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.
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, don't worry; Janet Yellen has their backs.
We bring this up because an end to the de-leveraging cycle has been widely reported. Households must borrow to spend more. Because their wages and salaries are still crawling along the floor. And if they do get in a borrowing mood, it would have a powerful and magical effect. Consumer incomes and spending are roughly 6 times as much as corporate earnings. So, a rise in the consumer's willingness to borrow and spend could be important...at least for a while. Corporate earnings - already at record highs - could go even higher!
But wait. It would take some pretty strong magic to get corporate earnings and stock prices to go higher. How many more rabbits does Ms. Yellen have in that hat?
By our count, not many. The Fed has tried QE. They've tried ZIRP. And now what? Nominal rates can't go below zero. And QE doesn't seem to do more than to get them down on the floor.
That leaves jawboning...or 'forward guidance,' as the Fed calls it. But everyone knows 'forward guidance' is no guidance at all. The Fed tells us it can change its mind at any time.
So, unless the consumers really are ready to bugaloo....we are still in a de-leveraging episode...still with a long way to go down. Debt is still in its Mr. Hyde phase. And there's not much the Fed can do about it.
How about demographics?
Oh la la. There are a number of studies linking demography to stock market P/Es. The results are what you would expect. When people prepare for retirement, they buy stocks. When they retire, they sell stocks.
As more and more people retire more and more stocks are sold. P/Es go down in - at least according to the studies - is a predictable pattern.
And here's where the grim news comes. According to the latest study we saw, the expected effect on stock prices of demographics will be about MINUS 15% per year...over the next 10 years.
Debt and demographics cannot be QE-ed or ZIRPed away. They are both long-term trends. And they'll pull down stock prices for at least a decade.
Prepare for it.
Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.