… we'll probably have to see some sort of shock such as major corporate bond defaults or bankruptcies, a retail season that is more disastrous than expected, sharp declines in earnings expectations and an abrupt increase in layoffs.

Either way, I see the next few years as a process in which all asset values — stocks, bonds, commodities, land — adjust to a level that is sustainable in a world of lower debt and lower growth.

Earnings Estimates Too High?

Over the next week, we might start to hear the holiday season is going at retail. We may be surprised to hear it's going a bit better than the most dire projections, which might help to keep investors in a generous mood.

But pretty soon it's going to be time to start thinking about the full quarter, and whether companies are on track to meet earnings expectations now and next year. This is where the rubber meets the road. So let's take a quick look at consensus beliefs.

The growth rate for the fiscal third quarter of this year came in at -18.7%. While that's clearly bad, you can see why the market tumbled so sharply this fall when you realize that on April 1 the estimated growth rate for Q3 2008 was 17.3%! That's a delta of 35 percentage points.

Even on July 1, estimates called for growth of 12.3%. And as recently as October 1 expectations were that companies would contract by -4.3%. So you can see that expectations were incredibly off base earlier this year, and never actually caught up to the misery actually experienced at companies. (Most of the difference was the extreme weakness in financial companies.)

So what about now?