I knew that article actually forecasted the bear market rally to continue. It was ranked as the 6th most popular article before, and it was a good proxy of the general bearish sentiment.

I. A recent Heritage Foundation report “Retiring Baby Boomers Will Not Cause an Asset Bust” states that since most of the assets are not in weak hands (a large portion of assets are concentrated in a few hands), and it will not likely cause a bust. However, there might be a secular shift towards fixed income and a decline in equities in portfolio construction.

II. Although the labor market is absolutely horrible, corporations can use this to their advantage through lower input costs and increased productivity. (Volumes may decline though.) If unemployment and wages stays the same, the current equity prices can be justified.

III.
The argument that historical P/E’s average at 15.5 does not apply now since lower interest rates can justify a (forward) P/E of 17.5 .) However, it seems likely that the liquidation sales of last year, and various stimulus programs simply pulled demand forward. Moreover, demographic trends suggest the population is getting older, and this would result in lower intertemporal discount rates (or even negative discount rates), so it would mean less present consumption. A decline in immigration and older people moving into retirement homes would depress the housing market for years.

IV. Some Darwinian selection has already taken place. Some corporations learned how to deal with the aftermath of the tech bubble, and delevered after that. There is a high chance that deflation would lower the value of the equity of these corporations because of lower profit margins and volume, but they would not face existential risk, and high risk premiums would not be necessary.

However, this is not a bullish argument. The risk/reward favors bearish sentiment now. However, the political risk is very high right now. Even if the economists are correct that we will have a jobless “recovery” (no one is denying the “jobless” part), a prolonged period of no net job creation will lead to a glum social mood. A jobless recovery at a 10% headline unemployment is much different than at 5%, and there will be an imperative for politicians to do “something.”