The peak nobody recognizes as a peak.

The Dow Jones hit 14,164 this week. The consensus is optimistic. The credit market is saying the opposite.

The Dow Jones closed this week at 14,164 — a new all-time high. The narrative is one of strength: the American economy still grows, third-quarter corporate results are above expectations, and credit market problems seem, for now, contained to the subprime mortgage sector. The Federal Reserve cut rates in September, reducing immediate pressure in the interbank market. Everything seems under control. What concerns me isn't what the market knows. It's what the market is choosing not to ask.

The stock market is an expectation aggregation mechanism. When it's rising, it's saying that the weighted average of everyone with capital allocated believes assets are worth what they're trading at. But expectations aren't analysis. They're the result of a social process where people reach consensus about the future using information already in the past. The problem with the current peak is that it's being reached while the credit mechanisms that financed five years of economic growth are under visible stress. The stock market is saying the problem isn't serious. The credit market is saying the opposite.

Historical peaks aren't visible as peaks at the moment they happen. They only become visible afterward, when what followed revealed that the consensus was wrong. I don't know if the market will fall tomorrow. But I know that the current level of optimism coexists with Bear Stearns, BNP, Northern Rock, and interbank credit operating with abnormal spreads — and that the stock market hasn't processed any of that proportionally. When it does, it will be all at once.

Leo Bentier