Why Not Buy Some Stock? Joe McCarthy’s Back In Town!

If you can say anything about the absurdity of the Russell 2000 (RUT) trading at 81X reported net income it’s that Washington made it so.

The hideous level of speculation rampant on Wall Street today would not have happened in a million years on an honest free market. The RUT and other indexes are hanging from a sky-hook only because the present mega-bubble was enabled by the TARP bailout of October 2008 and the $3.5 trillion money printing spree of the Fed which followed hard thereupon.

It was those blunderbuss interventions which stopped the market cold when it attempted to purge the decades of rot which had built up in the financial system by the fall of 2008. But instead of an old-fashioned recessionary cleansing of speculative excesses and unsupportable debt, we got a reflationary extension of the financial bubbles and a doubling down of the nation’s mountainous debts.

As sh0wn in the chart below, the explosion of total US debt—household, business, financial and government—was bad enough in the run-up to the great financial crisis. Between Greenspan’s arrival at the Fed in August 1987 and Q4 2007, total debt surged by 5X while nominal GDP rose by only 3X.

But the debt-a-thon was not nearly done thanks to nine subsequent years of ZIRP and QEs here and abroad. Since the pre-crisis peak, total debt outstanding has risen by $16 trillion compared to only a $5 trillion gain in nominal GDP.