10/14/09 London, England
Two important items in the news today:
First, Bloomberg reports that retails sales fell 2.1% in September – the biggest decrease this year.
Know what that means? It means the “Age of Thrift” is here…and that consumers really are cutting back – just like we said they would.
And it means that the consumer economy is not going to return to robust growth anytime soon. And it means, too, that people will find it hard to find jobs for a very long time.
Another thing it means is that housing prices are not likely to recover – not in our lifetimes. That was a once-a-century bubble and it has blown up.
Mortgage lenders say they expect the peak in foreclosures to come about a year from now. As for the bottom of price declines, you can expect that in 2013 or beyond. A housing bubble typically takes prices down for six years, says a study by professors Reinhart and Rogoff. But this was not a typical bubble; it was an extraordinary bubble. Seems logical that the correction will be extraordinarily deep and long too.
And it also means that this stock market rally is very vulnerable. The stock market and the economy seem to be reading different newspapers!
The Dow fell 14 points yesterday. It could begin a major drop any day. That’s why our ‘Crash Alert’ flag is flying from our London headquarters.
Yesterday, we reported the curious fact that consumer spending as a percentage of the GDP had increased. But it only increased because the other parts of the GDP – notably business spending and investment – fell off even faster.
With output falling…sales falling…and investment (in new plant and equipment) falling even faster…who’s going to hire new workers? Not many companies. And which companies are going to invest in young workers…who will have to be trained – sometimes over a period of many years – before they are really productive? Not many.
It’s the “Lost Generation,” says BusinessWeek. Unemployment nationwide is officially 9.8%. But for young people the rate is nearly twice that level – at 18%.
Their elders aren’t doing so well either.
“Baby boomers working longer hours, for less,” says a Financial Times headline. What do you expect? Their currency is going down in value. Their customers are disappearing. Their retirement savings disappeared with housing prices. They can’t even borrow money anymore.
David Rosenberg:
“Now that lenders have started to respond to their record-high delinquency rates by rationing credit, a mad scramble for cash is occurring to replace the loans – food stamp usage is up 22% year-over-year, pawn shop business is up nearly 40%, and there is a tidal wave of applications for Social Security disability benefits that are not explained alone by workplace mishaps.”
Boomers have no choice. They need money. So they work harder, and longer. And they get paid less. Why? Because prices are falling. Even the price of labor. It’s a deflationary world.
Meanwhile, The New York Times reports, “China consolidates its lead in global trade.”
This headline is a little like the announcement that consumer spending is a bigger part of the economy. It might lead you to think that global trade is growing – or, at least that the Chinese part of global trade is growing. Not at all! Global trade is still shrinking. Chinese exports too. It’s just that China’s part of the global marketplace is increasing…because America and Europe are losing market share. China is gaining market share because it competes on price. And price competition is what is driving this market.
No discount? No sale!
Power and wealth are shifting east. No doubt about it. The Chinese took over the Hummer this week. And they are even building a ‘big plane’ – the C919 – to compete against Boeing and Airbus.
Is there any business they can’t compete in? We don’t know…but we’re counting on them to stay out of financial publishing at least until we retire!
The other big news is that gold has reached a new high. It rose yesterday to $1065 yesterday – an increase of $7.
“Why so high…so fast?” That was the question in our Daily Reckoning analyst meeting this morning.
“In the last big boom in gold – in the late ’70s – gold followed inflation…and the central bank. Investors saw inflation increasing. And they saw the central bank failing to react fast enough. They bought gold to protect themselves.
“But now…there is no inflation. And central banks are alert to the problem. They haven’t raised rates…but they don’t need to. There’s no need to protect against a problem that doesn’t exist. So what are investors trying to protect against?”
No one at the table had a good answer.
“They’re just looking ahead to when all that money the feds put in the system finally shows up in inflation. If you believe there’s a real recovery you might think it is coming soon…” said one analyst.
“They’re worried about a crash of the dollar…they’re just buying gold because it’s the anti-dollar…” said another.
“Maybe the Chinese are switching their reserves to gold…just like they said they would. And maybe instead of buying at below $1,000 they’re buying quietly below $1,100…” offered another.
“Gold is being re-monetized,” says MoneyWeek editor Simone Wapler. “All the world’s paper monies are losing value – and credibility. There’s a race to the bottom as they try to devalue their currencies.”
All countries are fighting for market share. In a price-sensitive world, they increase exports by cutting prices. And the fastest – sometimes, the only – way to do that is by devaluing the currency. But when one nation devalues – say, by printing extra money – other nations must devalue too in order to stay competitive.
What can they all devalue against?
“Gold is rediscovering its old role,” says Simone. “Once again, it is the way we preserve wealth and keep track of what things are worth.”
Your editor had his say too.
“Most people are buying gold only because gold is going up. Maybe they realize that the world’s financial system is in a period of crisis. They see the central banks are being derelict in their duty. Instead of protecting the value of their paper money the bankers are intentionally undermining it. They figure that if the central banks aren’t doing their jobs – that is, if they aren’t maintaining a reserve of real money – they’ll have to do it themselves. Each person now needs to be his own central bank, with his own reserve of real wealth – gold.
“Or maybe investors don’t see that all. Maybe they just see the price going up and they want to hitch a ride. What else can they buy that has been going up for the last 10 years? Gold is up $150 – about 17% – in the last 6 months. It’s up 27% in the last year. It’s up 300% since 1999.”
Gold is in a bull market. How far it will go and how long it takes it to get where it is going, no one knows. No one knows, either, how many scrapes and setbacks it will suffer before it finally reaches its destination.
But it is a bull market. And you don’t ask questions in a bull market. You get on board and ride it to the end.
Then, you wished you had asked some questions.
Until tomorrow,
Bill Bonner
The Daily Reckoning
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I just read the atimes article above. It seems first we had the dot com bubble; then the housing bubble; then the crude oil bubble; then the other commodities bubble(golly, why was there a rice shortage? see atimes article) now we have a gold bubble; sooner or later investors will figure out that gold is not “real money” either and that bubble will bust; I’ll bet, sooner or later also investors will create a food bubble; I also bet sooner or later you all will figure out that the quantity theory of money has been completely and thoroughly discredited; V is not constant; the Fed cannot control purchasing power (not lately anyway) so, there will be no inflation until the central banks around the world start increasing interest cost. they can see inflatiton in the offing like Friedmand did in the late sixties; they will increase interest rates (costs?) and cause inflation again; have you all ever noticed there is never inflation without first increasing some cost, either energy, labor or interest.
Bye
BB
People are buying gold because a currency failure or devaluation is highly inflationary
Here in Alberta, which has been Canada’s land of milk and honey the following has happened…
Budget surplus amounts of $5 billion in the fiscal year ended March 2008 is projected to fall to a deficit of about $7 billion for March 2010.
http://edmonton.ctv.ca/servlet/an/local/CTVNews/20080624/EDM_surplus_080624/20080624/?hub=EdmontonHome
In 2008 it would have been a higher surplus except for special spending initiatives.
A while ago the government announced no bonuses for government employees next Spring and a hiring freeze. Just today they annnounced a pay freeze for the next two years… and so it begins.
Alberta is heavily dependent on royalties from Natural Gas, but with low natural gas prices those have shriveled up to almost nothing.
I’m buying gold because as the Mogambo Guru says “we’re freakin doomed!”. There’s no telling what lies at the end of these pump and dump schemes of government healthcare, cap and trade, nationalizations of our industries and various bailouts. Good ship America might be the Titanic and I want to make sure there’ a life raft for my family.
There is no telling what will happen with the fraudulent accounting the banks are now using; instead of foreclosing, they allow tons of delinquent mortgages on their books as assets. Meanwhile, my newspaper is reporting 30,000 jobs “saved or created” by the stimulus–this is a far cry from Obama’s statement of one million jobs saved or created. What’s going on here?
Does anyone really know why they buy anything? No one can see the future. You get “impressions” really from what you see and read. You choose one side over the other.
There can be no doubt that the removal of the dollar from reserve currency status has alot to do with it, however.
Where is Mr. Mogambo?
I think a good question to ask is: “What do we manufacture that China needs now and in the near future, say a generation?”
That is what will “rule” the financial world to come…..
China has the population capacity to drown the world in consumer products (junk)….such “competitiveness” will bring third world status (like now, here) to much of the rest of the world.
As far as “bubbles” go, I believe the stock market is building a “trading” bubble; ie., attempting to “trade” their way out of the financial mess that has been created since the early ’90’s…….
Governments must do what the people cannot do for themselves, in this case protect them from the more horrible vagaries (brutalities) of the power of predatory capital. (Roaming the world scott free)
The dollar is now doomed as the “oil currency of first resort.”
That is the beginning of the end of the dollar. It will just be like a roll of toilet paper….
Most of the arguments I read here about how to explain the rise in gold price and other commodities and presumed inflation miss a critical item:
that most of these rises do occur more or less only if measured against the Dollar. Print the gold chart versus the Euro or the Yen and you will see that it changes much less.
And when we talk about inflation, it is critical to distinguish between inflation which comes from “real” demand for certain goods (commodities) caused by increased production within an economy (a lift up in the supply-demand equation basically), or, as we face now, an artificial demand caused by an increase in available money. Increased “Real demand” slowly distributes the inflationary effects to the ultimate buyer (in our case the American consumer) by wage rises caused by labour shortage which leads to wage competition among companies. So the overall purchasing power effect is ideally zero over time.
With pure monetary induced commodity price inflation (more money chases practically the same amount of commodities, hence the price must go up), the outcome may be even a loss in purchasing power of the consumer, as ordinary people usually do not buy oil futures but are subject to higher prices at the gas station, hence, consume less. Wasn’t the whole FED action designed to increase consumer spending?
Furthermore: as those parts of the world with a clear mind (basically Asia and BRIC)are observing that America goes the wrong way, they are happy to sell their overpriced treasuries into the hands of the greedy American “to big to fail” banks, which those finance with 0,25% FED credit to pocket the interest spread. Guess how these big banks can produce such nice results as recently published. and all that money finds its way into overpriced commodity markets (and they are overpriced by all standards if you consider “real economic demand” in this globally recessionary environment).
When you are a Chinese central banker having more than 2 trillion $ in your reserves, knowing that you could not count on American consumers to take off chinese factory production for a long time, wouldn’t it be prudent to sell off treasuries which pay a lousy interest rate and flip it over into commodities, which you could convert into product and either sell it in your home market or sell it oversees later?
Chinese central bankers must be loughing at Ben Bernanke, trying to bring light into a dark room by going outside with a bucket, holding it into the sunlight and then putting a cover on it, go back inside again and release the “captured” light into the dark room …
I would not be surprised if all that extra cash, which is infused with force into the US banking system, shows up one by one in international commodities markets and the US stock markets. The first means that those Americans which should carry the recovery will get poorer and thus will contribute to the deflationary force, and the second means that US assets are sold out to foreigners. and if you see it from the perspective of foreign currency, the price increase is much less spectacular, as most is being paid by the decreased exchange rate.
either way, America is bankrupt, and it seems Zimbabwe central banking is around the corner …
If I missed some rationale here, I’d be delighted to be educated. there is one question I would really like to ask Ben Bernanke if I’d had the chance to do so:
How, Mr. chairman, can you increase the purchasing power of the consumer, i.e. transfer wealth into his pocket?
Only those with money to burn look to places to stash it; that’s why gold is going up and why foreigners are coming to the U.S. to buy real estate. But 95% of Americans are too busy trying to stay alive. They can’t eat gold and they are losing their homes and jobs. At this rate, we will have millions of angry desperate people no longer willing to just bitch and moan about being screwed, and those at the top need to run for cover.