The 2008 Credit Crunch by MoneyBob

After a two-week decline which brought the Dow down 3.5%, the bulls are reasserting themselves to start this week. Building on Monday’s rally, global stocks were higher Tuesday amid renewed weakness in the dollar.In recent trading, the Dow was up 1.1% the S&P by 1.3% and the Nasdaq by 1.5%. Commodities rallied sharply, led by gold, as the dollar weakened anew after Australia’s surprise rate hike heightened interest rate differentials and improved the appeal of the carry trade (whereby fund managers borrow low-yielding dollars to invest in higher-yielding assets.)Once again, the skeptics find themselves on the defensive and it’s clear it will take more than a 3.5% drop or reminders about October’s “scary” history to break the market’s short-term momentum.Coincidentally (or not), the past few days has brought a raft of dour comments from the few analysts who correctly predicted the credit crisis before it became obvious to everyone.Here’s a sample: * George Soros says the U.S. banking system is “basically bankrupt,” in sharp contrast to Goldman’s upgrade of the large banks. * Nouriel Roubini says “markets have gone up too much, too soon, too fast,” and will retreat when economic news refutes the V-shaped consensus, Bloomberg reports. * Joseph Stiglitz told Bloomberg TV investors have become “irrationally exuberant” about prospects for a recovery. “There’s a lot of risk…ahead of some big bumps.” * Christopher Whalen tells Tech Ticker the fourth-quarter will be a “bloodbath” for banking as says stocks rallying while the “real economy is dying” is not a healthy sign. * Meredith Whitney warned about the likelihood of a second credit crunch, especially for small businesses, a WSJ op-ed last week.Meanwhile, stocks are now 15%-20% overvalued based on Robert Shiller’s long-term cyclically adjusted P/E ratio and Henry reports that Wall Street analysts are forecasting a return to record profit margins, which are only likely if more layoffs are coming, which begs the question: How can the economy maintain forward momentum if unemployment continues to rise and consumers remain in lock-down mode?The fact there’s so much to worry about is probably good news for bulls from a short-term perspective, as I wrote here. But long-term investors – as well as traders sitting on fat profits – would be wise to heed these collective warnings.