bear.jpgThe markets are having a rough time since the beginning of January and its beginning to look like the Greenspan liquidity bubble is (has) catching (caught) up to us. If you ask me, there’s no rally around the corner right now but the start of a race to a bottom. My guess is that we could see the S&P500 at 2006 levels (1250) or even 2004 levels if things get really ugly.

For the record, I’m not a perma-bear and neither am I perma-bull. I just believe that for the past 5 years our stock market gains were built on excessive liquidity and the ability of the US consumer to spend to his hearts content using HELOCs. Now that RE bubble is burst, houses are being valued below their peak and loans are harder to come by, so you can bet that Mr. Joe Consumer won’t be able to spend anymore.

Can you blame Mr. Joe Consumer, who in my opinion hasn’t had real wage growth in years, skipping his credit card payments with “in your face” inflation, such as $4/gallon milk and $3/gallon gas? I surely don’t. Mr. Joe Consumer is finally tapped out.

Although my post sounds alarmist, it isn’t. The market will bottom eventually and then we’ll rally but I don’t expect that to happen anytime soon. You can argue till your blue in the face with me that stocks are really undervalued here, and they are if you add in the liquidity inflation. Look at how undervalued Citigroup (C) is now at $26/share? It was also undervalued at $45/share when I bought it. Subtract out the liquidity inflation and then tell me the price where Citigroup is truly undervalued at.