»The Daily Reckoning by Bill Borner

The can is no longer rolling along

- By Bill Bonner

Bill Bonner
Gualfin, Argentina

Dear Diary,

As expected, the shills were out yesterday. And the Dow rebounded - up 293 points.

CNBC told investors that the "US is a place you should be investing."

And then Bloomberg explained that 'based on history' investors could expect to wait no more than 4 months until the market has fully recovered.


    Investors conditioned to expect quick recoveries from equity stumbles may need patience after U.S. stocks fell into the first correction in four years.

    Judging by prior 10 percent drops in this bull market, it could take until the end of 2015 as investors await a return to levels last seen in May. The gauge has fallen as much as 12 percent since reaching a high that month.

    The S&P 500's rally that began in March 2009 has been marked by two previous corrections: a 16 percent selloff from April to July in 2010, and a 19 percent slump over seven months a year later. The benchmark group recovered within about four months of each, so if history is any guide, the market may not be back at its May peak until late December.
But wait. This assumes that we're still in a bull market. And as we've seen, the bull market of the last 7 years was driven by two things: the Fed's zero interest rate policy and the Fed's QE programs. Neither of those things is working for the US now.

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Today, the Fed has no QE in operation. And as for ZIRP...it seems to have lost some of its zest. We MAY no longer be in a bull market at all. We MAY be in a bear market. If so, you can forget about a recovery in 4 months. Instead, it may take 4 years...or 40 years. From the high in 1929 it took until 1956 before stocks recovered - 27 years later. The high in the mid-'60s wasn't reached again until the mid-'80s - 20 years later. And over in Japan, stocks still haven't come near the high of 1989 - 26 years ago.

Corrections in a bull market are one thing. Bear markets are something very different.

It is excess liquidity that has floated stocks higher over the last 7 years, argues our friend, economist Richard Duncan. Not earnings. Not growth. Not productivity. Not savings. Not investments. Instead, excess liquidity came from central banks who were practically wearing out the pump handles to get more credit into the system. They did it by offering credit to others - governments, corporations, and households - at the lowest rates in recorded history. And if that weren't enough, they used their ability to create money (credit) to buy other debt instruments of uncertain value (aka QE).

Remember, for liquidity to increase, central banks have to make credit available...and someone has to borrow it. That's how you get "money" (liquidity) into the system. And you can tell how much of that is going on by looking at central bank balance sheets. When they are lending heavily, their balance sheets rise. And what you see now is that, overall, global liquidity is barely increasing at all, which should be taken as a warning signal to everyone.

But let's back up. This is an economy that runs on credit. As we've pointed out many times, lending money that doesn't exist to people who are already deeply in debt is not a good business model. It doesn't really stimulate an economy. And it doesn't really make people better off.

But it does keep the can bouncing down the road.

Credit - beyond actual savings - comes from banks and originates with the central banks. But the Fed balance sheet shows only a small rise - 1.8% -- this year. In the middle of the '08-'09 crisis it was as much as 140%.

Other central banks are not doing much more. Europe and England show little credit growth. In dollar terms, the Bank of Japan is hardly doing anything either. The Bank of China's balance sheet is growing by 2% per year.

Why so little credit growth? Because households aren't borrowing much. And governments are borrowing less and less. The US, Japan, France, Italy, Australia, Canada, and India all have falling deficits. And Germany is running a surplus.

What all this means is that the can is no longer rolling along. Instead, it has come to a near halt, with central bankers and government policymakers desperate to give it another boot.

Watch out!

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