01/08/10 Baltimore, Maryland – Uh oh… The wind chill is 50 below in North Dakota. And the storm is headed our way.
What happened to global warming? This report from colleague Chris Hunter in Ireland, where we have our Family Office:
“Ireland is under snow – lots of it. The media have dubbed it the ‘Big Chill.’ It hasn’t been colder since 1962. I stupidly tried to drive to a nearby village yesterday evening in said snow and got my car stuck in a ditch.
“I’m now holed up in a friend’s house waiting for an opportunity to rescue my car and get back to the office…”
Fierce storms are approaching the financial markets too. But almost nobody sees them coming.
“We’re now in a period of wealth destruction,” says George Soros. “It is going to be very hard to preserve your wealth in these circumstances.”
It is astonishing. But after the biggest financial crisis in the history of the planet, few people are concerned about wealth destruction; like James Cramer, they’re just interested in “getting back to even.”
At least, that’s the sense we get by talking to people in America…and from looking inside our own feelings. Are we worried? Yes…when we think about it. That is, we know we SHOULD be worried. But we don’t feel particularly worried.
We recall how we felt after Lehman Bros. went broke. We checked our bank balances. We looked at our portfolios. We counted our gold. We took inventory in our wine cellar, wondering if we had enough liquid assets to survive a long, deep depression in the style to which we wanted to remain accustomed.
We ranted and raved. Household and business spending were curtailed. Trips were cancelled. We ordered the children to stop getting pizzas delivered to the door; henceforth, if they wanted a pizza they’d have to walk down the street and get it themselves.
We deliberately tried to create an atmosphere of alarm. We knew trouble was coming…and we wanted to prepare everyone around us. It was a “WorldWide Financial Meltdown,” we told everyone. A WWFM, for short. This provided a useful shorthand.
‘Hey Dad, I need a new coat…my old one’s too small,’ Edward said last December.
‘Forget it! Remember the WWFM!’
Now, it’s more than a year later. Edward went out and bought one of those fashionable “Canada” brand jackets last month. We told him he could…and then gasped when we found out how expensive they are.
The fear has receded, not just from the economy…but from our own souls. We no longer feel it. Afraid? Why? We already faced death…and survived. Everything will be all right now. We count the months until we are even again.
And yet…when we look at the reasons for the fear last fall – they’re still there.
The stock market has not been corrected. It could easily get cut in half in the next six months. (We’re leaving our ‘Crash Alert’ flying over the building with the gold balls…until stocks reach bargain prices.)
The bond market could crash any time. The US is borrowing more money than ever before – trillions more. With such a huge increase in supply, demand…and prices…it should crack, sooner or later. Higher bond yields would send the whole economy into a much deeper depression.
Even our gold holdings could lose 20%-30% of their value. And gold stocks? They could get killed in the next stock market downswing.
Despite a truly monumental (albeit imbecilic) effort to revive the economy…the latest figures show the weakest post-recession recovery ever. Jobs are missing. Consumer credit is shrinking. Inflation is going negative. There is no real recovery…it’s a mirage created by government spending.
Monetary policy is useless (banks won’t lend; consumers won’t borrow). And fiscal policy, while apparently more effective, destroys wealth; it doesn’t add to it.
The more the government increases spending, to offset the correction, the more the economy becomes addicted to it. It’s like trying to cure an alcoholic by introducing him to heroin. Take away the government spending – as Japan tried to do – and the economy collapses into a deeper depression. Not only that, but the budget deficit actually grows!
In other words, the feds spend money they don’t have trying to fight a correction. This creates huge budget deficits, but it makes it look like the economy is recovering. So they slack off. Then, they discover that their fiscal stimulus didn’t really create any genuine economic activity. Take away the fiscal stimulus and the economy collapses again…reducing tax receipts and widening the deficit. In effect, the cure became a disease of its own! Now they can’t cut government spending. The economy depends on it. Instead, they’re locked into a debt spiral…more and more deficits…higher and higher debt…down, down, down, until…
…until the whole thing finally crashes.
Japan faced this problem in the ’90s. It eased off its stimulus program…and the economy collapsed. Now, it’s become hooked on government spending. Where does it lead? We repeat this prescient note from The Telegraph, which we sent you yesterday:
“This is the year when Tokyo finds it can no longer borrow at 1pc from a captive bond market, and when it must foot the bill for all those fiscal packages that seemed such a good idea at the time…
“Once the dam breaks, debt service costs will tear the budget to pieces. The Bank of Japan will pull the emergency lever on QE [quantitative easing...aka ‘printing money’]. The country will flip from deflation to incipient hyperinflation…”
But we’re not worried. Somehow it will all work out. Americans are still trying to get even. They still believe that the stock market will recover – fully. They still think the Fed is in control…and that our economists know what they are doing. They are delusional, in other words.
Bill Bonner
Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. 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. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill’s daily reckonings from more than a decade: 1999-2010.
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It all sounds so dire, but I don’t have a care in the world. I’m going to get ridiculously wealthy when my tiny stocks explode. It says so right on the ad to the right of the article. If $200 turns into a million,I’ll put in $2000 and get 10 million. whew, let me know how those other suckers make out, I’ll be on my yacht in the Riviera.
Dan Ritz Margate NJ
“The stock market has not been corrected. It could easily get cut in half in the next six months. (We’re leaving our ‘Crash Alert’ flying over the building with the gold balls…until stocks reach bargain prices.)”
I spit out my tea when I read this I was laughing so hard. Two points:
-There isn’t a chance in hell we’ll see the market get “cut in half”, not just in six months but not again in our lifetimes.
-Stocks have been and still are at bargain price. Just wait until the earnings reports validate the optimism of the market and the strength of the economy.
So please, go back into your cellar and miss out on more great returns on investment in 2010.
you all 9.8mh devils are delusional ?
what a pity !
in reality 9.8mh delusional since for
loooooong time ago before God body born !
Harry for once I agree with you. I believe the stock market has learned how to beat the system and it will not be allowed to fall. So the market will hold its price and maybe even go up a few percent.
Where the problem will arise; what will a Dow @ 10-15,000 buy you when a loaf of bread will cost you $50k?
Hey lets all hang out in my Bsmt. with Harry and watch cnbc all daylong. And go ga-ga over how great J Cramer is, and his huckle-berry/polly-anna friend Larry are. Wadda-ya-say all? Like i say,i don’t wanna work,i just wanna beat on the drum all day. Live long an prosper all. W0o!!! *S*
there’s one thing to do if investing fails, if all wealth is destroyed – get back to work and make something new
There isn’t a chance in hell we’ll see the market get “cut in half”, not just in six months but not again in our lifetimes.
Of course. Especially when history has given so many proofs of it and gave all due respect to brilliant intellects of your kind. Or not.
Geez, Japan’s about to crash, China’s about to crash, the US is about to crash. Nothing much left to loose. I am quite happy to know how it feels to sleep in the cold.
“Take away the government spending – as Japan tried to do – and the economy collapses into a deeper depression.”
That’s precisely what our gov did in 1937….took away some of the gov spending and the country promptly fell deeper into the hole….
George Soros is correct…..we are in a deep ravine of “wealth destruction.” Where I differ is that is is/was “false wealth” and deserves to be destroyed….only we didn’t go far enough…we should have let the largest thieves self-destruct; you all know who they are…..
I also agree about treasuries….and when they go we will be between a rock and a hard place….
I encourage my family and friends to but toilet paper….you will be able to trade a roll (or maybe just a few sheets) for a loaf or bread….
You had to be a perfect idiot not to have seen all this coming 30 years ago…….
I’m 80 and remember the Great Depression and the life my parents and families led.
“Oh Happy Days Are Here Again”!!!!
Dear Bill,
There are many ways to preserve food, isn’t there a single way to preserve wealth ?
Years ago Berlin Wall crumbled off. Now, it is the turn of Wall Steet ? It seems that anything to do with “Wall” is sensitive.
Dear Bill,
Dominance of the earth by a single power will not last. Do not be greedy, leave some to the communist. What about 50-50,
communism and capitalism. After all, they originated from the same source.
We have been on the path to wealth destruction for a long time. When I was in school in the 70′s the issue of factories in this country closing and those jobs relocating overseas was becoming a issue. At a point instead of money coming into this country on goods we produce and sell overseas, now money flows out of this country buying goods from overseas that we used to produce. After getting out of the service in the 80′s it was said we were becoming a service economy. New technologies were developed along with new jobs. But where as it took manufacturing jobs a few decades to go overseas, it only took a few years for the new tech jobs to go. Apparently construction carried employment for a few years, but you can only build so much before buyers run out. Also a lot of construction and agricultural work was given to illegal immigrants in that time frame, who sent as much money back home, OUT of the U.S., as possible.
So, after doing everything possible to be done wrong, here we are. There is talk of the so called “Jobless Recovery”, which long term is no recovery. Government stimulus might stir some bridge repairs and what not, but there are plenty of people already in that line of work semi-working waiting for things to pick up. There is the so called “Green Jobs” idea. That might give a few jobs but other countries are already well established in this area. Its unlikely that “green” will produce enough exports or real jobs to matter.
All is not lost tho. One day in the future when the average Chinese workers wage is $35-$45 per hour and the average Americans wage is $5 per day, some crafty Chinese CEO will start thinking “I’m spending too much on labor. Labor is so cheap in America I can build factories there and hire those cheap people while closing all the factories in China and lay off the expensive people”.
Between now and then I think we may find it hard to hold on to wealth.
Harry – I think you are delusional, it wouldn’t take a lot to cut stocks in half, just look at the last time, it is obvious that there is simply not enough cash in the system to liquidate more than a tiny percentage of the stock market’s value, watch out if the next leg down caused by the next unkown crisis is not over so quickly, you will soon see the market go down hard again if ‘money’ tied up in the market is again needed fast.