08/18/10 Ouzilly, France – US stocks have been teetering on the top of a wall for weeks. Someone should give them a shove!
But yesterday, the Dow rose 103 points. Gold was up $2.
This leaves investors hoping, wondering, waiting for another day. “Maybe I can make some money in the stock market, after all,” say the mom & pop mutual fund buyers. “I gotta stay in this market; it’s going up,” say the pros.
And so it goes…
But the Great Correction continues. Here’s the latest from Bloomberg:
US Household Debt Shrank 1.5% in the Second Quarter
American households pared their debts last quarter, closing credit card accounts and taking out fewer mortgages as unemployment persisted near a 26-year high, a survey by the Federal Reserve Bank of New York showed.
Consumer indebtedness totaled $11.7 trillion at the end of June, a decline of 1.5 percent from the previous three months and down 6.5 percent from its peak in the third quarter of 2008, according to the New York Fed’s first quarterly report on household debt and credit.
The report reinforces forecasts for a slowing economy in the second half of 2010 as consumers hold back on spending and rebuild savings. The Fed last week said the recovery would be “more modest” than it had anticipated and announced it would keep its securities holdings at $2.05 trillion to prevent money from draining out of the financial system.
“Everybody understood coming into this recovery that the need for reduction in debt and deleveraging was going to be a pretty significant headwind,” said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut. “Households in particular continue to be much more conservative than in the recent past.”
The Fed last week said high unemployment, lower housing wealth and tight credit are restraining the household spending that makes up 70 percent of the world’s largest economy. Policy makers repeated a pledge to keep interest rates low for an “extended period” to keep the recovery going. The jobless rate stayed at 9.5 percent in July and has remained above 9 percent since May 2009.
Consumer debt increased dramatically in the Bubble Epoque. Paul Wright explains:
In 2005, America’s 164 million credit card holders charged $2 trillion to their credit cards – amounting to $12,500 per credit card holder. This contributed to massive consumer debt, which rose over seven times in 28 years – from $355 billion in 1980 to $2.6 trillion in 2008. By 2008, consumer debt increased seven times, while the savings rate was seven times lower than in 1980.
Now consumers are paying down their debt – or defaulting on it – at a rate of about 6% per year. We don’t know where this process will go, but if consumer debt is to be cut in half, it will take about 7-10 years, at this rate.
In the meantime, The New York Times calls America’s nationalized mortgage lenders, Fannie and Freddie, “zombies.” But it says they must be “tolerated for a while.”
The amount of mortgage payments in arrears is increasing.
And the Fed is back in the bond market buying federal government debt. It bought $2.55 billion worth of Treasury debt yesterday.
The moaning and whining…the bailouts and boondoggles…the crackpot solutions and ditzy diversions – everything is normal!
Bill Bonner
for The Daily Reckoning
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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Although the nominal debt has risen by 700% over the last three decades, inflation since that time has been about 500%. Therefore, the actual real increase in debt has been 50%. This is not to say that this isn’t bad in and of itself. However, to get a realistic picture of where things have gone economically and financially, we need to look at inflation adjusted numbers.