Payback

Nobody understood better how to take advantage of mis-priced credit than the money mavens of Wall Street. Speculators borrowed at very low rates — even below the rate of inflation — and bought stocks.

Source: Getty Images

Wednesday, February 26^th, 2025

Bill Bonner, writing from Baltimore, Maryland

‘There is no means of avoiding the final collapse of a boom brought about by credit expansion.’

—Ludwig von Mises

Dan says our view of the stock market — is ‘almost un-American.’ It defies the evidence of the stock market since 1925 — which is up 366 times. It seems to contradict the greatest investor of all time — Warren Buffett — who says you should ‘never bet against America.’

And our dear readers, too, think we are off track:

Astonishingly, Bill seems to leave out *productivity* gains in his argument. Sure, a chicken in 1925 produced the same eggs as a chicken in 2025… *unless* from bioscience knowledge over the years you now know how to better keep the bird healthy and more nutritionally fed such that it produces 6 eggs a week instead of 4 and produces for 4 years instead of two. That bird is arguably worth 4 times what the 1925 bird is worth, even if both are Rhode Island Reds. Increased productivity, either by working more hours or producing more per hour, is what generates wealth over time.

Seems obvious. Seems right.

Progress!

Improved productivity. Companies have more output even with reduced inputs. Therefore, they are worth more…right? And we are all richer; all we have to do is to hold stocks ‘for the long run,’ right?

Maybe. But our Law of Conservation of Value tells us that stocks shouldn’t be worth a single penny more, even over 100 years. Today, we’ll figure out why.

We all know the dollar can’t be trusted. It’s lost about 97% of its value since 1925. But the feds can manipulate the dollar. They can’t manipulate time. It’s a constant…marching forward by minutes and hours…eternally.

In 1925, the journeyman baker in Baltimore earned nearly $40 a week. We’ll make the math easy by saying that the median wage was about $1 an hour. At that rate it would have required three weeks’ work to buy the 30 Dow stocks. Today, the average wage is around $1,200 per week. So. it will take 36 weeks to buy the Dow — 12 times as much.

Even in ‘time prices’ stocks have gone way up. But what about in terms of real money, gold?

Yesterday came this exciting news from Tom Dyson:

The Dow/gold ratio is 14.8 today. Our strategy used 5 and 15 as the buy and sell triggers…so this may be the last time we can pound the table on the Dow/gold trade. Next stop might be a Dow/gold ratio of 5, in which case we’d have to start preparing to buy stocks as per the system! 

We keep score in gold. It’s the only real money. Everything else is credit. And in April 1929 — 96 years ago — the Dow/gold ratio was… you guessed it… 14.80. From there, stocks moved higher for another six months, before collapsing over the next four years, down to two ounces of gold to the Dow in 1933.

You could trade your Dow stocks for 14.80 ounces of gold in 1929. So can you do so today. In dollars, stocks went up. And in time too, they went up. But in real money, they went up and down…to nowhere.

What to make of it? What happened to all of those ‘productivity gains?’

We’ve seen that wages, earnings, sales, costs, and profits are all linked together, like alpine climbers connected to a single rope. Individual companies can go off on their own and climb to whatever heights they can achieve. But taken altogether, the key elements of a real economy stick fairly close together. Productivity raises them all up…and makes us all better off…but it doesn’t separate capital values from the rest of the economy.

Corporate America (not including memes or zombies) should be worth the present value of its anticipated earnings. And earnings are limited by wages, sales, competition and costs. Taken together, those earnings should never get too far out of line with the rest of the economy… including productivity enhancements

With the help of bio-science and workplace innovations, hens may produce more eggs. But people only have so much money to spend and can only eat so many eggs. And the new abundance lowers egg prices, so that farmers’ profit margins remain more or less the same. The real values of the egg producers oughtn’t to change.

As productivity raises the amount of ‘stuff’ available to consumers…it also increases the amount of real money for them to buy it with. As innovation, education, and specialization improved corporate results generally, they have a similar effect on the gold mining industry. For the whole 19th century, gold increased along with the economy, leading to more or less stable prices.

But in 1971, the feds replaced the rope with a bungee cord. Funny money gave the system much more flexibility…much more stretch.

Milton Friedman didn’t miss the point. He applied it to his post-1971 flexible money system. He recommended that the feds add 3% to the nation’s money supply every year…roughly in line with GDP growth.

Alas, the feds couldn’t be trusted with the nation’s money. They allowed the money supply to expand far faster than Friedman recommended. The result was an economy so disfigured that even its own mother wouldn’t recognize it.

Normally, consumers can only spend what they earn…and investors can only invest what they save. Cometh the new dollar — lent at artificially low interest rates — and all of a sudden, US businesses, consumers and investors were living it up, using money that nobody earned or saved.

Sales went up, and with no offsetting wage cost, much of the money fell right to the bottom line. And speculators could now gamble with almost no carrying cost. GDP rose too…lifted up by funny money.

Nobody understood better how to take advantage of mis-priced credit than the money mavens of Wall Street. Speculators borrowed at very low rates — even below the rate of inflation — and bought stocks, cryptos, bonds, and real estate. They bet — correctly! — that their own betting (more dollars invested in assets) would lead to capital gains.

Thanks to the Fed, they won their bets. But the game is not over; the bungee still hasn’t snapped back. The pay-back phase of the credit boom is still ahead. The Dow/Gold ratio goes over 40 (as it did in 1999). But it also goes down to 1 (as it did in 1980). It just passed 15… look out below.

Stay tuned.

Regards,

Bill Bonner