Today's Market Is Anything But Normal

Authored by Bill Bonner via,

In this issue, we aim to develop a compass… to help us figure out where we are and where we are going.

On Planet Earth, we can find our direction by reference to the Magnetic North. For investing, we use the most reliable force in finance – the relentless return to “normal” – to get our bearings.

And searching for normal, we may have stumbled upon what could be the Trade of the Century. More on that later…

Reversion to the Mean

As economists describe it, reversion to the mean is merely a recognition of the tendency for things to stay in a range that we recognize as “normal.”

Trees do not grow 1,000 feet high. People don’t run 100 mph. You don’t get something for nothing.

Normal exists because things tend to follow certain familiar patterns, shapes, and routines.

When people go out in the morning, they know, generally, whether to wear a winter coat or a pair of shorts. The temperature is not 100 degrees one day and zero the next.

Occasionally, of course, odd things happen. And sometimes, things change in a fundamental way. But usually, when people say “this time is different”… it’s time to bet on normal.

This phenomenon – reversion to the mean – has been thoroughly tested and studied in the investment world. It seems to apply to just about everything – stocks, bonds, strategies, markets, sectors… you name it.

But let’s push on. What is unusual in the chart below? What is so abnormal that the mean is likely to revert against it?


You will note that global debt was only $30 trillion in 1994. Now it is $230 trillion. That $200 trillion in extra credit is probably the whirlwind that sent equities spinning up to the top right.

Those gusts blew stock and other asset prices up to heights never seen before. The Dow reached over 26,000. Houses went on the market for more than $100 million. Gold rose above $1,900.

But while stocks and bonds may have the wind at their backs, it seems to blow in the economy’s face… making forward progress almost impossible. The real economy – as depicted by GDP at the bottom of the chart – has grown in a rather normal way, but at a slower and slower rate.

Its steady, plodding increase gives no hint of the chaos going on above it. The real economy and the financial world are as different as the eye of a hurricane and the swirling clouds and storms around it.

Another thing you notice is that until the mid-’90s… and again between 2008 and 2012… the average investor got essentially no benefit in exchange for the added risk of putting his money into equities (the chart above includes dividends). He might just as well have left his money in U.S. Treasury bonds.

In theory, he is supposed to be able to earn some return – over pure cash – by lending his money to the U.S. government (with the 10-year Treasury bond as the benchmark). He should be able to earn even more, a premium (more than he would earn from risk-free Treasurys), by investing in stocks. The premium is supposed to compensate him for the risk that his stocks could go down at an inconvenient time.

In practice, we find that risk-free Treasurys gave him less than nothing. He has earned less from Treasurys than he would have from gold (which pays zero interest) – over the entire 48-year period.

Stocks, meanwhile, earned him nothing for the first 24 years. Then they exploded to the upside, along with debt, until the financial crisis brought them back in line with gold.

By 2008, the average investor was again earning less on stocks – despite all the risk and bother of market investing – than on gold. It continued like that until 2012, when his stock investments shot up.

But there is a time to be in stocks… and a time to be out of them. Without knowing the future, you can still know when something is not normal. And when something is not normal… it is just biding its time until it becomes normal again.



Occams_Razor_Trader Madolf Sanders… Sun, 02/04/2018 - 11:24 Permalink

Debt schmet- personal debt is owed to a bank- the bank has shown a willingness to repossesses the asset that collateralizes the debt.


Government debt- false debt made from ether- which is owed to the Banking Oligarchs. The Oligarchs have showed zero willingness to repossess the asset- because doing so would remove the ability to fleece the indebted country for the longer term. Rather they can leverage the owed amount toward favorable policy change to have ultimate control of said nation!


"Let us control the money of a country and we care not who makes its laws."  Well, ultimately it would be the money men who will make the laws- so they win on both fronts.

In reply to by Madolf Sanders…

FreeShitter Sat, 02/03/2018 - 16:50 Permalink

It is abnormal because we dont have a market, we have a policy tool that is used to transfer all the wealth to the .01%.  Roll the motherfucking guillotines or nothing changes. That should be trademarked

abgary1 FreeShitter Sat, 02/03/2018 - 17:04 Permalink

I don't know if the policy tools were designed to benefit the 0.001% but that is what happened.

I think the tools were designed by economists that were educated in an economic theory that has no relevance to reality.

I don't know if the guillotine is necessary unless you are using it to end neo-classical economic theory and the central banking system.

Support Steve Keen in his efforts to develop theories that reflect the complex, dynamic and chaotic nature of the economy and markets.

End the Fed.

In reply to by FreeShitter

HillaryOdor Captain Nemo d… Sun, 02/04/2018 - 11:11 Permalink

Bypass the central bank and replace the currency with direct state issued toilet paper fiat clearly. Obviously Congress is much more competent than the fed. 

This is what people actually believe. It's only slightly more subtle. The fed is "private" and private property is evil, you see. So they are greedy predators while our noble elected officials are good and just and care so much about our well being, so they should have complete and total control over the money we are forced to use instead. It's just the standard neo-Marxist fantasy world that these people live in. 

Steve Keen is always blathering on about how debt doesn't matter when government issues it because they can always print their own currency. This was the model of the Weimar republic, Zimbabwe, Venezuela, etc..

These are the "intellectuals" the know-nothing public puts their faith in, and we are supposed to believe democracy is this wonderful thing.

In reply to by Captain Nemo d…

Don Sunset Sat, 02/03/2018 - 17:07 Permalink

It's time we see a story from Paul B Farrell.

After the the market crashes a lot more, maybe they'll release him from Rolling Hills, Danvers, Waverly Hills or wherever they have him holed up.  He should be redeemed soon.

I'd like to hear Paul's thoughts on who if anyone will play in the stock market casino after the next huge blowout collapse.  How will the FED achieve recapitalization of future failed banks and companies if nobody plays in the market casino?  As we can see, there were still plenty of suckers out there with this last go around.  Even after 2 hard crashes just this century already (and it's only 18 years deep).  When will they learn?

Goatboy Sat, 02/03/2018 - 17:32 Permalink

If you make another chart from 1971-1995. it would become more obvious that this insanity is nothing new.

Yes, it's probably crazier now but not as much as this chart suggests.

On every exponential chart previous periods look almost flat.

Our current "insane hockey stick" will look almost flat for future period. If we survive to see it.

Endgame Napoleon SH_Resurrected Sun, 02/04/2018 - 09:29 Permalink

We are back to the era of lords and serfs, where the lords in the top 20% are the ones with all the intergenerational assets, but this time, the serfs are not even resourceful enough to know how to live off of the land. 

Or, more likely, we are back to the corrupt era of the Industrial Age, with new technology that only benefits a few and a boom-and-bust stock market, like the one that prevailed all through the late 19th century. 

Today’s stock market appears much more promising than a job market that does not provide even a modicum of security for most citizens.

With mass underemployment of citizens, we are back to a period when corrupt Tammany Hall politicians pandered for immigrant votes, wanting to let in ever more low-wage workers to fill the tenements, the sweatshops and the meat-packing plants with child laborers, while handing the moms some low-wage piecework, along with favors from the politicians’ welfare trough.

Well, that is where the analogy gets weak. Our 21st century Tammany Hall Uniparty does wayyyy more of the pay-per-birth voter buying than in the days when a maximum number of children were actually needed to work in factories and on farms.

During the last wave of mass immigration, governent did not pay citizens and immigrants in single-earner households to have sex and reproduce, giving them free food, free rent and refundable (EITC) child tax credits, doubled from a max of $6,444, that boost their wages up over the wages of individual citizens, when the parents work part time to stay below the earned-income limit for monthly welfare and the cut off for refundable child tax credits.

Nor did Big Government help the wives of men making plenty to support the household to take part-time jobs that they—due to child tax credits and withholding—are paid more for than the individual citizens, struggling to cover rent that consumes more than half of their monthly pay with earned-only income and no spousal income.

It takes a special kind of corrupt 21st-century politician to design that rigged, American Last, piled-higher-and-deeper socialism for some. 

In reply to by SH_Resurrected

Captain Nemo d… Endgame Napoleon Sun, 02/04/2018 - 10:31 Permalink

Very true, but note that as you say it represents a return to serfs and lords. So you do not need a special kind of 21st century politician, it is a reversion to normal where the rich get richer and keep the rest under leash. What we needed with enlightenment was a new kind of economic system based on free trade but where the underlying assumption was satisfied. Other than that it is always (1) take over some resources (2) extract sufficiently high rent that the serfs can barely survive (3) use the power over the serfs to tilt the system in your favour. Problems do not come from the IPhoneX being too expensive, people can always choose not to buy them. They come from basic essentials getting more expensive, which is what differentiates rich countries from poor ones.

In reply to by Endgame Napoleon

buzzsaw99 Sat, 02/03/2018 - 18:08 Permalink

easy credit is like high blood pressure.  you feel pretty good for a long time while you have it until something that can't be fixed suddenly goes horribly wrong.

Arnold buzzsaw99 Sun, 02/04/2018 - 08:54 Permalink

A personal flat line is the real mean.

Our acquisition lifetime is very short in the greater run of the history of stuff.

In our conscious lifetime, it is more like an oscillation around some arbitrary point, rather than a reversion to mean.

And..."On a long enough time line..."

In the meantime, BTFD.
(Except for General Electric and Deutsche Bank)

In reply to by buzzsaw99

Let it Go Sat, 02/03/2018 - 18:18 Permalink

What is not normal and cannot be justified are PE multiples hundreds of times earnings. The so-called FANG stocks have accounted for much of the stock market rally we are witnessing, however, it might be wise to step back and question the fundamentals behind the upward movement of these stocks.

It is logical that these so-called bright spots that have pulled the market higher also have the most room to fall as valuations retreat. Signs that central banks are becoming more concerned about asset bubbles growing as a direct result of their actions is in the air. A massive surge in debt across the globe as consumers, businesses, and governments have thrown caution to the wind setting up a scenario that ends in tears. The article below explores why the FANG stocks may suffer most.

http://FANG Stocks Have Potential To Really Bite Investors.html

Endgame Napoleon Let it Go Sun, 02/04/2018 - 10:30 Permalink

It won’t be good for their brands, either, if that happens. Most of these guys depend on a huge volume of eyes or customers with a happy feeling about their products.

Most of them are not creating a high volume of jobs in the USA, like so many of the measuring sticks for financial success in this economy. 

In reply to by Let it Go

P.K.Snosage Sun, 02/04/2018 - 03:23 Permalink

"And when something is not normal... it is just biding its time until it becomes normal again."


We are all blessed that Zerohedge allows us to tap into this type of pure genius for free.

Endgame Napoleon P.K.Snosage Sun, 02/04/2018 - 10:36 Permalink

Actually, I have learned a lot from ZHedge. For one thing, some of these retired guys with a lifetime of serious academic and / or real-life economic knowledge have blogs, where they can say whatever they want due to retirement, rather than cow-towing and/or lying for the Establishmemt to hang onto a fat paycheck, like so many in the Fake News Media, Fake (Politically Correct) Academia and the Fake Governent Statistics Churn Mill. Maybe, they will save the world, but it is probably already to corrupted.

In reply to by P.K.Snosage

peterk Sun, 02/04/2018 - 08:11 Permalink

this concept of normal reversion to the mean is dangerous

it is the basis of all technical  analysis since the  1970's

little wonder that most people who make money in markets

do so only in  range bound markets.

the profits are  elsewhere.. in non range bound markets

yet here again in this dribble of an article we have  a focus on

reversion to the mean

An Shrubbery Sun, 02/04/2018 - 10:21 Permalink


When will your next report come out?

My belly button is already puckering, and unpuckering in anticipation...

Edit: Same shit, different day. Where the fuck have you been for the last 12 years, you useless sack of shit?

An Shrubbery Sun, 02/04/2018 - 13:14 Permalink

Truly, I have missed my calling.

I coulda been a contenda!

I could write more bullshit articles in my sleep, and enjoy a better prediction record than most of the horse shit that gets linked to by Zero Heads.

I'm outta here...