01/20/10 Waterford, Ireland – Does the stock market know something we don’t? Yesterday, investors bid up prices on the Dow stocks to a new high. The index rose 115 points.
According to theory, the markets know more than any single investor, analyst or economist. In theory, the markets know everything there is to know. In theory, the markets are always right.
But what the heck? This is the same stock market that signaled clear sailing ahead ten years ago. Soon after, equities hit an iceberg. They sank for the next decade.
Here at The Daily Reckoning, we had our own views. At the beginning of the ’00s, we told readers to sell their stocks. We were right. The stock market was wrong. Heh heh.
So, who ya gonna trust now? The stock market… Or, The Daily Reckoning?
Who knows… Maybe we’re wrong this time, but we see another 10 years of trouble coming. Two years ago, the credit cycle peaked out. After half a century of adding debt, the private sector had had enough. Borrowing turned down. Last November, it registered its 10th month in a row of declines, something that had never happened since they began keeping records after WWII.
Consumer spending has held up surprisingly well. But with credit contracting and unemployment high and rising, it can’t continue.
Small businesses create jobs. But who wants to take the risk of funding a small business now? Not the banks. And the capital markets are closed off to small businesses. You have to have a big business – preferably one that is dying… Then, you can get all the money you want from Wall Street and the feds.
Since the downturn began two years ago, 7.5 million jobs have been lost. There is no sign that they will be found anytime soon. Jobless people do not spend a lot of money. Ergo, you can’t really expect an economic surge until people get jobs.
When will that happen? Possibly years from now…maybe 2…maybe 5…maybe 10…
Yes, dear reader, we are in a depression. It is a period of adjustment…of correction…of de-leveraging…of paying down debt. And there’s not much the feds can do about it – except disguise it…delay it…and make it worse.
The government can spend money. The government can inflate the currency. But it’s neither government spending nor inflation of the currency that makes an economy healthy. If inflating the currency could make an economy prosper, where did Zimbabwe go wrong? And if government spending could boost an economy, what did Cuba do wrong? Or Venezuela? The two-bit, banana republic economies are almost all burdened by too much government stimulus. The feds tax too much, spend too much, borrow too much and inflate too much. Instead of doing their jobs – enforcing property rights, protecting people from crime, and staying out of the way – they meddle and spend. The president gets a fancy house and lots of security guards. And the economy rots.
Of course, we could be wrong about what is happening in the US. But our guess is that the stock market is wrong instead. Stock market investors anticipate a return to ‘normal.’ But the normal they’re looking at is a very unusual credit bubble that blew up and can’t be mended. The real normal is what we’re getting. And the real normal is a world where bad stuff happens. Investors make mistakes. Markets make mistakes. Often, they are misled by their own financial authorities, such as Ben Bernanke. The US Fed chief meddles in the economy and distorts the picture. Investors look, but get the wrong idea.
Our guess is that stock market investors are seeing the distorted picture caused by the feds’ meddling…not the real picture. They look. They see low interest rates. They see stimulus. They see a stock market that seemed so friendly and so rewarding for so long that they can’t imagine anything else. They see a government taking action…and making things better. They read Thomas Friedman and think the ‘political class’ can fix whatever problems it encounters.
But in the real world, the political class is a life-threatening parasite. Allow it to grow large enough and the host – the private economy – will shrivel up and die.
And in the real normal world, markets go up…and then they go down. We are in one of those periods of decline. We are in a depression, with a growing, parasitic political class. This phase won’t end any time soon.
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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Bill, Do you have anything positive that you can identify? How about the election in MA, for example? This Depression is depressing me, so how about some good news!
Neocon fruitcakes replacing commie fruitcakes in the Senate isn’t exactly news for which I’d cheer.
Oh, oh, jeez…Oh dear..The market went up 115 yesterday….and DOWN 122 today. My, my, my…
Perhaps that Economic Euclid Harry can explain to us how that is SOMEHOW good.
Ah, but overall it IS a self-correcting mechanism: Once the host dies, the parasites will die. Western civilization may cease to exist in any form recognizable by modern society, but the system will eventually work itself out.
Of course, short-sighted parasites don’t care about long-term survival–and I don’t want them to figure it out before I can acquire more gold, silver, and freeze-dried food.
“Consumer spending has held up surprisingly well. But with credit contracting and unemployment high and rising, it can’t continue.”
Tell that to Starbucks or Panera – both put up great numbers AH today on earnings. Your “consumer is dead/dying” scenario is obviously not playing out. People seem to have money and are spending it on coffee, going out for lunch, new computers, etc. Looks like good old fashioned growth to me.
Only a few days ago you told us we would not see any strong earnings. Well, that’s pretty much all we have seen are strong earnings. Time to give it up.
Reply to Daniel Miller:
+1
Harry says: “Tell that to Starbucks and Panera”
Your bullish optimism is admirable. But the idea that economic recovery will be spearheaded by the likes of Starbucks and Panera is laughable. It will take nothing short of a miracle on par with a breakthrough in cold fusion technology to restore the 7.5 million jobs lost.
Gnome: Point is, people are spending on many things. The economic recovery is certainly confirmed to be v-shaped. Just look at all the data. Unemployment peaked and we’re starting to see job creation. Saw it in November and will start seeing it in earnest this year.
I’m not saying Starbucks and Panera are going to carry the recovery but obviously, if people are spending there, it can’t be as bad as you folks here try to make it sound.
hey harry, the penera near me just closed a month back, and this is in a well to do neighborhood. Closing stores only and laying off only brings good earnings for a quarter or two, and bill is looking on a longer time line then that. Harry i think the fed is hiring, or perhaps the census count could use you!
Well, FWIW – China just posted phenomenal numbers. The global recovery is in high gear. Period. That will spur industrial growth which in turn leads to more jobs. Just open your eyes, it’s amazing!
I’m glad I didn’t go to grade school with any of you. (Bonner included) I would have spent all my time in the office.
I’m surprised you didn’t comment on the dollar continuing it’s upward climb today. Sure looks to me like currency traders are pricing in a rate hike or two.
Hey, you know this stock market rise?? Would it have anything to do with the people like me who have just got new online trading accounts and have chucked over 20 grand into shares in the last 12 months??? Remember, previous to 2009, I would have previously spent that 20 grand on toys and cars etc ?
Surely I am not alone, how many people are throwing their savings at the market rather than get no interest at the bank ?!?
P.S don’t worry, I am of course still spending lots of cash on women!!
The market is currently rising and therfore this is still the time to make money if you know what your doing, i manage my own pension and have set a ambitious target of 25% year on year growth, my portfolio is around 50% cash and corp bonds and 50% shares, so i need to make approx 45% on the shares element to hit my target, it’s probebly not going to be easy to hit that this year but i got to try.
When i read posts from Harry i do feel a bit more optermistic, when you can easily spot the mugs like Harry and thousands of others, you know your in with a good chance!
Good luck to all.
The Stock Market is set to crash. Simply look at the Price/Earning ratio. This is way out of whack.
The U.S. dollar will also soon crash. Simply look at how much is being printed and the U.S. yearly deficit.
So the U.S. is in a depression. So parts of the world are not!
Good news! Buy Silver and Gold while the prices are low! They should be much higher but that would be telling on the FED who manipulate the Stock Market.