Bill Bonner

Poor Obama. The man is in way over his head. And what can he do? Few people understand what is going on in the economy…and none of them work for the Obama administration, as near as we can tell. The only one who seemed to be on the ball was his advisor, Paul Volcker. But Volcker got edged out by Larry Summers, a man with a long history of bad ideas on economic matters.

Summers is a stalwart member of that very special club – modern economists. Never has an unarmed professional group done more damage to a society than Summers and his colleagues.

“We cannot and will not accept any speed limit on American growth,” said Summers in a 1995 speech, rejecting the idea of higher interest rates to cool speculation. By 2000, the economy with no speed limit had smashed into an abutment. But Summers never figured out what the problem was. He was too busy wrecking a great university. He went on to apply the same ‘no speed limit’ philosophy to Harvard, where his building program was so costly the university years will probably never recover from it.

Ben Bernanke gives no hint that he has any idea of what is going on either. He maintains that modern central banking can’t see when economies are getting into trouble. But when they do…he knows just what to do to fix it.

What kind of strange GPS system is this, dear reader? It failed to tell us where we were before we ran off the cliff… But now, we’re going to use it to find our way home. Good luck!

But who worries now? We’re rolling along…convinced that trouble is behind us. Recovery is on the way; that’s what the signs say.

But wait…

Joblessness at a 26-year high, and rising….

Consumer credit just took the biggest monthly drop ever…it’s fallen 10 months in a row.

Nearly half of Florida’s mortgages are underwater…

Hey…what a recovery!

But the stock market doesn’t seem to care. Or notice.

The Dow rose 45 points yesterday. Investors seem to think that businesses are going to make a lot of money in the years ahead. How? How much stuff can you sell to unemployed people? But why else would investors pay 100 times earnings for a share?

The current price/earnings ratio is a subject of much discussion. Earnings collapsed in the depression. Prices did not. So if you look just at current earnings you come to a P/E ratio in the 100+ range. That means investors pay $100 for every dollar’s worth of earnings. If they intend to earn their money back – and nothing changes – they’ll wait a century to break even.

But earnings are expected to go up. So Robert Shiller used a 10-year moving average to compute earnings…smoothing them out to a “normal” level. Still, he says, the S&P 500 is overvalued by about 27%.

The point is, stocks are expensive. So, you have to wonder: what is going on? Are stock market investors really such optimists?

Or, is the federal government manipulating stock prices? It is spending trillions of dollars to give people the impression that things are getting back to normal. Why not spend a few billion more to manipulate stock prices?

We don’t know. The feds have shown themselves willing to do any fool thing…but rigging the stock market? Who knows?

We’ve got to reckon with what we’ve got. And what we’ve got is a stock market that is either manipulated…or delusional.

Stocks could only be worth current prices if this were a normal recession. But if this were a normal recession, it would be over by now. Stocks would be moving up in anticipation of the next boom phase. But this is not a normal recession. And it hasn’t come to an end. New jobs aren’t being created. Consumer credit is not expanding. And the only prices that are going up are the prices subject to speculation.

The real reason stocks are so expensive (assuming the market isn’t rigged) is that this is the beginning of a depression, not the end of one. At the beginning, people don’t quite believe it.

“We’re climbing out of a nasty recession,” said a financial expert interviewed on the radio this morning. “And we’re all happy to put this thing behind us as soon as possible.”

Stocks are high because people think they can ‘put this thing behind them.’ They can’t imagine that the depression will last for 5…10…maybe 15 more years. Nor do they realize that the US economy is permanently impaired…that the companies traded on Wall Street will have a very hard time earning profits in the years ahead…nor that the average American family may have reached the height of its wealth in 1973!

The disappointment will come…then the disillusionment…then the disgust…then the despair. It will be like walking down a staircase…each step heavier…deeper…and more depressing the last. And with each step, stocks will fall. Investors will begin to see things in a new way. And at the bottom, a whole new outlook will be common:

“America is finished as an economic power,” people will say. “Incomes are going down – forever; we can’t compete with the Chinese. Stocks were dreadfully overpriced; now they are cheap…but who would want to buy them?”

It may not happen like that. But somehow, some day…stocks will once again trade at low P/E ratios… Below 10…maybe down to 5. Then, they will be bargains.

How will you know when it is time to buy again? When you no longer want to.

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success in numerous industries. His unique writing style, philanthropic undertakings and preservationist activities have been recognized by some of America's most respected authorities. With his friend and colleague Addison Wiggin, he co-founded The Daily Reckoning in 1999, and together they co-wrote the New York Times best-selling books Financial Reckoning Day and Empire of Debt. His other works include Mobs, Messiahs and Markets (with Lila Rajiva), Dice Have No Memory, and most recently, Hormegeddon: How Too Much of a Good Thing Leads to Disaster. His most recent project is The Bill Bonner Letter.

  • CommonCents

    Real people buy/invest when they see value/profitability. People sit on their pocketbooks when they cannot determine either. Gambler’s take risks when they can calculate the odds of winning. This cannot happen with the numbers being provided.

    So who the heck is the fool that’s buying and investing?

  • charlie

    I would be more surprised if the FED weren’t buying after hours futures than if they were. It’s kind of like steroids in baseball. I would be more surprised is a star player weren’t taking steroids than if they were.

  • The Investors Friend

    Regarding the P/E of the S&P 500

    Agreed it is difficult to figure it out.

    Here is an excellent article on the valuation of the S&P 500 and its P/E ratio.

    Confession: I wrote the article. Well it was more math than writing but anyhow…

    Or see a link to this article on the Home page of my Site…

  • Theophiluspunofall

    Harry convinced me to buy GOOG and AAPL.

    Now they keep going down. Harry, you lie!

  • Lost & Found

    I am censored again. Bull.

  • StingingNettle

    How do you, “put your money to work” when there is no work? Better just get some silver for now.

  • Tyler Eliott

    When you mentioned the American family’s wealth peaking in 1973, for some reason I thought of the TV Show “All In The Family” and its main character Archie Bunker. Here was someone blue-collar without even a high school degree, working odd jobs here and there while being the sole breadwinner of a house of four adults; paying the mortgage, utilities, food, etc. Now while Archie Bunker was a fictionalized TV Character, his life was reality for many Americans. If the show was made in 2010, you’d have to believe all four- Archie, Edith, Gloria & Mike would have to be working to afford that basic standard of living. Time sure change..

  • Harry


    You will be greatly rewarded for holding AAPL and GOOG. Both will continue to move much higher with small pullback buying opportunities along the way.

    Regarding this article, same old nonsense. The recession ended in May/June as I’ve been saying. We’re experiencing a rapid return to growth. You must be losing a lot of money on the wrong side of this trade. And, you know what? You’ll continue to lose until you realize this market will continue to run higher this year.

  • lagirl

    OMG don’t tell me we’re just at the beginning.

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