16 Tons of Debt

Another day older... and the straw boss said, "Well-a bless my soul!"

(Source: Getty Images)

Bill Bonner, reckoning today from Youghal, Ireland...

First, ‘you load 16 tons and whaddya get…?’

We reported last week that inflation is costing the typical household around $300 a month extra, just to stay in the same place. Where does that money come from?  Here’s part of it; Business Insider: 

Americans have been swiping their credit cards at record speed in the last few months, as rising inflation eats into the savings people accumulated during the pandemic.

The total US household debt hit $15.8 trillion in the fourth quarter of 2021, the New York Fed reported this week, seeing an increase of $333 billion from the previous quarter. Credit card balances alone hit $860 billion, up $52 billion in that same timeframe. That's the largest quarterly increase the Fed has seen in the 22 years it's been collecting data, the researchers say, adding that the surge in debt overall was driven by home and car purchases.

Yes, day by day, you get another day older. And often, deeper in debt.  

A Most Basic Pattern

There are patterns to everything in life. Look at a leaf. Listen to a song. Look at a church… or a funeral home. If you build a house that looks like a church… or a slaughterhouse… it could still function very well. But, like a cowboy hat on a Swiss banker, it won’t ‘look right.’ 

A house ought to look like a house. A song ought to sound like a song. You ought to get what you pay for. And, if you rob a bank… or inflate the currency… or borrow too much money, you ought to get what’s coming to you.  

Sometimes, the borders shift. What makes it a song, and not just noise? That is what we wondered as we saw some of the half-time entertainment during the SuperBowl. There is always innovation… experimentation; the frontiers get pushed out… and then recede.  

The most basic kind of pattern is the one we refer to often in these pages. Actions have consequences. Those consequences are often described as “common sense” or signaled to us in moral lessons, old wives tales, and Bible quotations. They establish the patterns of life that we see rehearsed in movies, novels… and even the evening news!

‘Sow the wind, reap the whirlwind’ is one. “As ye sow, so shall ye reap” is another one using the same image. Others are more practical: ‘take care of your tools and they will take care of you’… ‘watch your pennies and the nickels will look out for themselves’… ‘if your outgo exceeds your income, your upkeep will be your downfall.’

Carl Jung maintained that there were ‘archetypes’ buried deep in the human psyche. He said you could find them in folk tales and myths.  

Maybe. What we notice is that we have certain, almost innate, ideas about what things are worth. And we express them in market patterns. Stocks go up and down, for example, but rarely – and only temporarily – get too far out of a normal channel. This gives rise to the old-timer’s advice: buy cheap; sell dear. That advice would be useless were it not for a pattern.

But if you measure stock market trends in dollars, you will easily be confused and deceived. Like a carpenter with an elastic tape measure, it will be hard to keep things straight. The dollar has lost 96% of its value since the Fed was set up to protect it. It’s losing more everyday… currently at the rate of 7.5% (officially) per year.

Measure for Measure

A better measure, for this purpose, is to compare the stock price to the company’s earnings – the P/E ratio. A dollar’s worth of earnings – whether from a gambling casino or a steel mill – seems to have some archetypal relationship to price. Over the last century, investors have paid as little as $5 for a stock in a company that earned $1/share. Or, when they are feeling their oats, they might pay $10… or $20 for the same stock with the same earnings. So, a pattern emerges… and is reflected in the stock market cycle. In bull markets, prices go up. In bear markets they go down. The pattern repeats itself in long waves, often playing out over decades. In the bond market, for example, the last time interest rates were going up was 40 years ago.  

In the stock market, prices went down – adjusted for inflation – for 16 years, from 1966 to 1982. Except for short-lived counter-trends, they have mostly gone up since then – again, for 40 years.  

P/E ratios range from a low around 5 to around 25 at the top of the range, with an average of about 12. They sometimes go much higher, of course. In the big bubble market of 1999, the P/E of the Dow index hit 44, an all-time high. 

There’s a lot of ‘noise’ in P/E ratios. Individual stocks sometimes just go bonkers with Ps that have no connection to Es at all. Sometimes the companies have no earnings to measure against. Or they have negative earnings. And in today’s market, there are plenty of ‘clown stocks’ or ‘meme stocks’ that trade at absurd prices.

Sometimes, too, P/Es shoot up when stock prices suddenly fall. In the panic sell-off of 2008-2009, for example, the P/E of the S&P 500 soared over a 100.

In terms of gold, the stock market as a whole has gone nowhere over the last century. In 1929, you could buy all 30 Dow stocks for 18 ounces of gold. Today, you can still buy the Dow stocks for 18 ounces of gold. So, why bother?

But while it is sometimes tempting to be out of stocks… forever… it would be leaving money on the table. Companies, driven by a profit motive, create real wealth. And people who own companies – shareholders – get much of it. Stocks pay dividends. If you had simply re-invested your dividends, since 1929, you would have multiplied your original investment by 33 times – even adjusted for inflation.

In short, it pays to be in stocks. But not all the time. When should you get in? When should you get out? That’s what we tried to figure out. And we came up with a system, based on comparing the Dow to Gold. More on that on Monday. In the meantime, you can get Tom Dyson’s updated report on our Dow/Gold model here...

Enjoy your weekend,

Bill Bonner