Krugman Warns That the Run-up in Stocks Can’t Be Justified By the Fundamentals

By Bill Bonner • May 15th, 2009 •

"The market seems to be looking as if this is going to be an average recession, but it's not," said Paul Krugman, Princeton University's Nobel Prize-winning economist.

Nouriel Roubini also thinks the forecasts of a recovery are "too optimistic."

They're almost certainly right.

Krugman goes on to warn that the run-up in stocks can't be justified by the fundamentals: "It looks to me now as if the markets are now pricing in a rapid recovery, that they're pricing in a V-shaped recession, which I consider extremely unlikely."

Let's review: stocks get expensive...then they become cheap. That's just the way it works. Prices go up and down in long cycles. At the top of the cycle, they're very expensive - over 20 times earnings. At the bottom, they're very cheap, under 5 times earnings. At the top of the cycle you might need as many as 43 ounces of gold to buy the Dow stocks. At the bottom, one or two ounces will do the job. (more)