Strange things have been taken for normal

Jun 19, 2015

- By Bill Bonner

Bill Bonner
Paris, France

Dear Diary,

Dow up 180. Gold down $2. The first number measures the value of America's business. The second measures the measure.

We watch the two, but not closely. Most often, nothing important happens. There is no information content in the numbers. Just "noise." Then, occasionally, they say something.

Many investors and analysts spend their time trying to figure out what they will say next. To us, that is like trying to guess what will come out next from the mouth of a raving lunatic. Instead, we try to figure out what Mr. Market should say...if he had some sense.

Should he say that "all is well" and America's businesses are becoming more valuable? Why would he?

Companies compete with each other for whatever sales are available. Some win market share, some lose it. Overall, the value of businesses should rise along with the rest of the economy - that is, along with GDP.

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But for the last 30 years, the value of equities has risen much faster than GDP. In raw numbers, the Dow itself it up 18 times. GDP is only 3.5 times greater than it was in the early 80s. How is that possible?

That, of course, is the story of our times...the story of our lives. Most of our adult lives have been spent in this world, where strange things have happened...and been taken for normal.

And now we live with stock prices - and not just stock prices, but also bonds, real estate and other assets - far higher than actual economic performance would predict. What gives? And what should Mr. Market say about it?

It doesn't make sense for asset prices to run so far ahead of the real economy that supports them. There are only so many sales to be had...only so much business...and only so many profits. And there is no particular reason that a dollar earned today would be worth a lot more than a dollar earned in 1980.

"Oh...but interest rates are lower!"

Yes, but that is not a permanent condition. That is only a temporary - and profoundly cyclical - situation. Mr. Market will have some say about that too.

And while he has been mumbling and grumbling, one thing interesting has slipped from his lips. 'Bonds have topped out.' At least, that's what we thought we heard. About two months ago, bond yields dropped to such strange levels - negative in many cases! - that it must have caught Mr. Market's attention and offended his delicate sensibilities. Since then, bonds have dropped. Here in France, for example, yields on the 10 year French government bond quadrupled in just 60 days.

This could be more than noise. It could be the end of the whole thing...

Stay tuned...

And stay tuned too, as we defend ourselves against a terrible, outrageous and preposterous calumny...until Monday.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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