The Daily Reckoning
resident Barack Obama speaks at a fundraising reception in Baltimore, Tuesday, June 12, 2012. Democrats and Republicans are wary of trying to exploit a new report about the sharp drop in household wealth over the past 20 years. (Patrick Semansky/AP)
The disconnect between household wealth and GDP growth
Twenty years of going nowhere! Where are we, Hokohama?
Dear Reader…and anyone who has been paying attention…you already knew there was something wrong. The world’s leading economy, in the most dynamic, inventive period in human history, failed to make people a penny richer.
GDP went up. But real wages did not. In fact, people got nowhere financially — if they were lucky. And many families got caught in the credit/housing bubble. When it blew up they got knocked back…actually losing wealth.
We’ll give you the conclusion before we give you the facts: the “growth” in the last 20 years was largely phony. The wheels on the economy spun around faster and faster. The shopping malls were full. Houses were built on nearly every vacant lot. Wall Street cashed big checks. But, overall, it was an illusion. Compared to a real boom, it was a counterfeit. Nobody got anywhere.
Here’s the story from The New York Times:
Family Net Worth Drops to Level of Early ’90s, Fed Says
WASHINGTON — The recent economic crisis left the median American family in 2010 with no more wealth than in the early 1990s, erasing almost two decades of accumulated prosperity, the Federal Reserve said Monday.
A hypothetical family richer than half the nation’s families and poorer than the other half had a net worth of $77,300 in 2010, compared with $126,400 in 2007, the Fed said. The crash of housing prices directly accounted for three-quarters of the loss.
Families’ income also continued to decline, a trend that predated the crisis but accelerated over the same period. Median family income fell to $45,800 in 2010 from $49,600 in 2007. All figures were adjusted for inflation.
The new data comes from the Fed’s much-anticipated release on Monday of its Survey of Consumer Finances, a report issued every three years that is one of the broadest and deepest sources of information about the financial health of American families.
While the numbers are already 18 months old, the survey illuminates problems that continue to slow the pace of the economic recovery. The Fed found that middle-class families had sustained the largest percentage losses in both wealth and income during the crisis, limiting their ability and willingness to spend.
The share of families saving anything over the previous year fell to 52 percent in 2010 from 56.4 percent in 2007. Other government statistics show that total savings have increased since 2007, suggesting that a smaller group of families is saving more money, while a growing number manage to save nothing.
You might be tempted think that this is just a temporary setback…that when things return to normal the typical household will recover two decades of financial progress too.
Don’t count on it. Household wealth in the US rests on housing and wages. Housing prices might stop dropping; they are unlikely to enter a new bull market. Instead, they will probably track GDP growth, just like they always did. Nor can you expect to see wages rise substantially. Why? Because there are 15 million people who don’t have jobs. It will be a long time — practically forever at the current rate — before they are absorbed into the labor force again. Until this huge inventory of willing and able labor is put to use, don’t expect wages to go up.
In other words, when things return to normal they will be what they are now… The bubble was an illusion. The current, dismal situation is real.
The New York Times continues, pointing out that if the feds had let Mr. Market do his work in ’08/’09 the rich wouldn’t be so rich…
The data does provide the latest indication, however, that the recession reduced income inequality in the United States, at least temporarily. The average income of the wealthiest families fell much more sharply than the median, indicating that some of those at the very top of the ladder slipped down at least a few rungs.
Isn’t that what we’ve been saying? First, the feds made the rich richer by creating a phony, credit-fueled economy, where the amount of credit grew 50 times over the last 50 years. Then, when the credit bubble blew up, the feds stepped in to prevent the rich from losing money. And now the feds moan about the ‘inequality’ in our society…and how they have to do something about it. Haven’t they done enough already?
Bill Bonner
for The Daily Reckoning
John Bumgarner, a cyber warfare expert who is chief technology officer of the US Cyber Consequences Unit, a non-profit group that studies the impact of cyber threats, holds a notebook computer while posing for a portrait in Charlotte in this December 2011 file photo. (John Adkisson/Reuters/File)
Cybergeddon: Did US help develop dangerous new computer virus?
CYBERGEDDON!
What’s the latest? We don’t know. We spent the last couple of days in Florida. Nobody knows anything in Florida. They’re all retired down there. They don’t have to think anymore.
And one of the things they don’t think about very much is the zombie wars. You know what’s happening. The productive sector of our economy is being eaten alive by the unproductive, zombie sector — including many of those retirees in Florida.
Which is probably a good point to make a distinction. There are honest retirees…and zombies. The honest ones worked hard, saved their money…and now they live off the fruits of their own labor.
The dishonest ones live on disability…Social Security…bailouts and government contracts. That is, they live off the fruits of someone else’s labor.
“Hold on, Bill,” we hear you saying. “You can’t condemn a person for living on Social Security. After all, we all pay into the system. It’s not free. You have to earn it.”
Right! And we’re not condemning Social Security recipients. We’re just pointing out that many of them are zombies. They take. They don’t give. Maybe they gave enough already; maybe they didn’t. We don’t know. Down in Florida, it’s hard to tell the zombies from the rest of the population. They shuffle…they drool…they appear to be brain dead. Who knows? A zombie? Or a Republican?
“Isn’t this a strange world we live in,” said our tax accountant last week. “We have six people around a table…spending hours doing something that doesn’t make anyone any better off.”
He was wrong about that. But we know what he meant. We were zombie fighting. What a waste of time. At least for the productive economy and the general wellbeing of the people in it. But it is a very valuable way to spend your time if you’re being attacked by zombies! You have to fight back.
We were fighting back by using subsection 16 b, part 5, paragraphs g-l…against rule number 1,456 as applied to foregone earnings of a limited partnership that invests in unallocated, unamortized, unappealing properties subject to section 3612, as amended in the Tax Act of 1997 and re-amended in subsequent acts and deeds of which we have either lost tract or were totally ignorant all along.
Or something like that.
The zombies want more of our money. So, we use the zombies’ own weapon — the tax code — to protect ourselves. Instead of creating wealth…we are just trying to keep it away from the zombies. Neither zombie nor zombie fighter adds to the overall wealth or prosperity of the world or its people. But heck, you gotta look out for yourself.
There are two methods, or means, and only two, whereby man’s needs and desires can be satisfied: One is the production and exchange of wealth; this is the economic means. The other is uncompensated appropriation of wealth produced by others; this is the political means…
— Alfred J. Nock
In a late, degenerate system — whether it is socialism, capitalism, or whatever — half the population tries to live at the expense of the other half. In America today, they succeed. More than half the people get money from the government.
The other half is forced to spend much of its time trying to keep the zombies at bay. They hire tax accountants to help them avoid taxes. They hire estate lawyers to try to get their wealth to their heirs rather than to the zombies’ heirs. They move from a high tax state to a low-tax state. They dodge. They duck.
But the zombies are everywhere. When they send their children to college they pay a tax to the zombies — the whole educational establishment is subsidized by the feds. Even private schools are excessively expensive thanks to the federal money pumped into the industry.
Same for health care. Every part of it is regulated, prohibited, or supported by the government. A doctor who doesn’t take federal money is practically out of business. One who dares to give the best advice he can — without padding his derriere with insurance…and covering it with over-testing and excessive precautions — runs the risk of bankruptcy. The tort lawyers who control congress have made sure of that. Sooner or later a patient is bound to see an ad on a cross-town bus: “Does Your Doctor Owe You Money? Call 1-800-SHY-STER.”
And don’t forget the financial industry. Bailed out by the feds…subsidized by cheap credit…heavily regulated — as much as a third of every dollar you send to Wall Street is consumed by the zombies…rather than put to work in a productive industry.
And then, in a class of its own, is the “defense” industry. The rest of the zombies are causing the economy to go to hell. The defense industry is likely to get us all sent to hell.
In addition to signing death warrants for people who have never been charged with a crime, much less ever convicted…the Obama administration is now taking credit for starting what industry insiders are calling “cybergeddon.”
The US feds got together with the Israeli feds to create a computer virus which, apparently, completely disables a software system. Then, it put it out to work against a country with which neither nation is at war.
What gives? Is it now okay for groups of hackers to attack whomever they please…when they please? Is Internet vandalism now US policy?
If so, you could hardly fault a collection of clever Iranians…perhaps with the help of Russians, Iraqis, Chinese…who knows…for getting together to launch a counter-attack, could you? And you wouldn’t be surprised to find that they have taken key elements of the US bug, re-engineered it, and sent it right back where it came from, would you?
A Financial Times headline tells us that “the US will rue the day” it started a cyberwar. Here’s why:
One of the enduring characteristics of superpowers is that they always find some way to destroy themselves. Hitler and Bonaparte could have remained masters of all of Europe — perhaps indefinitely. Instead, they found Russia! Japan found Pearl Harbor. And now, Barack Obama has found a new area of warfare where America is most vulnerable and where its historic advantages count for almost nothing.
As to the first point, here is a question: what would happen to you if your credit card stopped working? The ATMs don’t work. You can’t buy anything with a credit card; what do you do? Go to the bank? Forget it. Within hours the banks would be out of cash. You would have no means to buy food.
But so what? There wouldn’t be any food to buy anyway.
America’s dependence on computer systems…and its vulnerability to disruption…was well researched and documented in the run-up to the year 2000. The “Y2K” problem might have brought the whole country to a dead stop.
It didn’t. And now the economy is more vulnerable than it was then. If the computers stop working, the whole system breaks down. Transportation…shipping…shopping — the whole supply chain that keeps us going — stops.
What a great idea, to encourage innovation…and deployment…of computer viruses! It is as if a person who lived in a glass house handed out rocks!
But it is worse. Because the US has huge military advantages. It is able to spend much more money than its rivals. It is able to produce more weapons. It is able to put more firepower into the field…and to blow up more buildings and kill more people.
But on the Internet its advantages are minimal. Money is important. But it is not nearly as important in computer warfare as it is in conventional warfare. This new battlefield gives America’s enemies an advantage. They don’t have to spend $700 billion (most of it wasted on zombie bureaucracy and expensive, but useless, weapons…after all, we are in a late, degenerate period) to compete. Instead, they can put together a small, talented, focused and motivated team.
And then, your credit card will stop working.
Bill Bonner
for The Daily Reckoning
Protesters shout slogans against the government of Argentine President Cristina Fernandez de Kirchner in Buenos Aires in this June 2012 file photo. The president wants Argentines to end their love affair with the dollar and start thinking in the local peso currency despite high inflation. (Enrique Marcarian/Reuters)
Argentina plays fast and loose with inflation facts
Spain was down again before we noticed it was up. Monday morning, stocks all over the world were rising on hopes of a solution to the euro problem. By afternoon, the rally was over. The Dow ended the day down 142 points.
But that’s the way the euro rescues go. The effects are more and more short-lived. Pretty soon, investors will realize they don’t work at all…and then there won’t be any up-surge, A new rescue plan will be announced. Investors will realize it is just another scammy fix. And stocks will go down.
When that happens the game will be over.
We might not be far from that point now.
Meanwhile, the US is worried too. About Europe, which is on the verge of total breakdown? Maybe. About China, which is growing at its slowest pace in 13 years? Maybe.
About the US itself…where the ‘recovery’ went missing? Almost certainly.
Here at our Daily Reckoning headquarters, we remain sans soucis. Which is another way of saying, we’re enjoying the show. What will the fixers do next, we wonder? Every fix makes things worse. But they keep at it.
For the benefit of Dear Readers with skin in the game, we leave our “Crash Alert” flag up for a few more days. This market could go to hell in a hurry. If you’ve got skin in the game, get it out.
And, for the benefit of everyone, we cast our weary eyes down to the pampas. Is there any policy so foolish the Argentines have not had a go at it? Is there any financial disaster so catastrophic the gauchos haven’t repeated it at least two or three times? Is there any trick so dishonest or so transparently fraudulent that the politicians south of the Rio de la Plata don’t make a regular habit of it?
Our Bonner Family Office chief investment strategist, Rob Marstrand, who makes his home in Buenos Aires, is visiting us in the US this week. He tells us that it is said to be a crime in Argentina to mention the “parallel” market in dollars. On the official market, the peso still trades at about 4.4 to the dollar. On the unofficial exchanges, that is, on the parallel market, the “blue” peso trades at less than 5.1 to the greenback.
But it’s apparently illegal to mention it.
So is it supposedly illegal to publish the real inflation rate. The Argentine feds have their rate; it’s a crime to contradict them.
The government is also trying to get Argentines to stop using the dollar as a protection against peso inflation. The president says she is converting her own dollar deposits to pesos, to set an example.
“I guarantee you she is not converting her accounts in Switzerland,” says Rob.
But the typical Argentine wasn’t born yesterday. He’s been around the block a few times. He knows that when the government gets in financial trouble, it can’t be trusted. He knows that it will seize whatever money it can get its hands on — especially if it is foreign currency. So, if he’s saved dollars, he’s hiding them…or getting them out of the country. Here’s the Reuters report:
BUENOS AIRES, June 8 (Reuters) — Argentine banks have seen a third of their US dollar deposits withdrawn since November as savers chase greenbacks in response to stiffening foreign exchange restrictions, local banking sources said on Friday.
Depositors withdrew a total of about $100 million per day over the last month in a safe-haven bid fueled by uncertainty over policies that might be adopted as pressure grows to keep US currency in the country.
The chase for dollars is motivated by fear that the government may further toughen its clamp down on access to the US currency as high inflation and lack of faith in government policy erode the local peso.
From May 11 until Friday, data compiled by Reuters from private banks showed $1.9 billion in US currency had been withdrawn, or about 15 percent of all greenbacks deposited in the country.
Feisty populist leader Fernandez was re-elected in October vowing to “deepen the model” of the interventionist policies associated with her predecessor, Nestor Kirchner, who is also her late husband.
She wants Argentines to end their love affair with the greenback and start saving in pesos despite inflation clocked by private economists at about 25 percent per year.
Fernandez set an example on Wednesday by vowing to swap her only dollar-denominated savings account for a fixed-term deposit in pesos.
But savers in crisis-prone Argentina are notoriously jittery.
Why would they be jittery? Because their dollar deposits were seized and forcibly converted to pesos 10 years ago? Because the peso was devalued by 66% in the last crisis?
Or because the Argentine peso of 50 years ago has been devalued by approximately 42 trillion percent. We don’t know how such a thing is mathematically possible…but that’s the report we’ve read.
Defaults, devaluations, hyperinflations — the Argentines have seen it all.
Americans have a lot to learn.
And another thought…
The British writer AA Gill once noted that…
“Europe is an allegory for the ages of man. You are born Italian, relentlessly infantile and mother-obsessed. In childhood, you are English: chronically shy, tongue-tied clicky and only happy kicking balls or pulling the legs off things. Teenagers are French: pretentiously philosophical, embarrassingly vain, ridiculously romantic yet simultaneously insecure. During Middle-Age, we become either Irish and fun loving, or Swiss and serious. Old age is German: ponderous, pompous and pedantic. And finally, we regress into being Belgian, with no idea of who we are at all.”
Bill Bonner
for The Daily Reckoning
Horror movie culture enthusiasts dressed as zombies take part in the Helsinki Zombie Walk in Central Helsinki in this May 2012 file photo. but zombies of a different kind have on the prowl recently, according to Bill Bonner. Economic zombies suck the life out of the economy and use up valuable resources. (Mikko Stig/Lehtikuva/Reuters)
Zombie apocalypse? Economic zombies thrive off of state spending
Coming soon…a Zombie Apocalypse…
You must be getting tired of hearing us talk about zombies. And maybe we are getting a little obsessed by them. But we see them all around us. And they’re getting bold…brazen. They’re coming out in broad daylight.
Here’s an article that appeared last week in The Wall Street Journal:
The recipient of the Obama administration’s biggest loan guarantee for solar energy won federal money after an intense push in early 2011 that included hiring a former chief of staff to Vice President Joe Biden to lobby the administration, according to federal records and people involved in the approval process.
The lobbying blitz came as the $1.6 billion loan to BrightSource Energy Inc. — a centerpiece of the administration’s program to promote nascent green-energy projects — faced a do-or-die moment, and the company called on its Democratic connections to help push the deal forward, according to emails, records and those familiar with the loan.
The $16 billion federal loan-guarantee program became headline news in September when a recipient of a $535 million guarantee, solar-panel maker Solyndra LLC, declared bankruptcy. Solyndra’s chief backer was an Oklahoma industrialist who had bundled contributions for Mr. Obama’s 2008 campaign. The White House said there was no connection between the donations and the loan.
President Barack Obama has said the loan program was run fairly and that some failures were inevitable in the business of backing new energy systems.
Mr. Obama lauded BrightSource in a weekly radio address in 2010. The company, which is building a 392-megawatt solar-power plant called Ivanpah in the Mojave Desert, had several other Democratic connections, including its then-chairman, John Bryson, a longtime green-energy proponent whom Mr. Obama later named commerce secretary.
BrightSource spent more than $500,000 on lobbying in the third quarter of 2010 through the second quarter of 2011, according to federal records, on behalf of the loan program and its own loan. The records show that $40,000 of the BrightSource lobbying money went to Bernie Toon, who was chief of staff to Mr. Biden, then a US senator, in the 1990s.
Yes, dear reader, the zombies are everywhere. Lobbying. Spending. Getting disability and bailouts. Every US government program is full of zombies.
Why so many zombies? What you pay for is what you get. And with the “new” dollar after 1971, the feds could buy a lot of zombies.
Remember, zombies are people who take money from the productive sector of the economy and transfer it to themselves. As they grow more numerous and more powerful — thanks to the resources that go their way — the productive part of the economy is less and less able to support them.
Fewer and fewer workers…more and more zombies.
Fewer and fewer people producing things…while more and more people just consume them.
Everything is okay as long as the resources keep flowing. But the productive sector of society can only support so many zombies. Yes, the producers can be bamboozled into supporting more “education” and more “defense” when they are flush. But when times get tough, the zombies and the producers head for a showdown.
Scott Walker won a battle in Wisconsin. But the zombies’ power still grows — funded by cheap credit and government spending. A larger war lies ahead.
*** Poor Mr. Obama. We warned George W. Bush and his henchmen that they would be held accountable for torturing people. It’s clearly against the law. It violates treaties and conventions that the US signed. And sooner or later some ambitious, gutsy or naïve judge is going to issue a warrant for their arrest.
“Stay in Texas,” we told the ex-president, or he is likely to fall into a judicial trap, like Chile’s former head of state, Pinochet.
Now, Mr. Obama better put his passport away too.
Is Obama committing crimes? He might someday be prosecuted for ordering drone attacks
By Dan Simpson, Pittsburgh Post-GazetteThe coincidence in time of an international court sentencing former Liberian President Charles G. Taylor to 50 years in prison for war crimes and the detailed account in The New York Times of how President Barack Obama decides which foreign and US citizens to kill with drones, without trial, makes me nervous.
Mr. Taylor was not the first major political leader tried for crimes in an international court. Former Yugoslav President Slobodan Milosevic was on trial when he died in 2006. Former Bosnian Serb leaders Radovan Karadjic and Ratko Mladic are currently on trial. Former Chad President Hissene Habre and Sudanese President Omar al-Bashir are candidates for such trials.
Any prosecutor involved in international law is fully aware of one of the major difficulties of bringing off successful war crimes prosecutions — tying the actions of the accused directly to the crimes committed.
Now, putting aside whether it is legal for Mr. Obama to order the death by drone of al-Qaida and other figures, numbering now around 2,000 in Afghanistan, Pakistan, Somalia and Yemen, plus whoever happens to be nearby when a rocket hits — associates, friends, wives, children — he is clearly responsible for doing so. The president is described in the Times piece as personally choosing the targets.
Few have said yet that these killings are war crimes, but one day someone is likely to deem them so and Mr. Obama may even be charged in an international court, probably after he has left office. He clearly is taking direct responsibility because he sees the drone killings as something that only a president can order.
Regards,
Bill Bonner
for The Daily Reckoning
Federal Reserve Board Chairman Ben Bernanke testifies on Capitol Hill in Washington, before the Joint Economic Committee hearing on the health of nation's economy, the slumping recovery, and the European debt crisis, on Thursday, June 7, 2012. Bonner argues that another round of Federal stimulus would do little to ease the US economic downturn. (J. Scott Applewhite/AP)
Stimulus won't save the economy
Q…E…
Waitin’ for ya
Prayin’ for ya
Not much follow through in the stock market yesterday. The Dow was up…but only 46 points.
Meanwhile, gold fell $46.
We long for clarity. For a day of reckoning. But it seems far in the future. Yesterday, the world waited for Mr. Bernanke to reveal his intentions. Instead, he said he was keeping his options open.
That was good enough to keep some steam in the stock market. But not enough to keep gold going up.
Both gold bugs and stock market bulls are counting on the Fed to come through. And it probably will.
We saw yesterday how the 1% got to be so rich. The feds — aided and abetted by consumers and the financial industry — bubbled up the amount of cash and credit in the US by 50 times in the last 50 years.
“That explosion of credit changed the world,” writes Richard Duncan in his new book, The New Depression.
Yep…for one thing it made the rich richer. That money didn’t go to wage earners. It went into stocks and bonds — the assets owned by the 1%.
The stock market began its epic march up the mountain in 1982. Since then, it’s gone up 13 times (as measured by the Dow).
US GDP is up about 13 times too.
But much of the “growth” in stocks and GDP in this period was phony. The tape measure, used to track growth, was calibrated in dollars. And the dollars — stretched by the feds — lied.
Just look at what has happened in the last ten years. From its low in the early 2000s, stocks are up about 50%. Investors might think they are ahead of the game.
But measure that increase in terms of gold…and the gains disappear. Instead, stocks are DOWN 16%. In terms of oil, stocks are down even more — 43%.
And now the feds tell us the economy is in ‘recovery.’ Yes, they admit, it’s not a great recovery. But the economy is growing. And if we wait long enough everything will be put right.
Oh yeah? At this rate the US will never reach full employment. Because, each month, more people are looking for work than finding it. Why? Because little of this ‘growth’ is real. It’s just what you get when you put an extra $2 trillion of cash and credit into the system.
But investors don’t seem to care whether the growth is real or not. Instead, they’re waitin’…prayin’…hopin’ for another round of MONEY! They want that old elixir…more cash and credit…that Miracle-Gro that the feds use to turn the economy green.
Oh yes, dear reader, we are five years into the Great Correction crisis…and once again, the world (and especially Barack Obama) turns its weary eyes to Dr. Bernanke.
“Touch us…heal us… Take away our pains. Lift us up to paradise.”
Or, at least put us back in the White House!
And word on the street is that Ben Bernanke is getting ready.
“Fed considers more action…” says The Wall Street Journal.
“Stocks rise on hopes of more stimulus,” reports The Financial Times.
But not all the Fed team is on the same page. Richard Fisher, of the Fed bank of Dallas, is clearly not:
“I believe that were we to go down the path to further accommodation at this juncture, we would not simply be pushing on a string but would be viewed as accomplice to the mischief that has become synonymous with Washington.”
Our guess is that Mr. Fisher will be left behind. If not now…later.
Matthew O’Brien, writing in The Atlantic, explains why.
Save Us, Ben Bernanke, You’re Our Only Hope
By Matthew O’BrienThis may not be our darkest hour, but the disappointing May jobs report showed the US economy once again slowing towards stall speed. It’s not just the anemic 69,000 jobs the economy added last month. More disconcerting were the sharp downward revisions to previous months. It looks like we could be in for an unwelcome rerun of the summer doldrums we have gotten to know all too well in 2010 and 2011.
Markets have a bad feeling about this. It isn’t just about the deteriorating US outlook. Europe and China are turning to the dark side of growth too. The euro is continuing its game of Schrödinger’s currency: At any moment it is both saved and doomed. Right now, it’s looking more and more doomed. Then there’s the slowdown in China — along with India and Brazil. These economies powered global growth during the dark days of 2008 and 2009, but seem certifiably wobbly now.
The Fed is our last hope — and there isn’t another. Republicans in Congress continue to block further fiscal stimulus, despite historically low borrowing costs and a clear need for better infrastructure. So that leaves Ben Bernanke & Co. as the last and only line of defense.
Will the Fed be an accomplice to Washington’s mischief? You bet. Because this is an economy that has depended on more cash and credit for at least 30 years. It can’t stop now.
Here’s another Fed governor, more in sync with the times. The Wall Street Journal has the report:
The Federal Reserve must stand ready to do more if the US growth outlook worsens, a top central banker said Wednesday.
If the outlook deteriorates such that the unemployment rate doesn’t fall to levels consistent with the central bank’s mandate and if the medium-term outlook for inflation falls significantly below the Fed’s 2% target, “then additional monetary accommodation would be warranted,” John Williams, president of the Federal Reserve Bank of San Francisco, said in prepared remarks to Seattle-area community leaders in Bellevue, Wash.
Mr. Williams is a voting member of the policy-setting Federal Open Market Committee.
You heard it here first, dear reader: There’s no reverse gear in this car. It won’t back up to correct its mistakes. Instead, it races along until it hits a brick wall.
Regards,
Bill Bonner,
for The Daily Reckoning
Former White House economic advisor Larry Summers in a September 2011 file photo. As Summers attempts a new economic fix, Bonner asks: Why not just give markets a chance? (Jonathan Ernst/Reuters)
In defense of Mr. Market
Monday was a disappointment. Tuesday too. The Dow rose 26 points yesterday.
After last week, we were hoping for more. A hard rain…a cleansing wash…a flood that would flush the trash out of this market.
We’re ready for the next chapters in the story — chapters 7 and 11…!
Hey, wait…you’re probably thinking — “How heartless can this man be?”
Well, we can be a whole lot more heartless. Just give us some widows and orphans to evict! Give us some malingering employees to fire! Show us a man who is down…we’ll give him a kick!
But…shucks…you know we’re kidding. We are such a softie; we can’t fire or evict anyone. And kick a man when he is down? We wouldn’t think of it…unless he is a world improver.
Yes, dear reader…can’t anyone rid of these pesky meddlers?
The reason we want a collapse on Wall Street is that it’s only way for the economy to get back on its feet.
Birds gotta fly. Fish gotta swim. And a Great Correction has to correct.
It has to clean up the mistakes. It has to sweep out the debris. It has to un-screw up the economy.
Who screwed it up? The fixers…the world improvers…the meddlers…the democrats and republicans…
Now, stocks have to fall. Banks need to go out of business. Companies need to go broke…and households need to default…
Asset prices need to go down. Unemployment needs to go up.
The pieces have to fall…or you can never pick them up.
If the feds would just leave well enough alone Mr. Market would have handled the whole thing. And we’d be out of this Great Correction by now. He would have knocked down almost all of Wall Street. He would have put dozens of our leading companies into Chapter 11…blown up trillions of dollars in derivatives…and forced thousands of bankers, brokers, businessmen and hedge fund managers into early retirement.
That problem of unequal distribution of wealth…the rich getting richer, and all? He would have taken care of it!
And he would have done it all in a few short weeks in late 2008. By now, we’d have full employment again. And people building real wealth.
In other words, if the feds had not poured trillions of dollars down so many rat-holes…good money after bad…the whole thing would be over by now. We’d have a growing economy. We’d have real businesses producing real stuff…and paying real wages to real workers.
But the feds are on the job. And the job they’re on is to protect their voters…and their campaign donors…from Mr. Market.
Of course, all they can do is delay the fix. They can make the problem worse. They can make the losses bigger. But they can’t fix anything.
Fixing requires pain. And the feds try to avoid pain at all costs….especially when they are the ones who will feel it.
So, they borrow and spend…and then print and spend…until the whole thing blows up.
And here comes another world improver, Larry Summers.
“What is to be done,” he asks.
The question reveals the conceit. Why is it any of his business? Left alone, people generally get what they have coming — at least in the world of economics. Why not give markets a chance?
Ah…but then Mr. World Improver would not be such a very big shot, would he?
What if Mr. Summers could only throw his weight around in his own home…in his own businesses…at his own club? Imagine how lucky his family would be, with all that problem-solving brainpower focused on such a small enterprise.
Instead, his fixit energies are dispersed all over the world. Solve China’s problems one day…Japan’s the next…and America’s the day after. So what if it’s Saturday? There’s work to be done!
So, instead of minding his own business, Mr. Summers has come to the aid of a world suffering from a Japan-like slump.
“The question is not whether the current policy path is acceptable. The question is what should be done?” he asks again in the same article.
“Rather than focusing on lowering already epically low rates, governments that enjoy such low borrowing costs can improve their creditworthiness by borrowing more not less.”
Hey…spend more…buy more stuff. Then, people will want to lend you more money!
How does that work, again? Well, the idea is an old one. You spend more money…the economy gets revved up…and you pay off your debts out of the greater flow of revenue. Perhaps Mr. Summers hasn’t noticed. But that formula has worked less and less well ever since WWII. This time the feds borrowed and spent more than ever before…and they got the weakest, palest, saddest excuse for a recovery on record.
Mr. Summers is right about one thing. When some fool is willing to lend you money at negative real interest rates, you should generally take it. Dear Readers will recognize this as essentially Japan’s strategy for the last 2 decades. The lumps want to lend you money. They don’t want anything in return. So you take their money.
You can use it to build roads, sports facilities…any damned thing you want. Are they worth the resources? Who’s to know? Government improvement projects are never marked to market.
“It would be amazing if there were not many public investment projects with certain equivalent real returns well above zero,” writes Summers.
But how could you tell? Maybe if you put in a toll bridge, or something like that. Otherwise, you’d never find out…and our strong hunch is that the net return on these government “investments” would be well below zero.
The Japan solution…which is also Mr. Summers’…is a solution to a non-problem. A Great Correction brings a lack of demand, as consumers and businesses cut back spending. The lack of demand lowers prices…which makes assets attractive, labor affordable and investment projects profitable again. That’s how a correction works. Without a lack of demand you can have no correction.
But the meddlers think they have to make up for a lack of real demand by substituting an ersatz demand from government. The result? Ersatz “growth.” You get an economy that seems to be functioning more or less well, but which is really digging a deeper hole for itself. Government debt increases…while real production is pushed aside in favor of boondoggles, bailouts and bunkum.
Regards,
Bill Bonner
for The Daily Reckoning
A man is reflected in an electronic board displaying Japanese yen's exchange rates against the euro, Australian dollar and the Dow Jones industrial average outside a brokerage in Tokyo in this May 2012 file photo. (Yuriko Nakao/Reuters)
Floating to Japan on a sea of bad debt
Hold onto your hats. Grab your wallet. All over the world, central planners are getting together. They’re watching the whole developed world tilt towards Tokyo. And they’re determined to “do something” to stop it.
What’s wrong with Tokyo, we want to know… On the other hand, what’s not wrong with it?
But never mind that…
The Dow fell again yesterday, down 17 points. Not a big deal. But hardly a day goes by without a loss. And look at the yield on a 10-year T-note. Barely above 1.5%.
This market and this economy seem to want to go down. Like Japan. Which is fine with us. They probably have some business to attend to down there — such as cleaning up the mess that comes after a long credit expansion built on phony money and EZ credit. There’s trash that needs to be swept up and hauled away.
But the fixers want to stop Mr. Market from doing his job.
And you can see why they might want to do something. They’ve got elections to win…jobs to keep…reputations to doctor up and résumés to forge.
The world’s advanced economies are almost all in a dreadful funk. And some people say the fixers caused the problem themselves.
So, they’ve got their work cut out for them. They’ve got to mislead the voters…and flim flam the markets… Not easy!
Last Friday, for example, analysts turned on their Bloomberg terminals to find out how many jobs had been added last month. Remember, it takes about 100,000 new jobs in order to keep the unemployment level about even. So what number came up on the terminals? Twenty-six thousand!
Whoa, nowhere near enough.
But wait. That wasn’t the number of new jobs created. That was the number of old jobs lost. Net. For men, there were actually 26,000 fewer jobs at the end of the month than there were at the beginning.
What kind of a recovery is this?
We’ve asked that question — rhetorically — many times. We know the answer. It’s not a recovery at all. Instead, it’s the deadest dead cat bounce in US economic history. Never before has a ‘recovery’ been so weak. Felix Salmon:
This is about as bad as the jobs report could possibly be: just 69,000 jobs created, split between 95,000 new jobs for women and 26,000 fewer jobs for men.
To spell this out: high corporate profits and low levels of job growth are two sides of the same coin. If things were working properly right now, companies would take their excess revenues and use them to hire more people. Instead, they’re basically just letting those excess revenues sit on their balance sheets as cash because they’re scared to invest in themselves.
But Mr. Salmon has a plan. He wants the US to follow Japan:
The government can borrow at 1.45%: it should do so, in vast quantities, and invest that money back into the economy itself. Take a few hundred billion dollars and use it to fix our broken infrastructure, to re-hire all those laid-off teachers and firefighters, to provide some kind of safety net for the millions of Americans who have been out of work for more than a year. Even if the real long-term return on any stimulus package was zero, the nominal long-term return would be well over 1.45%, making the investment worthwhile.
And here’s Paul Krugman. He’s got a solution. The same solution! More borrowing…more spending…more trash in the basement!
“Open ended financing and macroeconomic expansion…” is his formula for both Europe and America.
As to Japan, he is full of admiration.
“When people ask: might we become Japan? I say: ‘I wish we could become Japan.’”
From our vantage point here at The Daily Reckoning, it looks like Mr. Krugman will get his wish. The world’s tectonic plates are loose. Every day, both Europe and America drift closer to Tokyo.
We’ve got nothing against Japan. But what puzzles us is why anybody would want to be like Japan. The Japanese economy has gone essentially nowhere in the last 22 years. Now, it has the largest pile of debt in the entire world — rivaled only by Britain. How did it get all that debt? Following Paul Krugman’s advice!
So let’s see…you run up debt equal to 4.5 times your GDP…you don’t increase the number of jobs. Your assets get cut in half…and then cut in half again.
With debt equal to 450% of GDP, you are forced to use a big part of next year’s output just to pay for things you already put out last year…and consumed! At 5% interest rate, the equivalent of one day a week must be spent merely supporting your debt. That doesn’t leave you much to spend on things you want to consume today…or tomorrow.
And if interest rates were to go to 10%, nearly half your GDP would be required for debt service.
You would be like a galley slave…chained to your oar…forced to row in order to keep up with your debt. And pray the ship doesn’t sink!
What kind of success is that?
We don’t know, but we tend to agree with Mr. Krugman, in a few years we may be happy to take a place beside Japan on the galley slave bench. At least the SS Japan is still afloat.
Bill Bonner
for The Daily Reckoning
More than 100 people demonstrate against the lending practices of student loan company Sallie Mae outside its headquarters near Newark, Del. in this May 24, 2012 file photo. The protesters criticized the heavy debt burden that students accumulate during college and what they say are unfair profits made by Sallie Mae. (John J. Jankowski Jr./The Wilmington News-Journal/AP)
Ready to pop? The subprime student loan bubble balloons
Yes, dear reader, the market seems to have turned. Friday was a disaster…
“Grim Job Report Sinks Markets,” reported The Wall Street Journal.
We’ve had our ‘Crash Alert’ flag up for the last two weeks. Hope it helped.
Day after day stocks have been falling. And day after day has brought more bad news. Greece was on the verge of collapse. US growth figures revised downward. Consumer sentiment fell. House prices are still going down. Unemployment is going up.
The whole world is ‘turning Japanese.’
And then, oil closed at $83 on Friday. The Dow fell 274 points. The 10-year T-note must have thought it was already in Tokyo; the yield dropped to an unbelievable 1.45%. Was that a typo on the Bloomberg line?
And get this, gold rose $57.
Whew!
What’s happening?
The Great Correction is getting greater. And the odds that the feds will panic…in the US or in Euroland…are increasing.
Remember, the Fed works for the banks. And the bankers know who their ultimate master is. They’ll play it cool. But if stocks fall below 10,000 on the Dow…and unemployment gets worse before the November election…they’ll come in with more QE. That’s why gold is up so strongly. Investors are running scared. They know they can’t trust the euro. As for the dollar, they’re not so sure…
We can hardly wait to find out what happens today!
What’s the next industry to bubble up…pop…and collapse?
“Student loans,” said our new friend, Barry Dyke.
From the far north…well, from New Hampshire…Barry has been following the money. And he sees a lot of it going to the education.
Why?
“It worked just like subprime,” he explained.
The feds bankrolled it. Guaranteed it. Regulated it. And conveniently didn’t notice as it got to monstrous proportions… And then, when it blows up…they’ll be there again, pointing fingers and promising to “regulate” more heavily.
“When you pay for something, you get more of it,” says presidential candidate Ron Paul.
The feds paid for one heckuva a lot of education…subsidizing students and colleges…with trillions of dollars. They pay for GIs to go to school. They give grants to the schools themselves. And they hand out hundreds of billions in loans, at low teaser rates (just like subprime!) to students…often to students who are unqualified and unlikely to get much out of it.
Here’s the Washington Post story:
As the nation amasses more than $1 trillion in student loans, education experts say a vexing new problem has emerged: A growing number of young people have a mountain of debt but no degree to show for it.
Nearly 30 percent of college students who took out loans dropped out of school, up from fewer than a quarter of students a decade ago, according to a recent analysis of government data by think tank Education Sector. College dropouts are also among the most likely to default on their loans, falling behind at a rate four times that of graduates.
“They have the economic burden of the debt but they do not get the benefit of higher income and higher levels of employment that one gets with a college degree,” said Jack Remondi, chief operating officer at Sallie Mae, the nation’s largest private student lender. “Access and success are not linking up.”
The plight of “non-completers” has grown in magnitude as student debt tops $1 trillion, according to the Consumer Financial Protection Bureau. In addition, the sputtering economy has forced a growing number of students to make difficult choices between the benefits of a degree and the burden of paying for it. More students are balancing their studies with full- or part-time jobs or signing up for a reduced course load to save money, increasing the likelihood that they will not graduate.
Colleague, Justice Litle is on the case too:
We have all heard it said: “You can’t put a price on a good education.” But this is silly — of course you can.
It was the thoughtless peddling of such a mantra that allowed institutions of higher learning to raise prices with impunity… year after year, at a faster rate than inflation, as costs spiraled out of control… with government-sponsored loan programs fueling the whole thing.
Sound familiar?
Echoing subprime, the college bubble even has its own version of the “principal-agent problem,” in which the financial interests of the college (which profits from the loan money) have no alignment with the students (who voluntarily drown themselves in debt).
Soon these (literally) poor, debt-burdened waiters and waitresses of the future may realize they were snookered, and wake up angry… not unlike the legions of starry-eyed home buyers who, caught up in the rush of the American dream, chained themselves to a grossly inflated asset at a price impossible to pay.
Geez. It looks like college students have been the chumps in this story…flimflammed by the feds and the universities.
But, remember, we are grateful to the patsies. They’re the ones who keep the whole scammy economy going.
Imagine what would happen if young people decided to learn something instead of going to college? They could get a job learning from a plumber or a machinist…or apprenticing to a furniture maker…or just sitting in the library with a big stack of books and a notepad. No tuition payments…no beer parties…no orientation programs (No means no!)…no graduation programs (You can make a change!)…no research labs…no football stadiums…
…imagine if a group of them got together, hired a teacher…and learned the classics…or theoretical physics…or quantum mechanics…or linguistics…the old fashioned way? Let’s see, pay the teacher $80,000…split it among 7 students… Good teacher/student ratio…much better than sitting in a lecture hall with 150 other students. And $8,000 each.
A lot better than the $40,000 we spent to send our five children to college. Yes…we spent about $40,000 for each of them, per year. You can do the math. It adds up to $800,000. And we’ve got one more to go!
That’s why we’re still writing these Daily Reckonings…we can’t afford to stop.
And it’s kinda fun, frankly…as long as you don’t take it seriously.
But let’s not talk about us. Let’s talk about them. Those poor young people…leaving school with $25,000 in debt (approximate average)…and a punky job market.
If they got a degree in math or science, they can probably get a job. But what if they got a degree in the social sciences? Or the arts? Or no degree at all? How many baristas can Starbucks hire?
What can they do?
Go to work for the government! Or at least go to work in ZombieTown. You don’t need to know anything to work for the feds. No kidding.
Regards,
Bill Bonner
for The Daily Reckoning
Traders work in the 10-Year Treasury Bill Options Pit at the CME Group in Chicago, in this August 2010 file photo. With no sign of a real recovery in sight, Bonner wonders who will come out the winner when the dust finally settles. Will it be the gold bugs, the stock traders, or perhaps, could it possibly be bonds buyers? (John Gress/Reuters)
As recovery signs slow, US Treasury bonds sales continue
The Chumps’ Revenge? The German’s Retreat?
Another month gone by. Still no sign of recovery. Where are the fools when you need their money?
Yesterday, we were singing the praises of the chumps and patsies. Thank God for the dumb money, was the chorus.
People willing to spend what they don’t have on what they don’t need — that’s what made the old economy of ’71-‘07 spin around so fast. And now where are these chumps? They seem to have run for cover where they didn’t want to go. They don’t seem to want to buy stocks. Now, they’re buying US Treasury bonds!
But what’s this?
“Gold Rises $40 As Markets Fall Sharply — Safe Haven “Tipping Point”?
Bloomberg (on Wednesday):
Gold fell and tested support at $1,530/oz but then bounced very sharply and rose by nearly $40 from $1,532/oz to $1,570/oz. US stocks and commodities remained under heavy pressure and the benchmark S&P 500 ended down 1.43%.
Gold consolidated on yesterday’s gain in Asia and during European trading it is challenging resistance at $1,570/oz.
Gold is set to incur its 4th month of losses which has not been seen in nearly 13 years. Interestingly while gold in dollar term is off 6% in May, the sharp fall in the euro means that gold has again risen in euro terms and is up 0.3% in euro terms in the month.
Gold may have turned a corner. It was going down with stocks and other commodities. But on Wednesday, stocks fell hard…while gold bounced. Then, yesterday, gold held steady…while stocks fell again.
What’s going on? Ultimately, gold is money. It is the only money you can trust. And when you begin to have doubts about the other currencies — those made from wood and controlled by wooden heads — your enthusiasm for real money increases.
Which makes us wonder who is holding so many dollar-based US Treasury bonds? It must be the chumps. Yields fell to their lowest point ever on Wednesday. That means that a lot of people are buying them. Which is remarkable for a couple of reasons.
First, US credit quality has declined substantially over the last 5 years. Deficits have pushed up the national debt from 60% of GDP to over 100%. Both S&P and Egon Jones downgraded US debt as a result. Unlike Europe, which tries to squeeze the reckless spending out of the system, the feds are still at it…and unrepentant. They now fritter and consume about $1.30 per dollar received in tax revenues.
Second, in times of stress, the custodians of the dollar at the Fed have shown themselves ready, willing and able to throw the greenback out of the lifeboat. If it’s a choice between saving the dollar…or saving their jobs, or their campaign contributors…or their power…we know what they will do.
Third, unlike Japan, the US still runs a substantial trade deficit. The last month tallied was March, in which imports beat exports by more than $50 billion, or about $600 billion, annualized. The Japanese and others used to use a lot of that money to buy US debt and support US deficit spending. Now, they need it for their own purposes…or to buy gold. This leaves the US with neither a net flow of funds coming in from overseas…nor high domestic savings. It has no means of sustaining a long spell of deficit spending.
Fourth, last year, nearly two out of every three dollars in deficits were funded by printing press money — or a near equivalent — from the Fed.
All of those reasons should give bond buyers pause. But they can’t seem to find the pause button. They buy US bonds without hesitating. And who knows? Maybe they’re right. It has been five years since the crack up in subprime. There is still no relief in sight. No recovery. Instead, bond yields themselves signal a deep economic sleep setting in. Like a Japanese Rip Van Winkle, the US economy could slumber for 5…10…20 years. And the yield on the 10-year note could fall some more…maybe to as low as 1%. Then, the bond buyers will look like geniuses, not chumps.
People who mortgaged their homes to lock-in a 4% rate will regret not having waited for 3%.
People who bought stocks because they didn’t want to miss the big recovery boom, will regret ever leaving cash…as their stocks fall 20% to 50%.
And people who bought houses at a 30% discount from 2007 will cringe every time they look at the real estate section of the local paper. Those same houses will be down 40%…and 50%.
Yes, it will be the Revenge of the Chumps…the poor shmucks who bought US Treasury debt in the spring and summer of ’12. They’ll be right. We’ll be wrong…
…for a while.
Regards,
Bill Bonner
for The Daily Reckoning
A demonstrator encourages drivers to blow their horns in front the Caixa Bank during a protest in Barcelona, Spain, March 31, 2012. The European Union urged Spain Thursday to come clean on how it plans to finance the overhaul of its banking sector. European instability, possibly leading to a global recession, has Bonner advising investors to look for cover. (Emilio Morenatti/AP)
Retreat from stock market, impending European implosion worrying
Yesterday, we promised to tell you more about our L-shaped non-recovery. It’s already lasted 5 years since subprime cracked up… It could last another 5…10…20…or even 100 years.
Okay, 100 is probably an exaggeration, but who knows?
“An About-Face for Investors,” says The Wall Street Journal.
As predicted in this space, the “Facebook debacle turns high hopes into potentially mood-souring skepticism.”
“Retreat from the stock market continues,” reports The New York Times:
“I’m just extremely skeptical about the ability of a retail purchaser to be able to play on a level field in the market,” said [Alex] Tsesis, who is 45 and lives in Chicago. “I’m just trying to get out of stocks.”
Investors had a chance to think over the long weekend. When the markets opened on Tuesday morning, they were ready to act. The Dow rose 125 points. Gold dropped $20. They dumped Facebook.
But it hardly matters. Up one day. Down the next. Who cares? The big trend is what matters. And the big trend now, we believe, is down. Down for stocks. Down for the economy.
When this happens, it can last a very long time. For evidence, we give you exhibit #1 — Japan!
Yesterday, The Financial Times reported that a thousand yen invested in stocks in 1985, “even including dividends and inflation… has made exactly nothing.”
Colleague Justice Litle elaborates:
“Stocks for the long run” is a mantra of conventional investors everywhere. It is also the name of a book by Wharton finance professor (and babbling permabull) Jeremy Siegel.
Whenever the market outlook grows cloudy, or even downright bleak, we are urged to remember: It’s the long run that counts.
And yet, how’s this for “long run:” A yen-denominated investment in Japanese stocks, made in 1985, has been dead money for 27 years.
Japan’s dead presidents have gone nowhere…and made nothing for investors. They have been dead…dead…dead…for an entire generation.
“If it can happen to Japanese stocks,” asks Justice, “could it happen to American ones?”
Certainly — there is no real reason why not.
America has already “turned Japanese” in respect to perpetual ZIRP (zero interest rate monetary policy). Structural unemployment issues, and the utter failure of stimulus programs — so much for “shovel ready!” — resemble the Japanese experience. Like their Japanese counterparts, American policy makers have no new ideas… only tired old bad ones.
Back in the USA, investors are leaving the stock market. Mutual fund outflows continue at a rate of about $3 billion a month. The Dow is almost back to where it began the year. Trading volume is subdued.
As of last Friday, Facebook shares were down about 16% from the IPO price. Yesterday, they kept going down, closing below $29. The WSJ continues:
“Facebook’s banged-up share price and the technical snarls that bollixed up the stock’s first day of trading on the Nasdaq…have left some small investors even more glum…”
They’re probably not nearly as glum now as they will be later. The Dow is still above 12,000; stocks may not be at their peak, but they are far from their bottom. You’ll know it when you get to a real bottom. Investors are so glum you have to hide their guns. That’s when you get P/E ratios of 5 and dividend yields of 5%. That’s when you get bargains. Someday, unless this really is a new era, they will be real bargains. This day they are not.
The WSJ is wrong…or perhaps premature. Investors have not done an about face. Not yet. They’ve wheeled around a few degrees from their comfortable bullish trajectory of a few months ago. But they will have to keep turning in order to change course by a full 180 degrees. Then, watch out below!
What could make investors spin further against stocks? Two things:
First, Europe could blow up much worse than people expect. The eurozone has been on the brink of disaster for so long, most people think it will stay on the brink forever…as if there were an invisible barrier that keeps them from going over the edge.
We are connoisseurs of disaster here at The Daily Reckoning. Not that we like them; we just appreciate them. They clear away a lot of dead wood. And, yes, dead presidents. People invest badly. They spend unwisely. All is well ’til the disaster hits. Then, the dead presidents disappear.
One thing we’ve noticed is that disasters seem to take longer than you expect to start…and then they move faster than you anticipated. Remember the dot.com blow-up? You could see it coming for years. Then, when it happened…it blew up fast. Poof…hundreds of billions in dead presidents…gone!
So too the collapse of the housing industry — particularly those ‘low-docs, cash back, subprime mortgages’ — was visible long before it happened. We waited. We waited. And we waited some more. And then, when the catastrophe began, things happened so fast we couldn’t keep up with them.
The breakdown in Europe could happen fast too.
“I don’t know about you,” said a hedge fund manager we talked to last weekend, “but if I were in Greece, I’d be looking for a way to get my money out of the country. There’s a very good chance the Greeks will convert euro deposits to drachma. They will probably close the banks. The Greeks will probably riot and burn banks…if not bankers.
“So, what would you do if you were in Spain…or Italy? Wouldn’t you be trying to read the handwriting on the wall too? And wouldn’t you want to get your money out too?
“Of course you would. That’s why the Swiss are talking about imposing negative interest rates, to try to discourage other Europeans from exchanging their euros from Swiss francs.
“You don’t have to look very far ahead to see what would happen. Just wait ’til people start lining up in front of the banks to get their money out. If you were in Athens and you saw people lining up to get their money out of the banks…wouldn’t you get in line too? Most people would. And the banks don’t have enough money to honor all those depositors’ claims. So the banks have to go broke…and the whole thing falls down hard.”
According to the news media, everyone is making plans for when Greece says auf wiedersehen to the euro. But even an “orderly” exit of Greece from the euro is estimated to cost $1 trillion. And there isn’t enough money in all the banks in Euroland to pay for a disorderly exit.
Which is one reason we’re keeping our “Crash Alert” flag flying.
The other major reason for guarding against a crash is this: all the world’s major economies are approaching recession.
Old friend Marc Faber says he expects a global recession either in the last quarter of this year or early in 2013. Asked about the odds, Faber put them at “100%.”
One hundred percent does not sound like odds to us. It sounds like certainty. We doubt anything in economics is that sure. But let’s say the odds of a ‘synchronized worldwide recession’ are only 50%. That still puts a lot of empty space between today’s stock prices and a recession-inspired bottom. We wouldn’t want to be standing in that space, lest the market crash down upon our heads.
You know, dear reader, that it is futile to make predications, especially about the future, as Yogi Berra would say. But heck, we’ll take a guess. The euro zone won’t fall apart…at least, not completely. The Germans will give way. It won’t be pretty. No ‘elegant solution’ will be found. Instead, an awkward, ugly…even grotesque…combination of concessions, compromise, and craven corruption will keep the European project together. In fact, it will be more together than ever. Francois Hollande and Angela Merkel will find a way to preserve the union. Most likely, the Europeans will learn from the US. They will write a huge check to member states to cover…or partially cover…the debts of the past. The union will be responsible for the debts of, say, Greece or Ireland. It will be a scheme vaguely reminiscent of the Brady Bonds, or Alexander Hamilton’s takeover of state debt after the American Revolution, with new debt backed by the EU…of extremely long duration (long enough to allow inflation to cut down the real value of the bonds.) The debts of the future, on the other hand, will be the responsibility of member states (lenders beware!). Everyone can save face. Lenders (banks) will get their money (more or less). Borrowers can avoid disorderly defaults and bankruptcy (more or less). And Germany and France can hold onto their beloved European Union (more or less) …and still not be on the hook for Greek behavior going forward.
But as to the second danger — that of a global recession and bear market — investors won’t be so lucky. The odds may not be 100%, but they are high enough so that a wise investor will take cover.
Beware the disappearance of dead presidents in a crash. Then, beware again: the dead presidents could stay dead for a long, long time.
Regards,
Bill Bonner
for The Daily Reckoning
Previous
Become part of the Monitor community