Living in the Post-Bubble World

The markets of 2009: plenty of offers; few bids.

From Dubai comes word that the property market has not just fallen…it has ceased to exist. This from Justice Litle:

“You can’t put a percentage figure on the market drop. In fact, there isn’t a market at all.”

“The scary thing is, they’re nowhere close to facing reality… the official listings have only reduced prices by 10-20%, even with no buyers in sight, and builders are hoping to build more…”

Meanwhile, in the United States, the S&P has completed 6 quarters of negative growth and is now registering it first quarter ever of negative earnings. That’s right, dear reader, put all the S&P companies together. Add up their earnings. Subtract their losses. Result: net losses.

MarketWatch reports:

“A sixth quarter of negative growth ties the prior record set when Harry Truman was president, running from the first quarter of 1951 to the second quarter of 1952.

“‘Next quarter, we’re expecting a new record of seven quarters of negative growth,’ said an analyst.

“As of the close of business Thursday, [he] calculates S&P earnings per share, on a reported basis, at a loss of $10.44 for the quarter. If financials were taken out of the equation, that deficit would drop to $2.35 a share.”

We are in a period of price discovery. Many shares, businesses, and credits are on offer. Typically, people are reluctant to make bids until they have a clearer idea of what these things are worth. What are they worth now that we’re in a post-Bubble world? No one knows. And no one seems in a hurry to find out.

Even in Japan, the search for the bottom continues. It hardly seems possible. The Japanese economy was already in a deep hole after 19 years of recession/depression. Now, it’s digging deeper.

The latest figures show the Japanese economy falling at a 12% annual rate – faster than ever. Well, faster than at any time during its 19-year slump. The last time the economy in Japan slumped this hard was 35 years ago.

What to make of it?

Well, the simple answer is this: while Americans consumed too much, the Japanese produced too much. The United States had far too many retail shops and service industries. The Japanese built far too many factories to stock their shelves.

And now, well…you know the story now. No shoppers. No merchandise needed. No orders for Japan. So how much are the shops worth? How about the factories? What about houses? We’d all like to know what they’re worth so we could get on with business. But Mr. Market is playing it cool. We’ll just have to wait until the bids come in.

*** Strategic Short Report’s Dan Amoss offers his two cents on Geithner’s Financial Stability Plan, or ‘TARP 2.0’:

“Part of the new Financial Stability Plan involves an unspecified ‘public/private’ partnership to buy up toxic assets. Apparently, the idea for a public/private partnership was a last-minute development leading up to Tuesday’s announcement. Word is that several prominent hedge fund managers met privately with Larry Summers, one of the administration’s top economic advisers, just days before Tuesday’s announcement.

“Here’s my guess at how this arrangement might develop in the coming weeks: Long-term financing from the Treasury to distressed debt hedge funds is a very creative way to hide a government subsidy. The potential cash-on-cash return for hedge funds interested in cheap toxic assets is probably not enticing enough for them to pay what the banks are asking. But if the Treasury acts as a prime broker by providing, say, 10-year financing at 4%, so hedge funds can lever up their equity by five times, maybe the funds will be willing to pay a bit above the banks’ asking price and still earn a decent five- or 10-year return. This is a backdoor way to recapitalize stressed banks and get toxic assets into stronger hands without exposing taxpayers to too much credit risk. Combined with a major new mortgage refinancing initiative, this might have a shot at success.

“One thing is clear: The authorities are not going to just sit by and do nothing. I’ll be looking closely at the details of the Financial Stability Plan as they are revealed in the coming weeks.”

*** At least the Japanese have an orderly society with plenty of savings to lather over their hurts. The Land of the Rising Sun is also the land of an aging, shrinking population. These old people can just wait out the slump…knowing that it might last longer than they do.

Cross the straits into China. There, same story. Different ending. China has too many factories too – at least, too many set up to produce too much stuff for too many people who can’t pay for them. China has a huge, growing population. The rate of population growth is not at high as it used to be, but the raw numbers of getting larger all the time. If you have a population of 100 million and you grow at 6% per year, you add 6 million new people to the world’s population each year. If you have a population of a billion people, and you grow at half that rate – just 3% per year – you add 30 billion new people each year.

China’s economy needs to grow at nearly 10% per year just to provide jobs for these people, say the experts. Doesn’t seem very likely – not in today’s incredible shrinking world economy.

The New York Times:

“From lawyers in Paris to factory workers in China and bodyguards in Colombia, the ranks of the jobless are swelling rapidly across the globe.

“Worldwide job losses from the recession that started in the United States in December 2007 could hit a staggering 50 million by the end of 2009, according to the International Labor Organization, a United Nations agency. The slowdown has already claimed 3.6 million American jobs.

“High unemployment rates, especially among young workers, have led to protests in countries as varied as Latvia, Chile, Greece, Bulgaria and Iceland and contributed to strikes in Britain and France.

“Last month, the government of Iceland, whose economy is expected to contract 10 percent this year, collapsed and the prime minister moved up national elections after weeks of protests by Icelanders angered by soaring unemployment and rising prices.

“Just last week, the new United States director of national intelligence, Dennis C. Blair, told Congress that instability caused by the global economic crisis had become the biggest security threat facing the United States, outpacing terrorism.”

“Millions of migrant workers in mainland China are searching for jobs but finding that factories are shutting down. Though not as large as the disturbances in Greece or the Baltics, there have been dozens of protests at individual factories in China and Indonesia where workers were laid off with little or no notice.”

The Chinese have built their factories to sell things to foreigners – notably, the most feckless consumers on the planet, Americans. It will take time to re-jig factories and marketing channels to the needs of its own market.

Remember, this is a depression. A depression requires structural changes to an economy. Those take time. The Japanese can wait. But on both ends of the U.S.-China shipping lanes there are big, big problems.

*** On the U.S. end, the pols can’t leave bad enough alone. The voters won’t stand for it. They’re going to ‘do something’ – if it kills us all. What they are trying to do is obvious – inflate away America’s debts. So far, the market has been ahead of them – wiping out more money than the feds can replace. Sooner or later, they’re bound to turn the situation around.

And Obama heads to Denver, Colorado to sign the $787 billion stimulus package. (More on that tomorrow).

Our guess is that the next time we come to Nicaragua our dollars will no longer get the admiring glances they bring now.

“You can pay me in dollars,” said the woman from whom we bought a watermelon yesterday.

Next time, she’s likely to want cordobas…

Until tomorrow,

Bill Bonner
The Daily Reckoning