It seems that since the beginning of the year the perma-bulls and economists in the US have morphed themselves into 'contarian thinkers'. This has allowed them to justify purchase of stocks despite worsening economic data. This leads to situations like last night whereby they search for the positives in shocking consumer confidence data. At the moment, these new contarians have convinced themselves that they have outsmarted the market.
Last night on CNBC we saw a perma-bull (...sorry 'a contarian') show graphs of the bond to stock yield ratio suggesting stocks were enormously undervalued. This is the same sentiment used by the US market to push the the Dow up over 1,000 points when Peter Costello came out of the meeting with Alan Greenspan in 1997 or 1998 and said he would not increase interest rates (how many of us remember that).
It seems to me that higher corporate & mortgage defaults and government debt in US will lead the bond market to demand higher yields thereby leading to a situation where bond yields will rise in a falling share market. This happened in 1982 when bond yields were over 10% and the sharemarket PE ratio was around 8. As more companies have there credit ratings reduced their interest costs will increase and their profits will fall pushing down their share prices even further.
