Debt Woes in a Cosmic Bear Market

Ursa Major in the sky
Time to sell stocks is nigh

Last night was bright and clear in France. We could see the Milky Way stretched out against the dark background.

And there was the bear…Ursa Major.

Last week, stocks got hammered…mauled…beaten up…

Market veterans said they had never seen the buy/sell ratio more lopsided towards selling.

But why?

In the past couple of weeks we’ve seen zombies rising up and markets crashing down. Not the way we usually like it. But interesting…no?

In the weekend news comes word that the Social Security Disability program is almost broke – thanks to so many claims.

And California’s official joblessness figure is at 12%.

Want more bad news? What’s wrong with you, dear reader? Do you get a thrill from the suffering of others?

Of course not! You just want to know what’s going on. Besides, you suspected for years that the ‘prosperity’ so many people were enjoying was a fraud. Now, you find out that you were right. People didn’t really have the money to buy all those McMansions and luxury 4x4s… They were living on credit. And now that credit has become the darkest kind of debt…

…dense, heavy matter…and becoming heavier. Like a dwarf star…or an imploded sun…

Why is it getting heavier? Because, as the economy gets crushed under the weight of so much debt, it becomes harder and harder for people to earn the money to pay back their loans.

That’s why debt is always deflationary. When people have to pay debt, they withdraw money from the economy. They save rather than spend. Result = fewer sales, fewer jobs, falling prices…and an all-around feeling of gloom and doom.

Which, of course, is accompanied by falling asset prices. We’ve already seen the housing market fall. It’s down about a third nationwide, and still going down.

Now, we’re watching the stock market go down too.

On Friday, the Dow fell 172 points…after a big whack on Thursday. It will be interesting to see what happens this week. We thought Mr. Bear – Ursa Major – would want stock prices to get up again, after he knocked them down 2 weeks ago. We thought he’d like to see more people come into the stock market theater…before he set fire to it.

Maybe not. Maybe he’s going to work already. Or maybe he’ll lay off for a while.

But if we were you, dear reader, we wouldn’t hang around the stock market at all. Until this Great Correction is over, it’s not going to be a very rewarding place to be…

Stock market portfolios are getting squeezed. So are retirement incomes. The 10-year note briefly yielded less than 2% last week. And you know what that means. A lot of pensions aren’t providing the money people had hoped for. The Wall Street Journal:

Many older people are finding themselves in a position they never expected to be in at retirement age: still working or in need of a job.

And the laundry list of reasons just keeps growing. Already battered nest eggs took another beating this month with the market’s wild swings. With interest rates essentially at zero since 2008, income from Treasurys and certificates of deposit is pretty paltry. And the Federal Reserve recently said it would likely keep rates “exceptionally low” through mid-2013. On top of that, housing prices are still in the doldrums, leaving homeowners with much less equity to tap.

More than three in five US workers in their 50s and 60s plan on working past 65 – and 47% of that group say they’ll do so because they’ll need the money or health benefits, according to a 2011 study from the nonprofit Transamerica Center for Retirement Studies.

But in this tight labor market, working into your golden years isn’t easy. And you’ll have to make your age and years on the job come across as assets, not liabilities. In addition, with the current market upheaval, you’ll need a financial plan that puts your savings on the fast track and takes into account how Social Security and Medicare benefits could be affected.

What’s going on? Maybe this will be a period like the ’30s. There was a market break in ’29. Then, a bounce that made people think the worst was over. But then came another long, miserable slide….with stocks losing half their value.

If we follow the ’30s pattern, we’ll see the Dow hit a low around 6,000…but it will take years to reach.

We’ll also see unemployment get worse…we’ll see more bankruptcies…and more people on food stamps. And we’ll wait until 2035 before the Dow gets back to 12,000.

So relax. Take it easy. No need for panic.

Our advice… Sell. Buy gold. Be happy. Watch the stars.

Bill Bonner
for The Daily Reckoning