03/18/10 Mumbai, India – In the US, producer prices fell in February, more than expected. Core inflation was barely positive. That is not just a US trend. In Europe, price increases have fallen to the lowest level in 11 years. Japan is experiencing the biggest price drops in many years.
This sounds like a D-word to us…disinflation, almost deflation.
One report tells us that greater than 5% of Fannie Mae mortgages are 90 days in arrears – or more. Another report says it’s 10%.
This too sounds like a D-word. Default.
But wait…
“Fed signals optimism over US economy,” is the lead headline in today’s Financial Times.
The markets responded, pushing the Dow up 47 points to a new high for this bounce…though still midway between its all-time high and its low of March 2009.
Oil rose a dollar too. So did gold. The euro edged up too…
Reading more closely, we don’t see much reason for the Fed’s optimism. And apparently, neither does the Fed. It is leaving its monetary stimulus program in place for an “extended period.” It says inflation is likely to remain subdued “for some time.”
The Great Correction (our term) destroyed nearly 8.4 million jobs (the FT’s count) and wiped out $14 trillion in household wealth. And now Americans are struggling to find firm footing in an economy with fewer job openings, less credit available, and an uncertain growth outlook.
What’s going on? There’s a word for it. Another D-word…several of them. There’s Depression. Deflation. And De-leveraging, for example.
Our old friend Porter Stansberry writes to tell us that we’re wrong about household de-leveraging. The drop in credit we reported yesterday was caused by defaults…not by voluntary reductions in debt, he says.
He’s right. Most of the decline in household credit, so far, comes from defaults. And maybe it is just wishful thinking on our part… hoping that Americans would willingly and eagerly improve their balance sheets. The savings rate is up…but it’s not yet clear whether this marks the beginning of a major trend or not.
But whatever the cause – be it voluntary de-leveraging or involuntary de-leveraging – we think there’s more of it ahead.
Here’s a statistic: 21% of Iraq and Afghanistan veterans are jobless. They’re mostly men. And mostly unprepared for the modern job market. After all, who wants to hire someone who knows how to drive a tank or patrol a gas station?
Ultimately, an economy gets rich by making and acquiring things people want.
Ah…we look back nostalgically at the Bubble Epoch. It was so easy to make fun of people back then. They thought they could get rich by buying things they couldn’t afford with money they didn’t have. Now, we’re in a new era… of sorts. Now, it’s the public sector that has lost its head. The feds think they can make the economy work better by buying things nobody really wants with money nobody really has.
Who really wants to guard a gas station in Baghdad? Nobody we know. Who’s got the money to fund the fed’s $1.8 trillion deficit? Nobody.
And think of the poor fellow who draws that sorry duty in Iraq. When he comes back to the US, what does he have on his résumé? He’s good at guarding a gas station against terrorists? Not many job offers for that skill set.
So, one in five of these fellows is unemployed. And the feds try to do something about it by spending more money they don’t have on more things nobody really wants.
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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This “fear of deflation” is largely nonsensical. Deflation does not keep people from spending – they always spend what’s necessary. And money NOT “spent” is then saved which means it is credit to someone who invests it for capital goods etc. thus it is again being spent, only not for consumption. Money never lies completely idle to any extent whether there’s inflation, deflation, stability or a solar eclipse. For deflation to seriously happen, not only the current extreme credit expansion by the central banks and states (through “quantitative easing”, stimulus packages, monetising and then spending national debt etc.) but also the money that was released into the economy PRIOR to the collapse would have to be “mopped up” again. This is nowhere to be seen nor would it be technically possible (confiscation aside) so we will rather see inflation than deflation.
Well all the indices across the board are breaking out to new highs. Technically, this is the time you should be piling in with fresh support below the indices.
Fundamentally, we have the basis for this rally to run much, much longer than anyone thought. My outlook is for 1270 EOY SPX, possibly 1300. Dow looks to EOY at 12700- 13000.
Rarely is it this easy to make money in equities. And it will continue, no doubt. The Fed has guided us to a great sweet spot without inflation while stoking the growth of the economy. You would be extremely hard pressed to find anyone who could have handled it more efficiently, intelligently and gracefully.
What if this is the biggest game of ‘Liars Poker’ that was ever played? What if the U.S. Fed is getting people to cough up Treasuries with an end game that resorts to the ultimate flight for safety? Who owns the most treasuries? What do they have to gain? What do they have to lose?
“They thought they could get rich by buying things they couldn’t afford with money they didn’t have…Now, it’s the public sector that has lost its head. The feds think they can make the economy work better by buying things nobody really wants with money nobody really has.”
I agree, the old days like 5 years ago were much more fun, wasting money on granite countertops and big screen TVs was far superior to wasting it on public union pensions and boondoggle make-work projects.
I work for the government. I have time and age in for immediate retirement. And, frankly I am scared those retirement benefits promised are not going to be there in a few years. Surely everyone else must see what’s coming due to our deficits, unemployment levels, tax revenues, foreclosures (residential, with commercial soon to come).
Also, I work in information systems, and I believe there is a government effort to prioritize news stories for desired effect. For example, do a google news search which is economy related and you will typically get positive stories which are meant to improve confidence. Look at blogs, which cannot be manipulated due to there limited number, and the analysis is typically 180 degrees.
Hope I am hallucinating for my kid’s sake.