08/26/10 Ouzilly, France – Want to know what is really going on?
Investors are waking up. They are wiping the sleep from their eyes. Behold! No recovery.
Analysts and the commentariat are struggling to make sense of it. With record low mortgage rates, and after eight programs designed to boost up housing, for example, sales are still plummeting. July saw the biggest monthly drop in existing house sales since the Johnson Administration.
The supply of houses for sales is growing – thanks to record foreclosures. The demand is falling. Prices will come down too.
It’s a Great Recession, say some.
It’s not a recession, it’s a depression, says David Rosenberg.
It’s a “Contained Depression,” says one headline at Seeking Alpha.
The recession never ended, says another headline.
Stocks will sink to 5,000, says a headline at CNBC.
Bloomberg takes a more moderate tone:
“Durables, Housing Signal Recession Risk.”
But you, dear reader, you want to know what is really going on. So we will tell you.
We begin with a detail from yesterday’s news: credit card debt has dropped to its lowest level in eight years. This tells us that the de-leveraging of the private sector is real…and on-going. And as long as it lasts, you can forget about a “recovery.”
Instead, you should expect more on-again, off-again recession…with high unemployment, falling asset prices (stocks and real estate), weak sales and declining incomes.
This correction is a good thing. Consumers have too much debt. They’ll be better off when they get rid of half of it. But the feds want to fight this correction in the worst possible way. What’s the worst possible way? Adding more debt!
While the private sector de-leverages, the public sector leverages up. Eventually, this will have the result that everyone expects…bonds will crash, and the dollar will collapse…BUT PROBABLY ONLY AFTER PEOPLE STOP EXPECTING IT.
In the near term, the stock market is probably going down…it seems to be rolling over now. Yesterday, the Dow rose 19 points – a very weak bounce after so many down days.
When stocks go down, they will drag inflationary expectations. It will probably bring down stock markets in the emerging economies…possibly causing the Chinese economy to blow up…and bring falling commodities prices and deflation too. The idea of a “bond bubble” will disappear. People will see the “depression/Great Recession” as real…and permanent. They will try to protect themselves by buying US Treasury bonds. This will permit the feds to go further and further into debt.
Thus begins the world’s long day’s journey into night.
The US economy will become a Zombie Economy, with more and more activity dependent on government spending and government support. Banks are already Zombie Investors. Rather than lend to viable businesses that expand the world’s wealth, they borrow from the feds and lend the money back to them. We’ll see private investors become Zombie Investors too – putting nearly all their savings into US Treasury paper, just as the Japanese did.
The Dow will sink down towards 5,000. The feds will announce program after program to boost up the economy. Household savings rates will head to 10%. Unemployment will go to 12%…maybe 15%. Bond yields will collapse to new record lows. Ben Bernanke will threaten to drop money from helicopters…but as long as the US remains in an orderly decline, he will not dare to do it.
Eventually, the whole system will blow up in a spectacular fireball. But not until America’s investors are fully committed to US paper. Then, after having suffered huge losses in stocks and real estate, they can be finally ruined in what they thought were the safest investments in the world – dollar-based US Treasury bonds.
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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it is the only “safe” place outside the “mattress” guaranteeing you will have your money back
gold value is an illusion as anything else in depression time and will travel South faster than bonds
Not so – one has only to look at Zimbabwe or Argentina to see what happens during a currency crisis. Gold and Silver revert back to their function as money.
You can’t eat gold, nor are you going to shave off little bits to buy bread. Nor are you going to sell it when the currency is collapsing all around you. Gold isn’t worth anything if the surrounding currency isn’t worth anything either.
Gold and silver are obviously uneatable, as is currency, but should have value after printed notes are worthless–and their value must fall as more are created. I’ll take silver as the most liquid medium of exchange.
It’s all about this need for a medium of exchange. Without it, there is no commerce, including food production, utilities, emergency or medical services. How do you pay a military without money, or pay taxes to support any form of government?
We should only hope that unemployment will fall back to 12 or 15 percent…
The idea that consumers are paying down debt is the biggest joke I have heard yet. So you’re telling me that the average American who ran up credit card debt in the 90′s, paid it down with their home equity loan by 2005, only to run it back up by the time they lost their job in 2009, is paying down debt with their EUC (extended unemployment compensation)! This big “debt deleveraging” comes from one thing only; banks are charging off seriously delinquent accounts & writing off the losses. On paper, there is less debt. Please don’t imply that it means consumers have gotten frugal. That will only happen in coming years, when they have NOTHING (no cash, no credit, no job). That’s when things will get interesting.