Wonderful monthly letter by Pimco’s Bill Gross talking about the relationship of credit and asset prices with his pig example. Essentially he’s expecting headwinds for the stock markets with the removal of liquidity and thus credit by the Fed for the coming year.

Asset prices are dependent on credit expansion or in some cases credit contraction, and as credit goes, so go the markets, one might legitimately say, and I do most emphatically say that!

…

P/Es of 3 or P/Es of 15 or P/Es of 0 are intimately connected to the amount of available credit. So are interest rates. If there was only one dollar to lend and someone was desperate to have it, the interest rate would be usurious. If there was one trillion dollars of credit and no one was eager to borrow for some reason or another, then the rate would be .01% like it is today and for the past five years in my personal money market account.

Source: Pimco