Summer forecast: weak stocks and a big sell-off. Then QE3?
Stocks are falling and gold is rising. Is quantitative easing really helping the US recover?
US Federal Reserve Chairman Ben Bernanke and Federal Deposit Insurance Corporation Chairman Sheila Bair arrive to testify before the Senate Banking Committee hearing on oversight of Dodd-Frank Wall Street reform and consumer protection implementation, on Capitol Hill in Washington May 12, 2011. Guest blogger Bill Bonner suspects that the Federal Reserve will introduce a third round of quantitative easing.
Jonathan Ernst / Reuters
Look at what happened on Friday. The Dow dropped 93 points. Oil stayed below $100. But gold added $16 to close well above $1,500.
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Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning (dailyreckoning.com).
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Fluke? Or trend?
Hey, you’re asking the wrong person. What do we know? No one knows.
But what we do know is that the Great Correction is continuing to do its work. All the recent reports tell us that the economy is weak…and weakening. Housing starts, manufacturing output, consumer confidence – all are pointing to a long, hot, sultry, sluggish summer.
So far, the big sell-off has not even begun. But it could start any day. Maybe Friday’s numbers reflected the new trend. Maybe not.
But just so we get to say ‘I told you so’ here is what we expect:
1) Stocks will be weak…maybe a big sell-off in the summer months. Investors will begin to realize that the economy is not as healthy as they thought. And the effects of QE2 will wear off.
2) The Great Correction, combined with the feds’ battle against it, will continue. Economic reports will be mixed and confusing as a result. But no clear, real recovery will begin.
3) The Fed will announce new measures – QE3. These could come anytime, but will most likely follow a new crisis. For example, a default by Greece…or a sharp break in the stock market.
Analysts say the punky figures are not confined to the US. The entire world is slowing down. Emerging markets are being forced to try to control inflation. Europe is worried about what happens when Greece defaults – which is coming soon. And the US is suffering from the worst housing slump in its history. Prices are already down 33%…more than one out of four homeowners is already underwater…and prices are falling at the rate of about 1% per month.
This latest bit of information is worth a pause. The total value of US housing stock is about $20 trillion. So, a 1% loss equals $200 billion. That’s $9 billion every working day.
Now, say there are about 100 million wage earners. This puts the losses per day at about $90 per day per wage earner. The typical worker takes home about $2,500 per month – by our calculations, barely more than he loses in housing prices.
And here’s another fact to toss in front of you this morning. In 1980, US federal, state and local debt per person declined at the rate of $2 per working day. As recently as 2000, debt declined again – at the rate of $4 per day.
But never have we seen anything like this. Government debt per working person is now increasing at $115 per working day. And that doesn’t include the build-up in social welfare obligations.
Add housing losses to government debt, and the typical working person’s balance sheet is deteriorating at the rate of $205 every working day.
The poor lumpen! He rolls out of bed this morning. By Friday evening he’s $1,025 poorer! How long can that go on?
And here’s another thing. Seniors are supposed to be protected from inflation by COLA (cost of living) adjustments to their Social Security payments. But the feds compute the CPI as they choose. And they make their adjustments when it pleases them. The result is a big lag between the supposedly inflation-proof Social Security payments and the actual costs of living that old people face. According to a study done by a senior group, the post-65 population has suffered a real loss of purchasing power of 32% over the last decade.
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