The Bells Will Be Silent

Includes: DIA, IWM, QQQ, SPY
by: Acting Man

By Bill Bonner

Still too Much Debt

A faint breeze blew through the US stock exchanges on Friday. A few leaves fluttered. But Diary readers want to know: When is the next hurricane coming?

Alas, we get the newspaper no earlier than anyone else. It always has yesterday’s news… not tomorrow’s. That leaves us wondering and guessing and trying to figure out what comes next.

The storm that raged in 2008 was fundamentally deflationary. It was so predictable that we didn’t need tomorrow’s headlines; the weather forecast was obvious.

After decades of taking on debt, Americans started to stagger under the weight of their debt-service costs. When house prices fell, their knees buckled and their backs broke.

Households cut spending and reduced borrowing. But they are still heavily in debt. In 1971 – before the big credit bubble began inflating under the new fiat currency regime – American households had $5 of income for every $4 of debt.

Now, for every $5 of household income they have $12 of debt. That’s down from the “peak debt” of 2007 – at $13 for every $5 of disposable income – but still much more than the historic average.

Household debt-to-income ratios of US and Canada (Canada’s housing bubble hasn’t burst yet, hence the divergence in trends).

Mr. Government vs. Mr. Market

The Fed's response to Americans’ prudence was also predictable. After so many years of backstopping the stock market… and luring consumers and businesses deeper into debt… the Feds weren’t about to quit. Besides, their theories told them this was when their help was needed most.

This put Mr. Government and Mr. Market on opposing sides of the big blow. The Feds whip the winds up from the South. Mr. Market sends them blowing down from the North.

The Feds want inflation; Mr. Market wants deflation. The Feds want more credit; Mr. Market wants debt paid down. The Feds send down torrents of liquidity; Mr. Market mops them up. This leaves the economy in the eye of the storm – where all is quiet.

Black Friday was a disappointment for retailers, but the pundits say this was because so much shopping is now done online. There are fewer real breadwinner jobs, but the pundits say the unemployment rate is down. The economy is sluggish, but pundits say the stock market reports clear sailing.

Clear sailing ahead – as can be seen, a proper bubble gets even more stretched!

Dark Clouds and Fierce Tornadoes

But beyond this scene of calm the pundits are painting are the strong winds…

Zero-interest-rate policies… quantitative easing… deficit spending – all are meant to offset Mr. Market’s dark clouds and fierce tornadoes.

If Mr. Market weren’t in such a destructive mood, these measures would have already sent interest rates and inflation soaring skyward… with the Dow flying to 25,000… gold soaring to $3,000 an ounce… and $5 for a Big Mac.

And if the Feds weren’t so determined to stop him, Mr. Market probably would have knocked the Dow down to about half of where it is today. He would also have crushed half of the major Wall Street firms. And you’d probably be able to get a Big Mac for $1 – with fries.

Who will win this contest? In the end, Mr. Market will triumph. He always does. He represents the forces of nature… and the gods.

bell ringer

He is the fellow who keeps trees from growing to the sky… who forces prices back to the mean… and who never gives a sucker an even break. And that bell you don’t hear ringing at the top of a market? That’s Mr. Market not ringing it.

Photo credit:

All necessary precautions have actually been taken. This professional town crier was hired specifically to ring the bell when the top is in, so there’s nothing to worry about. Everybody will know exactly when to sell, and no one will suffer any losses! Except for the poor house-bound schmucks buying what everybody else will be selling just in time, and of course the hard of hearing who fail to hear the ringing of the bell (we’re working on getting hold of a bigger bell for them).

Charts by: Haver, Advisorperspectives / Doug Short

The above article Was published originally as “The Best Way to Play US Stocks from Here …” at the Diary of a Rogue Economist originally written for Bonner & Partners. Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.