Contemplate the following chart:

Now look at both business and equities.  Yes, there was a mighty crash in the Nasdaq in 2000 (from which it has not recovered, incidentally.) 

This is the chart that has to haunt you if you have a hint of common sense.  It is this expansion from 1980 to 2007 that led to the expansion of equity prices, house prices, all asset prices.

It is the madness of crowds that has led to the "recovery" of those asset prices since 2008, with two failed attempts to re-establish that spread. 

But it is that spread -- and only that spread -- that has powered the expansion of multiples and prices.

This is arithmetic folks.  What the government and Fed have done is attempt to prevent the recognition of this arithmetic.  The vast majority of pundits believe that expansion of price will continue, yet none of them can explain why the underlying facts that they claim will support this will and can occur.

The reason it occurred from 1980 forward was the above mathematical relationship.  Without it, that expansion could not have occurred.  Without it being restored that premise cannot be recovered.

This is not a prediction on timing, because as has been famously observed "The market can remain irrational for longer than you can remain solvent."  Nonetheless the mathematical facts cannot be altered, and eventually they come to the forefront, exactly as occurred in 2000 and 2007.

In 1999 the failure of the pattern in tech stocks -- the failure of continued expansion in leverage -- was clear.  Anyone who cared to look saw it; I saw it in 1998 and exited the industry.  Yet it was nearly two years after I identified that top in process and departed -- a top that first flattened out and then turned downward -- before the blow-up came.

In 2006 it was obvious to anyone who looked that we had a severe problem in the housing market.  There was a nasty market dip in the summer of 2006, with the market peaking in May in the low 1300s and then falling nearly 100 points, close to 10% -- before surging to new highs by the end of the year.  Everyone held their breath and many people (myself included) bought the dip and were richly rewarded.

There were, of course, two more dips and huge rallies, this time of 100 and then 200 S&P points, culminating at 1576 in October of 2007, before it all fell apart.

But again, look at the chart.  Leverage peaked in the first quarter of 2007, yet for six months the market ignored it, and it was more than a year later before the worst consequences came to the forefront.

So what does this auger for the future?

Simply this:

The paradigm has shifted since 2007; private leverage accumulation has failed to restart despite two attempts.  There is no evidence available that a restart of that paradigm can be accomplished.  Instead, we are propping up a model that has run to exhaustion with federal deficit spending.

This is a sucker's game; the Federal Government, vast though it is, only accounts for about 1/4 of the economy.  The subset of a thing can never replace the whole.  Yet that's the premise you're believing in today.

The market can remain irrational longer than you can remain solvent.

Indeed, but the market does not remain irrational forever.