A faint breeze blew through the US stock exchanges. A few leaves fluttered.
But 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.
Mr Government versus Mr Market
The Federal Reserve’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.
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.
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.
for Markets and Money