This article was published by The McAlvany Intelligence Advisor on Friday, September 28, 2018: 

The bears are still out there, but their voices are being drowned out by the exuberance of the stock market and the economy. New records are being set almost on a daily basis. Take this from the Conference Board earlier this week, for example. For an economist, Lynn Franco, director of Economic indicators for the Board, was positively giddy:

After a considerable improvement in August, Consumer Confidence increased further in September and hovers at an 18-year high. The September reading is not far from the all-time high of 144.7 reached in 2000.


Consumers’ assessment of current conditions remains extremely favorable, bolstered by a strong economy and robust job growth. The Expectations Index surged in September, suggesting solid economic growth exceeding 3.0 percent for the remainder of the year.


These historically high confidence levels should continue to support healthy consumer spending, and should be welcome news for retailers as they begin gearing up for the holiday season.

Franco said consumers are not only presently optimistic, just in time for Christmas, but their outlook over the next six months continues to be rosy as well:

Consumers’ optimism about the short-term outlook improved considerably in September. The percentage of consumers anticipating business conditions will improve over the next six months increased from 24.4 percent to 27.6 percent, while those expecting business conditions will worsen declined, from 9.9 percent to 8.0 percent.

Everywhere one looks, it seems, there is evidence of a robustly growing economy. The moderation in house price increases reported on Tuesday makes purchasing a new home a bit more affordable, especially for first-time buyers. Wage growth that exceeds price increases is encouraging those households not only to improve their standards of living, but also to increase their savings rate, providing a cushion in the event of a downturn. Major stock market indices just set new records. The good news just goes on and on, it seems.

Which means that, for market bears, it would seem that it’s time for hibernation: a time to wait, ponder, deliberate, and keep quiet.

Not so for these bears. One bear, Albert Edwards, writing to his clients at Societe Generale, the French international banking and investment firm, said: “The U.S. consumer has gorged on optimism until they are fit to burst. This [report from the Conference Board] is as good a contrary indicator as [any].”

Another bear, David Rosenberg, chief economist for Gluskin Sheff, a Canadian investment management firm, said that euphoria marks the peak before a big decline. He noted that 43 percent of the households surveyed by the Conference Board were bullish, nearly double the 22 percent who were negative.

Neil Dutta, head of economics at Renaissance Macro, a technical analysis firm, took the data from the Conference Board and plotted its data starting in 1967 against the seven recessions that have occurred since then. He had hoped not only to find at what level the Consumer Confidence Index would shout “recession ahead,” but the lead time as well. In economic forecasting that would be the Holy Grail.

Dutta found neither: “If there was a magic level, we would [see] recessions start around those points. Instead, recessions start at different levels of confidence.” So much for using the Conference Board reports to predict the future of the markets and the onset of the next recession.

Others use intuition, claiming that trees don’t grow to the sky, and eventually – someday, some way, somehow – the stock market will drop, triggering a recession.  John Hussman, president of Hussman Investment Trust and whom Business Insider has described as the “stock market’s biggest bear,” holds the “reversion to the mean” philosophy: that eventually there will be a top, a sharp decline which overshoots to the downside and then a rebound. Bears like Hussman often refer to the stock market that topped out in September 2007 and then lost half its value before finding a bottom in February 2009.

Since then, of course, the market reversed course and now trades four times higher.

What’s missing from all of this? Is the biggest indicator of all just sitting on their living room floors grinning at them, shiny teeth and all?

It’s called complacency, and the coming death spiral. It’s pure mathematics that no one will be able to escape. At present, the federal government spends an amount approaching $400 billion a year servicing its $21 trillion national debt. As the New York Times points out, in 10 years (probably less), that debt service will approach a trillion dollars a year, more than the government spends on the military.

Here’s the crux of the problem: no matter how fast the economy can grow, it simply cannot outgrow politicians’ propensity to spend. It’s a race that the taxpayer can never win and will always lose. This sets in place a moment in time – no can say when, and few are even trying – when the government can no longer afford to service that debt. At that point, taxes will have to rise enormously, or the Treasury will be forced to borrow even more, or both, in order to pay its bills.

Enter the Death Spiral.

It’s complacency that keeps that beast with the shiny teeth in the living room from being the topic of conversation. As actress Ruth Negga so profoundly put it: “I think it we don’t understand history, if we don’t keep referring back to it, we become complacent. And complacency, as we all know, leads to repeating history.”



The New York TimesAs Debt Rises, the Government Will Soon Spend More on Interest Than on the Military

CNBC.comConsumer confidence hits 138.4 in September, vs. 132 estimate

MarketWatch.comConsumer confidence surges in September to 18-year high, near all-time peak

ReutersU.S. consumer confidence hits 18-year high; house prices slowing

BusinessInsider.comAmericans haven’t felt this good about the economy in 18 years, but that could be foreshadowing a coming recession

Conference Board news release

Complacency quotes

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