11/06/09 Beunos Aires, Argentina – We left our Crash Alert flag up while we were away in the mountains. And for a while last week it looked like we were geniuses. Stocks seemed like they were going to crash.
But along came two very important bits of information.
First, we got word that the crisis was officially over. GDP grew last quarter. Thanks to all the Cash for Clunkers, Cash for Bankers, Cash for Houses, Cash for Trash, and cash for every other blessed thing under heaven, the number crunchers were able to report positive economic growth for the third quarter.
Let’s not get too excited. Stocks bounce. Bonds bounce. An economy bounces. Even dead economists bounce. And if we’re following the Japanese experience, with a long, slow on-again/off-again period of depression, we can expect some quarters of growth, followed by quarters of non-growth. It’s going to be a painful adjustment to the ‘new normal,’ whatever that is.
The other important bit of news was that the Fed – faced with undeniable evidence of growth and prosperity – decided to err on the side of caution. It will keep monetary policy loose from here until kingdom come, if necessary, in order to avoid a Japan-style slump.
But so far, a Japan-style slump is just what we seem to have…and our public officials are fighting it, Japan-style.
Unemployment is headed up. The U6 figure – a more accurate picture of how many people are out of work – is up to 17%. There are 1.5 million homeless children in the US now, including 300,000 in the state of California alone. One out of 10 Americans will not bite the hand of government – for it is the hand that gives him his food stamps.
Foreign direct investment has dropped 30%. International trade is down 10%.
Do you call this a recovery? We don’t.
As David Rosenberg puts it, the man on the street is perhaps “less enthused by the fact that a lower rate of inventory de-stocking is arithmetically underpinning GDP growth at this time.”
In other words, it’s ‘growth’ that only an economist could love…and then, only an economist who was an idiot. Rosenberg:
“Put simply, a Wall Street Journal/NBC News poll just found that 58% of the public believe the economic recession still has a ways to go – and that is up from 52% in September and means that the private investor, unlike the hedge fund manager, is not interested in adding risk to the portfolio even after a 60% surge in the equity market.
“Only 29% of those polled believe the economy has hit bottom – imagine having that psychology with nearly zero interest rates, a bloated Fed balance sheet and unprecedented fiscal deficits (poll was taken from October 23-25). Nearly two in three (64%) said the rally in the stock market (still a bear market rally – not the onset of a new bull market) has not swayed their view (or ours for that matter). There is going to be some very tough slogging ahead as far as the economy is concerned.”
Growth is largely illusional. It is the result of delusional policy-making at the Fed.
So, we’ll just keep our Crash Alert flag flying.
Meanwhile, gold hit a new record high yesterday. It’s at $1,089. More on gold, below.
The Dow went up too – 203 points yesterday. It’s over 10,000 again. Not very impressive for a bear market bounce. A 50% retracement would take the Dow to 10,300.
But you have to give the bounce credit. It’s been going on since March. That is impressive.
And now everyone is bullish, except us. We’ll see who’s right… in the fullness of time…
Gold seems to be advancing towards a new milestone – $1,100. Makes us nervous. We always feel more comfortable out in the wide, open spaces…that is to say, in trades we have all to ourselves.
But gold is still a marginal holding by marginal investors – like us. Central banks – especially those in emerging countries – have very little gold. The man on the street doesn’t know anything about gold. He wouldn’t know a gold coin if it hit him on the head.
As gold becomes accepted as a true store of value, we can expect more and more people to want to own it.
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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“As gold becomes accepted as a true store of value, we can expect more and more people to want to own it.”
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You were amongst the ones who said last spring that the bounce could go to 10, 10.5, even 11K. I, for one, am not surprised as we share similar opinions.
And as more discover gold for the very first time, the more will learn that real gold in hand is particularly tough to find. Oh, it’s out there, but at what price? A shortage exists as has long been established.
Of course, the poor man’s gold should do even better in a bidding war.
I can’t but help wonder if we are entering a stock market bubble. I’ve read that there are many large companies with large amounts of cash. This coupled with all the bailout money that banks have, it seems to me that there will be a temptation to put it into the market place thereby pumping up the stock market, irregardless of the fundamentals of a particular company. Any thoughts regarding this?
The last highs in the price of gold says us that the yellow metal can reach 2000, 3000, 5000 dls. per ounce, there are any limit. And beware, Lloyds and RBS are going to bailout again, that is a alert and the first symptom of the markets panic, next is US, Spain.
Well for starters, I don’t think all those homeless children or unemployed people will be buying gold. I don’t think folks will be buying much of anything. In Mr. Bonners’ last brief he wrote about the need for creative destruction….
Allowing the poorly managed companies to fail will clear the way for a new generation of healthier, more nimble, corporate survivors.(to paraphrase)
One thing you never hear from any economists, including bouncing ones, is marketplace destruction. The USA has been the greatest marketplace in the world. With high unemployment and low purchasing power for consumers, that marketplace is about to get a whole lot smaller.
For those surviving enterprises, they will have a greater slice of a much diminish pie. A world of monopolies and oligopolies will not be a competitive innovatived one. Capitialism has cannibalize itself.
If inflation is bad enough, can the stock market stay in place or rise even though it is falling?
Hi Bill,
Just wondering: what has the Argentinian mountain air done to you?
In the same letter you describe how “Only 29% of those polled believe the
economy has hit bottom.. “.
And a few lines later you tell us: ” And now everyone is bullish, except us..”
How is everyone bullish when only 29% believe the economy has hit bottom?
“Dead economists bounce”…can we try that with Tim Geithner when he, you know.