Here’s a relevant
post from last year, when the stock plunge was much less dramatic.
Lessons for the next bull market (yes there will be one eventually):
Low interest rates and high liquidity do not mean stock prices will
stay up. Those things are indicators of insufficient risk premiums,
not indicators of permanent demand for assets.
If companies have 2x their long-run average profit margins, something
unsustainable is going on. Abnormal profits don’t last forever in
(more or less) free market systems, due to competition and the
business cycle. Anytime you read an article that mentions a P/E
ratio, without discussing normalized margins, run away in fear. (The
inverse goes as we most likely head into recession. P/E
ratios will become misleadingly high, while in the bull market they
were misleadingly low.)
(This post was originally found at http://log.ometer.com/2008-09.html#29.2)