05/06/09 London, England “Jeepers, creepers…where’d you get those peepers…
“Jeepers, creepers…where’d you get those eyes…”
Thank god for laser eye surgery! Now, the people who were blind to the biggest financial crisis in the history of the world can see clearly again. And what do they see? A recovery!
“Bernanke strikes note of hope on economy,” says the headline in today’s International Herald Tribune.
“The chairman of the Federal Reserve, Ben S. Bernanke, said Tuesday that the US economy appeared to be stabilizing on many fronts and that a recovery was likely to begin this year.”
Is this good news? Or what? ‘Or what’ is our bet.
Yesterday, the markets seemed to take a breather. Stocks fell slightly. Oil slipped a bit too. The dollar remained where it was…but still on a downward trend. And gold held steady…at $902 an ounce.
Can the feds now fix the trouble they never saw coming? Can the people who ran banks into the ground now run the banks that will help finance the recovery? Can the investors who bought trashy investments with borrowed money now recognize the good investments that are put in front of them?
Neither Ben Bernanke, Tim Geithner, Hank Paulson nor Alan Greenspan could see it – but there was something clearly wrong with the Bubble Economy of 2001-2007. We said so many times.
‘Good riddance,’ we celebrated, when it keeled over
But now they struggle to revive it. Like a brain-dead codger on life support, they are bankrupting the next generation trying to keep it alive.
“We expect that the recovery will only gradually gain momentum,” Ben Bernanke forecast, trying to manage expectations, “and that the economic slack will diminish slowly.”
Really? Oh, the wonders of modern medicine. Now, with 20/20 vision, the Fed chief can look ahead and tell us what will happen next. If only he’d gone to the doctor two years ago!
Stocks are rallying all over the world. Economists are putting on their spectacles and looking to the future. Bankers are cashing their checks and laughing all the way home from work.
“That sense of unremitting free fall we had a month or two ago is not present today,” says White House economic advisor Larry Summers.
Barron’s Big Money Poll shows professional portfolio managers are bullish again. They’re looking for the Dow to gain 7% this year…and 17% by the middle of next year.
(This is good news for us. We were beginning to look around and notice that that too many stupid people agreed with us. But now that we see the pros are in the opposite camp…we can sleep more soundly.)
The proximate cause of all this optimism is the vigor with which the people who didn’t see the problem coming have gone about fighting it. Mr. Market may taketh away…but Mr. Federal Official putteth back. At least, that’s the logic of it. So far, in the U.S.A. alone, they’ve earmarked a sum nearly three times the cost of fighting World War II. Not all of that are direct cash outlays. Much of it is in the form of financial ‘guarantees’ and ‘investments’ (such as buying up Wall Street’s smelly derivatives). Still, it’s a lot of money.
Normally, in a correction, the supply of money – M1 – falls. Asset values are destroyed…borrowers default…money disappears into vaults and mattresses. But this time, so vigorous has been the authorities’ response that M-1 is actually increasing at about a 14% annual rate. The money’s got to go somewhere…
Here in London, the government has taken a similarly energetic line. The Bank of England has fallen in line with the government and boosted its balance sheet by more than two times in the last 12 months. Banks have been shored up with easy cash. Rates have been cut. Stimulus budgets have been passed. And yesterday, the government bailed out LDV, a maker of industrial vans.
Naturally, the bailout comes with some strings attached. The government stressed that this was just a ‘short term’ solution, pending a rescue by a Malaysian group. And hey…wait a minute…the company also had to promise not to move its production out of the United Kingdom. Who needs Smoot and Hawley when you can protect your markets using central bank cash?
So we see, the feds are on the case. Investors are coming back into the market. The banks have money again. What could go wrong?
Why…everything…of course! Luckily, when it does, our dear readers will be ready.
Now, we turn to Addison for the latest on the sucker’s rally:
“Markets make opinions… even of Federal Reserve Chairmen,” writes Addison in today’s issue of The 5 Min. Forecast.
“I think we are in much better shape than we were in September and October,” Mr. Bernanke testified yesterday, often speaking in a manner that, gulp, even a Congressman could understand. That the S&P 500 had just inched positive for the year provided ample cover for the chairman’s tepid confidence.
“The Dow, responding in kind, opened up 1% this morning. Following minor losses yesterday, the market turned positive after the ADP jobs report hit the wire this morning.
“Let us remind you, history shows this rally still has room to run:
“The current rally is smaller – in order of magnitude and duration – than the average Great Depression rebound. Should history rhyme, we still have another 5% to the upside and more than 20 days to go.
“Here’s the ‘money’ lesson: Despite 5 rallies from 1929-1932 that exceeded 15% – including the doozy that soared almost 48% – the Dow fell from 300 to 60 over the same period. That’s an 80% crash.
Caveat emptor.
“‘875 is the number to watch on the S&P 500,’ notes John Wayne Burritt, architect of Easy Money Options. ‘Because the market reversed course to the downside February 9th at that level (875), and that peak is called – in technical parlance – a ‘resistance’ level.
“‘The market also failed to penetrate this resistance level just a few trading days earlier, on Jan. 28. All told, that means 875 is a pretty tough point for the market to get above. That’s why the market’s most recent action is more significant than most investors and traders are thinking: It smashed above key resistance at 875 like a walk in the park. No doubt about it, that shows uncommon technical upside strength.
“‘Here’s the best part: When the market breaks through resistance – especially after failing to do so in previous attempts – that resistance level has an excellent chance of becoming a stopping point when the market decides to turn down again.
“‘In other words, strong resistance – once defeated – becomes solid support for future price action. So when the market pulls back – and it surely will – it’s very likely to not fall too much below 875.’
“And if the S&P 500 fails to find support at 875? All bets are off.”
And back to Bill, with more thoughts:
In the first place, the rally in stocks is likely to be a bear market trap. A real boom would require a real increase in profits. That is not likely to happen. Housing prices may be nearing a bottom – or not – but they’re not likely to begin another huge rise again in our lifetimes. Once a bubble pops…it’s usually over for that sector at least until another generation comes along. It will be a long time before homeowners forget what happened to their house prices. And it will be a long time before investors are willing to make big gambles on housing debt.
It will also be a long time before Americans return to free-spending ways. Not only do they no longer have the collateral to back up more debt, they are also growing older and wiser. Consumer spending rose 2.2% in the last quarter. But that is probably a fluke. Americans can’t spend what they don’t have. And they must save for long retirements…knowing that their houses and stocks could lose value at any time.
The last report we saw showed the saving rate was back towards 5% – a big jump up from zero a year ago. There is no way savings AND spending can go up at the same time.
What’s more, their incomes are falling. Wages and salaries are down 1.2% over the last year. As this depression sinks in…Americans will lose more income.
USA Today opens with a cover story on “the new homeless.” There’s a photo of a 53-year-old man sitting in his tent. It’s a “temporary situation,” he says. But the tent city in Pinellas County, Florida, may be home for longer than he expects.
“Tent cities filling up with casualties of the economy,’ says the headline. “Some middle-class workers with college degrees find themselves displaced by layoffs, foreclosures.”
“Economy contracts ‘faster than in the 1930s,’” says a headline in today’s Financial Times. A research outfit is forecasting a drop in British national income of 4.3% – substantially worse than the government’s guess. The reason for this new outlook is that “world trade has collapsed by more than forecast,” explained an economist on the case. The report went on to forecast UK public debt at 100% of GDP.
The story is not much different in the United States. GDP is falling at a 6% annual rate. If this continues for a few years, it will make this depression worse than the Great Depression of the ’30s – which hit America much harder than it did Britain (probably thanks to the forceful response of the Hoover and Roosevelt administrations).
Equity losses last year were worse than those of ’29. It stands to reason that the next phase – the economic decline – will also be worse than the ’30s.
By our calculation, the U.S. economy carries about $20 trillion of excess debt. Until that debt is eliminated, the idea of a healthy boom is a mirage. Getting rid of that debt either involves a long, hard period of work and sacrifice – as debts are paid down. Or, it involves something much worse.
Our guess is that the feds – who still have no idea what is going on – will choose the second solution…something much worse.
But what, exactly? We have some ideas…some guesses…stay tuned.
Until tomorrow,
Bill Bonner
The Daily Reckoning
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Inflation and economics are important, but at this point I think we should be more concerned with our LIBERTY: we have a federal government that is threatening CEOs and bondholders behind closed doors, some reporting that the fear for their lives. This is fascism, and I see no reason why the stock market should have any sort of sustained rally considering the federal gov’t is calling all the shots and taking over one corporation after another.
Always good to dig deeper and deeper into this mess, but for me the big picture is crystal-clear: Administrations and Feds worldwide are just buying time to postpone revolutions, hoping for miracles to happen.
Can Aliens help us? Or a meteor hitting earth? Or a huge earthquake or vulcanic eruption? Or worldwar III, or a disease cleaning up about 5 billion people?
Bill,
I’d like to posit a case for hyper-inflation that I haven’t heard to much (none?) banter on. Quickly and crudely.
Although the banks and their counterparts at the Fed wouldn’t like to see their hooks snipped from the jaws of society, they will, or may already have, realize that if the economy deteriorates enough folks will abandon debt.
If I own a home that keeps losing value, credit cards that keep getting fees tacked on and the rate arbitrarily changed and a bank that won’t lend me money for a business or let alone a car, why do I need credit at all? And if I don’t need/can’t get credit why in the world would I continue playing the game? All it takes is someone losing their job and they may stop paying their debts and give up on credit entirely.
But if people were released from their debt (oh the horror), the banks could at least keep the consumer credit psyche intact. Of course they would lose LOTS of money, but they would at least be able to string together that open window to lure people back into the credit trap. And there’s also an outside chance that people’s image of banks may soften..
Instead of talking about bottoms, recovery and Ls an Vs just keep your eye on the unemployment numbers for nothing else matters. the r eason being with an exonomy dpendent of 70 or 80 percent consumerism just where is the basis for a turn around or bottom or whatever with unemployment increasing. In stead of bailing out teh banks and automobile industry I do believe the congress and administration would be better advised to simply keep on extending unemployment benefits. Joe
I think a lot of people are missing the point and can not do simple math.
1. The ability of mankind to produce goods with the least amount of manpower, the least amount of waste, the least amount of polution, and the least amount of energy has never been better than this very minute. We are in the middle of a technology boom that has never been seen by the likes of mankind ever!
2. The reason people are losing there jobs is because the government is allowing the corporations with the help of the stock markets to take all the capitol and move it to third world countries to offshore every job that physically be moved.
3. Anyone who is not part of this money making racket will lose income until there are is no more slave labor left in third world countries. That will be a long time!
4. The answer is obvious! It is called people voting only for politicians who will force a percentage of most goods from every country to be domestic content. It does not and should not be 100% but must be at least 25%. That would fix everything for the average person in about 1 month!
Until then all these people who are writing about this are all basically liars paid off to not tell the truth!
We have the greatest economic surge in the history of mankind! We do not have a housing crisis that caused a banking crisis. That is more lies. The banks make and have always made money from mortgages!
Stop being an idiot everyone and do the math!!!!!!
Last thing.
Why is the US fighting in afganistan and trying to fight in Pakistan.
Dah! It is the corporations making sure they have slave labor in Pakistan and India!
The taliban want there law which basically means no corporate law like in the US were we close factories to move to india to use 12 year old boysto do by hand the job of union workers from the US and UK running robots to make shoes.
Basically everyone I read anymore is an idiot who has never stepped one foot in an American or european factory and then went to a factory in China or India!
CNN and the government and everyone is either a liar, a idiot, paidoff or all three!
I guess really last thing.
Things will change when the average US and UK individual, wakes up, starts voting, and actually does simple math and learns how to tell the media and politicians they are all full of sh(*!
Banks do not need bailouts they can borrow money! Dah!
Banks that are not loaning money are not banks! Dah!
Real banks can only make money by loaning money! Dah!
If two out of three mortgages are paid banks make 5% plus 5% and have to paid 1% plus 1% plus 1% or 7% profit. So until 2 out of three loans go into forelosure banks are making 7% for typing into computers! Dah!
Wake up all you idiots and start doing some simple math! And start telling all of these writers they are all liars!
With all the talk of bailouts for banks, I wonder how much stock in the Federal Reserve is owned by the Rothschilds and whether the current Secretary of the treasury, Mr. Geithner is actually on the Rothschilds payroll and whether Abby Joseph Cohen and her Wall Street gang are on the Rothschild’s payroll. It looks to me that the Fed Reserve has been taking us for a long time to complete ruin.