the financial system will function well. If that debt is instead driven by speculation on asset prices, we will face the equivalent of Global Warming in our financial system.

That, unfortunately, is how the recent explosion in debt has been used, both domestically, in the USA, and across most of the OECD. Driven by debt-financed speculation, the ratio of asset price to commodity prices has reached levels that have never been seen before. This ratio is the best guide as to whether we are in a bubble or not, and according to it, the current financial bubble is the biggest in human history, dwarfing the Roaring Twenties and even the 1987 Stock Market bubble (See Figure 3).

Also, in contradiction to Alan Greenspan’s oft-expressed view that a bubble could only be identified in its aftermath, the USA Stock Market Bubble obviously began in 1995—note the acceleration in the rate of growth of the CPI-deflated index. By the end of that year it had already overtaken all previous stock market bubbles in scale.

What is also interesting about 1994 (very few were in the business back then) that most if not investment professional were extremely bearish about the stock market... Why? The dividend yield on the S&P was about 3%, historical tops in the stock market, 1929, and 1987.

We know now that the stock market and the public entered the market in mass aided by debt to move the market to unbelievable low dividend yield at about 1.66% at the 2000 Top.

Today the market is still pricey with the dividend yield at about a 2.21%.  So as I have projected before 1994 or the S&P at below 500 would be a minimum low on the stock market.   That would bring the dividend yield down to about 6% historical bottoms for the stock market, but again it does not mean that it will stop there, the dividend went to about 12% in 1932.. Bubbles tend to overshoot on both sides.