10/28/11 Paris, France – Stocks up 339 points on the Dow! Gold at $1,747! Oil over $90!
Forget all of our worries about another big swing down in asset prices…about a Japan-like slump that could last a generation…about gold at $1,200 and the Dow at 6,000…
…we were wrong, wrong, wrong!
At least, that’s how it looks today. Stocks are on course for their best month since 1987…or 1974…depending on which report you read.
Gold has shaken off the blues…it’s rockin’ and rollin’ again…and seems to be headed back toward $2,000 by the end of the year.
And oil, too. The slippery goo — the lifeblood of the modern economy — seems to be going back to $100.
Go figure.
What set off yesterday’s big blitz to the upside? Two things…
…first, the Europeans seemed to be getting their act together. There’s a big headline in today’s Financial Times:
“China set to aid Europe bail-out.”
The Chinese are looking at an investment of up to $100 billion in Europe’s stabilization fund. Details to follow…
The Greeks are to get another $130 billion of bailout funds. Details to follow…
Bondholders are going to go along with a 50% haircut. Details to follow…
And the EFSF (the stabilization fund) is to increase to $1 trillion or more. Details to follow…
The marching band set the pace yesterday. But in the parade of details to follow we wouldn’t be at all surprised to find a few sour notes. And we wouldn’t be at all surprised to find that investors sell their stocks when they hear them.
In resume, the Greeks can’t pay their bills because they don’t have enough money…which causes the Greek economy to go flat…reduces revenues to the government and makes it even harder for them to pay their bills. This problem will be overcome by borrowing from other Europeans, who can barely pay their bills either. And, thank the mischievous gods, China has come to the rescue too. China has real money…which it makes by selling products to the people who can’t pay their bills.
But investors are ready to believe anything. First, they thought they could borrow and spend their way to prosperity. Now, they think they can avoid the consequences of too much borrowing, by borrowing from each other.
We’ll keep an eye on it, dear reader, and let you know how it works out.
The other big news that set off yesterday’s rush to buy stocks came from the USA, where it was reported that the recession is off. That’s right, according to the feds the US economy grew at a 2.5% rate in the last quarter. Details to follow.
Says The Financial Times…the growth was “led by an encouraging jump in consumption.”
What is encouraging about that?
The report tells us that “consumption rose 2.4% at an annualized rate, adding 1.7 percentage points to growth.”
We also learn that “personal disposable income fell by 1.7%, annualized.”
How were people able to spend more when their disposable income and wealth were both going down? Good question. The answer is in the report too. The savings rate went down from 5.1% to 4.1%.
Now, let’s see… Households lost $800 billion of housing value over the last 12 months — or about $8,000 per family. Their incomes fell too. And the largest group of them is facing retirement sometime in the next 15 years, totally unprepared, financially.
So…you tell me that the economy is picking up speed thanks to their increased spending? And you tell me too that consumer sentiment — how consumers see their own situation — is at its lowest point in 40 years.
Our forecast: recession ahead…if not in 2011, in 2012.
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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Bill said:
In resume, the Greeks can’t pay their bills because they don’t have enough money
Oh, really Bill?
Which Greeks don’t have enough money? Oh, the government. Well, let them tax cake.
There are probbaly lots of rich people in Greece who can step up and buy these bonds back at foreigners, and at maybe 50 cents on the dollar.
Greece must have some assets it can sell as well. Islands, Airports, Roads, any government utilities, priceless heirlooms. Sell, Sell Sell.
All they owe is a paltry $360 billion. I suspect the Country has far more wealtn than that.
To the Greek Government I say: Tax and re-pay, Tax and re-pay (your debt)
I wish I had your money Bill so I could be all blase and cynical. And I would be since I would still be in good shape no matter the state of markets or economy. Yeah it stinks, the government(s) and the whole of humanity. But at 57 I need to build sufficient wealth now or face a less than satisfying future. I managed to claw back 100k in the last 3-4 weeks so just let me enjoy that feeling for little while, OK? Actually I have done quite well since 2001 by investing limited amounts.
you are spot on with this little outline. if the devil is in the details we’ve gots lots of evil little demons and lots of places where all these plans will be blown up in our faces. the trick is to not become collateral damage when the can finally reaches the end of the road and the devils take over the show.
Carpe diem. Enjoy today. Tomorrow is another day.
I enjoy your daily reckoning, even though it has been somewhat gloomy these past couple years.
You have your finger on the pulse and bring a lot of sense about what is going on. I thought something was fishy with the recent rally. How can we be upbeat when solving a debt problem by adding more debt?
My children better learn to speak Chinese. It might come in handy some day.
“My children better learn to speak Chinese. It might come in handy some day.”
it won’t. without the u.s. and european markets china is a rice paddy. and those markets are going away. unless something somewhere really drastic changes then china’s not going anywhere.
“China has real money…which it makes by selling products to the people who can’t pay their bills.”
this makes no sense whatsoever. china makes real stuff and then exchanges it for dollars? dollars are real money? just what are they going to do with those dollars? buy stuff that america makes? the only thing those dollars are good for is to loan them back to america and europe so we can continue to buy chinese junk on credit.
china is so doomed.
China has and will continue to convert dollars into real products. They are building more factories, cities and are buying the worlds resources as we speak. While the US guts out what is left of a once great empire. The world will be buying Chinese goods for whatever China says they want payment in. Right now it just happens to be dollars, it won’t stay that way.
Wrong again – the market loves bail-outs, gold loves bail-outs and the American consumer loves to spend what he doesn’t have – how is he different from the rest of the world? But it seems to work – at least in the short term or until the next election, and then until the next favorable season, and then until year-end for fund manager bonuses and then until the next election and on and on it goes. Apparently DEBT doesn’t matter.
I’m LONG now as the naysayers are wrong, Wrong, WRONG all the time and that includes you Bill. S&P 1400 by year end? Yes the world is in shambles, but none of it matters in the “new economy” of prepetually manipulated interest rates and fiat currency printing. The whole thing is a big scam – there never were market forces or this couldn’t happen – new chapter please.
An excellent article and excellent points Bill.
Too bad the new economy is based on what the Federal Reserve does for or to our new crony capitalism.
Fundamentals no longer matter. ( Yet ???? )
i doubt if the GDP b.s. # will be adjusted upward…
…or be adjusted for inflation…
when things don’t check when you re-add them up, somebody “made a mistake”
would TPTB lie to us? sure!
why? to get people like John to take on some big, fat piece of TPTB’s risk, of course!
to Commoncents:
yeah, they’re building more factories and buying more resources – to make more junk to sell to us on more credit. let’s see – we print paper, and they send us manufactured goods. what a deal for us. but it’s a vortex ring state for them.
“Apparently DEBT doesn’t matter.”
it doesn’t, so long as the debt is not tied to any notion of valuable repayment. funny money in, funny money out.
S&P @ 1400 by year-end? Maybe. But compared to the continued devaluation of the dollar are you really ahead or losing ground?