A Bullish Consensus To Bet Against

When Debt Contracts …

The Dow fell 26 points on Friday. Gold rose a few bucks. Nothing important. After a good fright two weeks ago, investors in US stocks are comfortable again. They’ve learned their lesson: Whenever the stock market goes down, stay calm; it will always come back. 

So here is our prediction: The next time it won’t. The next bear market will last at least 10 years … and probably 20. 

Why? Debt and demography. Our old friend the late Dr. Kurt Richebächer spelled it out for us years ago: 

“You can’t build lasting stock market gains or solid GDP growth on debt. Because debt cannot expand forever. Sooner or later it must stabilize and then it must contract. When that happens, all the positive features of debt become negative features. Instead of borrowing and spending more, people must spend less and pay off past debt. Instead of adding to corporate sales and profits, they subtract from them. Instead of driving up asset prices, they push them down.”

Borrowed money has an almost magical effect on the way up. It comes out of nowhere. So there is no labor cost to offset against it. It goes almost directly into corporate profits. 

But on the way down Dr. Jekyll becomes Mr. Hyde. Debt has a maniacal effect when it goes into contraction mode. Jobs and wages go down as spending slows … making it harder than ever to pay debt … forcing households to make cuts far beyond what they would have had to do in the good times before. 

Biblical Effects

The effect is Biblical. And symmetrical. As ye sow so shall ye reap. Borrow a lot of money and you will have to repay a lot. Enjoy a big debt-financed boom … and you will suffer a big debt-driven bust. The bigger the boom, the bigger the bust.

Where are we now? Not far from an all-time high in debt … and stock prices. Investors are confident. If prices should go down, not to worry: Janet Yellen has their backs.