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I very highly recommend "The Credit Peril" in this week's Barron's. A
brief except follows:
Earl
"In a typical business-cycle expansion, interest rates can be used to
regulate the economy. In a credit economy like the one we're in, you
need the economy to run faster and faster as debt builds up. Every time
you remonetize throughout the cycle, the demand created by all that new
debt just makes the economy run faster. Paper assets become the saving
vehicle. And that is not a self-regulating mechanism. As you build up
this pyramid of credit, the debt market seizes up, just as it did with
Long-Term Capital, with Russia, with some Korean debt. The central
bank -- in this case, the Fed -- had to turn the printing presses back
on to get the markets functioning again. In the process, they created
more credit. So you get an economic cycle with no recession, with never
a bear market, an economy that goes faster and faster because it has to.
Liquidity short-circuits every decline. As those cycles mature, stocks
go to extreme valuation levels. Now you have some stocks that you can't
build a valuation model for. The ultimate liquidity play, of course, is
stocks with no sales! Individuals and institutions realize that every
time you have a problem in the credit, debt or financial markets, the
central bank will step in and prevent a serious dislocation. Thus, the
American public has bought every dip and has been right in every single
case. As long as you continue this cycle, the stocks are also pyramided
up."
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