They never learn

Just in time to get burned again:

As a historic bull market reaches its second birthday, everyday investors are piling back into stocks, finally ready for more risk and hoping the rally has further to go. The Standard & Poor’s 500 index has almost doubled since March 9, 2009, when it hit a 12-year low after the financial crisis. And the Dow Jones industrials are back above 12,000, about 2,000 points shy of their all-time high.

Little-guy investors appear to be on board. Since the beginning of the year, investors have put $24.2 billion into U.S. stock mutual funds, according to the Investment Company Institute. They withdrew $96.7 billion in 2010.

The March 2009 rally has certainly lasted longer than I thought it would, but I very much doubt it has much more left in the tank given that valuation ratios are higher than they were in 2000 and the strong hands are passing on stocks to the weak ones. With QE2 winding down, consumer credit growth coming entirely from the federal student loan industry. Karl Denninger notes:

This is one of the most-outrageous abuses I’ve ever seen perpetrated on anyone. It radically exceeds anything done to the subprime and ALT-A borrowers in that the young adults abused by this practice are by definition simply due to age and experience ill-equipped to understand what they’re getting into. They are relying on the adults advising them, from High School and College counselors to “Financial Aid” officers and their parents. To put a number on this abuse the cumulative damage inflicted on our youth between the first of 2009 and January of 2011, just two short years, is almost two hundred and twenty-four billion dollars.

Very little of that expanded credit is going to be paid back. And it can’t be defaulted, which means that the interest payments are going to cripple consumer spending from 2009 forward. With the market up, the positive GDP numbers and declining U3 unemployment, I understand why the unsophisticated buy into the recovery story. But it’s all a credit-inflated illusion and the illusion isn’t going to last much longer.

How much longer? I couldn’t possibly say with any degree of certainty. But back in 2008, I warned of coming problems in March. So, if the pattern repeats, the problems should come to a head in September.

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