Dissing Discounting

What strikes me is that markets seem to be incapable of "discounting" anything that might harm it. Sure, the Dow Industrials gave back 146-points of the roughly 1700-points it has gained since mid-March, but it still rests less than 2-percent from its all-time high. Most intriguing is the backdrop in which stock indexes have decided to throw such a speculative party. In spite of the nearly daily pronouncements that the "bottom is in" for housing with each progressively depressing data-point, stocks power forward. In spite of Jordan's King Abdullah warning the world that the Middle East is on the verge of not one, but three civil wars, stocks power higher. In spite of gas prices exceeding its all-time inflation-adjusted highs, stocks spurt higher. In spite of nearly daily clues of weak and weakening consumer spending (read: Best Buy and Circuit City), stocks go higher. In spite of the 10-year Treasury rate backing-up to its highest level since 2002---in a highly leveraged world, stocks go higher. In other words, if all of this should be acting as discounting data, but is incapbale to do so because of incredible complacency and everyone's catch-all---liquidity, then we find ourselves sitting in a very awkward and precarious position this evening, June 20th, 2007.

Todd Harrison of Minyanville scribbled an enticingly spot-on narrative as it concerns the current state of markets in which he titled, "Running blindfolded with the bulls." I encourage readers to check out the full account. But one of the more entertaining and poignant observations was as follows: "To be sure, there are plenty of reasons to question this rally. Debt levels are at historic highs, the housing market has visible cracks, the U.S economy is finance-dependent and rates seem to be trending higher around the world. And yet, true to form for the last few years, reward chasers are once again making risk managers feel silly for exercising their prudence."

I recall another period when prudence was punished much like today. If my memory serves me correctly, that was sometime late in 1999 and early 2000.