Friday, October 10, 2014

Dow At 8,000 by Tyler Durden

What If …

When we left off yesterday we were worried. What if we have seen the highs in US stocks and bonds – not just for the next five or 10 years… but for the rest of our lifetimes?
On Tuesday, the Dow fell 272 points. No big deal, of course. But what if it continues?
Just six years ago it fell 51%. It could easily do so again – back down to, say, 8,000. There would be nothing unusual about it. Fifty percent corrections are normal. You know what would happen, don’t you?
Ever since the “Black Monday” stock market crash in 1987 it has been standard procedure for the Fed to react quickly.
But what if Yellen & Co. got out the party favors… set up the booze on the counter … laid out some dishes with pretzels and olives …  and nobody came? What if the stock market stayed down for 30 years, as it has in Japan?


A Special and Unusual Time

It seems almost unbelievable … Every time US stocks have gone down since World War II they’ve bounced back… and hit new highs. We take it for granted that they will always go up over the long run. But why should they?
The time between 1945 and 2007 is starting to look less and less like the “way things always are”… and more and more like the “way things were during a special and unusual time.”
It was more of an outlier than an average. The world was recovering from World War II. Populations were growing. New markets were emerging. People were starting new families and new businesses. And perhaps most important, the world was just beginning the greatest credit expansion in its history.
Gold – which had kept the US dollar honest for almost two centuries – was taken out in two steps. First, in February 1968, when President Johnson asked Congress to end the requirement that dollars be backed by gold. Second, in August 1971, when President Nixon ended the direct convertibility of dollars to gold.
Thenceforth, the flimflam began. We’ve been over the numbers before. No point in repeating them. Besides, the point we are making is obvious: When it comes to multiplying a society’s debt by a factor of 50… or increasing its debt-to-GDP ratio from 140% to 350% … we pass this way but once in a lifetime.
Credit can continue to expand for one … two … even 10 years. But not for 50 years. Not without trouble hot on its heels, at least.
Of course, the future includes a potentially infinite number of days. And we don’t know what will happen on even a single one. But if half a century goes by… and we wake up one fine day and discover that debt has risen to 1,000% of GDP … won’t we be surprised!

credit market debt as percentage of GDP
Total credit market debt owed as a multiple of GDP. The message is mainly that debt has grown a lot more than the economy – and much of this debt has been of the non-productive sort – click to enlarge.

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