10/20/09 London, England – What a great recovery!
No jobs…
No credit…
No sales…
But look at those stocks!
And oil! And gold! And even London property!
Real estate agents in London say they are sold out…as prices go to records. Well, asking prices…that is. As for sales prices, that is another story.
Still, London is driven by finance…and finance seems to have gotten out of rehab. It’s party time again.
The Wall Street Journal is talking about a “full recovery” in luxury goods sales by 2011. And Wall Street itself is pricing stocks as if the record profit margins of ’05 and ’06 were just around the corner.
In other words…investors’ expectations have not changed. They think things will return to the way they were in the Bubble Epoque.
How could that happen? A full recovery implies a number of things…
…that the ‘Son of Bubble’ will be as big as his dad…
…that all those people without money or jobs will somehow find the wherewithal to spend again…
…and that the baby boomers will stop saving for their retirements and begin to party like it was 2006 again…
Remember, Bubble Epoque spending, sales and profit figures were made possible by borrowing. People spent every penny they earned…and then “took out equity” from their houses in order to spend more.
What they really got was a house with a bigger mortgage – without moving!
At the height of the bubble period, if we recall correctly, Americans were taking out more than $500 billion per year. Now, they’re putting back nearly $500 billion a year in savings.
We don’t like to be party poopers here at The Daily Reckoning. But there is no way to get a rerun of the Bubble Epoque on those numbers.
What we see happening is a typical post-crisis bounce…powered by easy cash and credit from the feds. How long can it go on? How far can it go? No one knows. But if you want answers, we’ll go way out on a limb:
It won’t go on forever. And it won’t go to the moon.
And most likely…it won’t be long before the whole thing comes to a crashing end.
Here’s noted analyst John Hussman:
“The stock market has never been this overbought.”
Hussman says that the only time stocks were this overbought was on Nov. 28th, 1980. That was the last rebound in the great bear market that had begun in 1966. Afterwards, stocks fell another 30% before finally hitting bottom in August 1982.
That’s why we have our Crash Alert flag flying over the headquarters of The Daily Reckoning. We put it up two weeks ago. No crash so far. But it can’t be too far in the future.
And more thoughts…
*** While champagne and caviar is served out in the speculative economy of bankers and hedge fund managers, its bread and branch water for the poor folks stuck in the real economy.
First, we have some figures from the Center for Responsible Lending. Nearly 3 million houses are expected to be foreclosed in 2009. And there are 8 million still to go!
Yes, we’ve crossed the foothills of sub-prime already. But the Rockies of Alt-A, jumbos, and other salacious mortgage instruments are still ahead.
And what happens to people who lose their houses? The New York Times reports that more and more foreclosure sufferers are becoming homeless. The article gives a ‘typical’ story. A woman loses her house. She stays with friends. She sleeps in her car. She tries to find work. Eventually, she runs out of options and checks into a homeless shelter.
What’s a little odd about this story is that this woman has three grown children…six grandchildren…and even a great grandchild. Now, what’s going on here? Are all those kids so heartless that they won’t take in grandma? Or is grandma so insufferable that no one can stand her?
We always take the ‘glass half full’ approach here at The Daily Reckoning. So this reminds us of what is so nice about depression: it brings families together. It also improves manners. Grandmothers know they need to watch their behavior, or they’ll be sent to a homeless shelter.
*** Once you knock them down it is harder than ever for grandmothers to get back on their feet. Why? They’re not as flexible as they used to be. Besides, they have no way to earn money.
Mortimer Zuckerman, editor of US News & World Report, provides the figures:
Of people who are out of work, more have been jobless for longer than at any time since 1948. More exhaust their unemployment benefits before finding a new job than ever before. And if they are lucky enough to find work, they’ll work the shortest workweeks since 1951.
In other words, the baby boomers have never seen times so rough…for themselves as well as for their children. One American in nine depends on the government for his daily bread. There are 6.2 million more people on food stamps than when the recession began. And there are 6 people waiting in line for each job opening, up from 1.7 when the recession started.
The baby boomers meanwhile figure they will have to keep working longer than expected. Sixty-three percent of them say they expect to delay retirement in order to build up more retirement savings.
This is bad news for younger workers, who were hoping the boomers would get out of the way to free up some jobs. Among young Americans, unemployment hasn’t been so high since 1945.
If that weren’t bad enough, the government has made things worse by increasing the minimum wage; that alone cost the young an estimated 300,000 jobs. In a depression, prices fall. The price of labor falls too…but not easily. That’s why inflation usually helps increase employment – it lowers the real cost of labor. But people do not accept wage cuts readily. And then, along come the feds with a crackpot scheme to INCREASE wages…making the situation worse.
Naturally, Zuckerman looks at these facts and comes to the wrong conclusion. The headline:
“The free market is not up to the job of creating work.”
“Only massive programs are equal to the challenge of restoring stable growth to our economy,” he writes, in The Financial Times. What kind of massive projects? He mentions an “infrastructure bank.” He might have said a war. WWII worked wonders for unemployment. All of sudden, anybody who wanted a job could find one.
But it’s all hokum and claptrap. The Soviet Union put everyone to work. You can see where that got them. It’s not the fact that people are sweating on a job site that makes a society prosper; they also have to be doing things that add to their wealth. Infrastructure, like any other capital investment, makes sense only when it pays off. The Japanese poured more concrete per square inch than anyone before or since. They proved that you can put up all the bridges and canals you want; it still won’t restart the economy.
The free market is the only thing that can create worthwhile work. Because it is the only thing that knows – by sales and earnings – which projects make sense.
But we’re facing a losing battle. People much prefer soothing lies.
Heck, we like them too.
Mundus vult decipi et decipiatur!
Until tomorrow,
Bill Bonner
The Daily Reckoning
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“People much prefer soothing lies.”
True. Harry, why don’t you come tell us some please.
Another ‘OMG’ article Bill B. Thanks. So why wouldn’t our beloved government, yours & mine, not want to to do the right thing and stop spending the country into oblivion. What is their end game if not to save us all from financial ruin?
when you think “Government” think: Charlie Rangle, Nancy Pelosi, Charles Schumer et al. These people are the government that is going to make all of our decisions for us and take away the burden of our decisions. Wise, brilliant people like these.
Imagine Charles Schumer doing the right thing – ever. IMPOSSIBLE!
But on the horizon is them telling us how many children we can have – for our own good.
To get people working, the government could hire people to dig holes and fill them, like the USSR once did. The exception in the U.S. situation, the holes would be filled with T.A.R.P. money and CDO’s.
They say that bubbles always last longer than anyone expects. But this rally/bubble-bounce has already lasted longer than most said it would, and sooner or later it’s going to find a pin, as Peter Schiff once said.
BTW, why don’t you post a picture of your crash flag? Would be nice to see what it looks like
@Boomer: there’s a lot of degrading infrastructure in the US: roads, water mains, electricity. If they are going to spend all that stimulus money anyway, why not at least spend it one something useful? And I’m not talking about building bridges to nowhere, I’m talking about repairing the bridges that are falling apart.
“The free market is the only thing that can create worthwhile work.”
I have to disagree! The advanced economy relies heavily on the state risk-taking, while eventual profit is privatized, and “eventual” can be a long time, sometimes decades. There was a dramatic increase in the state role after World War II, particularly in the United States, where a good part of the advanced economy developed in this framework. So while laying concrete might not be the answer this time around, government spending and risk taking is essential for future innovative growth, more of the same will not suffice.
“It’s not the fact that people are sweating on a job site that makes a society prosper; they also have to be doing things that add to their wealth. Infrastructure, like any other capital investment, makes sense only when it pays off.”
Both industrial democracy and political democratic forms work together without them they will lack real content. The Soviets worked not freely and intelligently but for pay a condition that is immoral. Whether you believe in global warming or not the state is leading us to believe that our wealth is our planet, reversing the post-WWII period of huge state-corporate social engineering projects that created our energy-wasting and environmentally destructive fossil fuel-based economy.
The market the way it is needs to be corrected this is true and if we wanted to go back to our consumption based economy here in the US we would after a major correction. Our state doesn’t see it that way. The government is going to prop up the old economy to steer it to the new economy whether we like it or not. The Japanese taught us that the government can stagnate a recession, in the mean time the government is going to spend trillions of dollars for the people and guide us to the future.
I believe that the state thinks that if Americans a half century ago had been given the choice of directing their tax money to Pentagon programs to enable their grandchildren to have computers, iPods, the Internet, and so on, or putting it into developing a livable and sustainable socioeconomic order, they might have made the latter choice. But my fellow Americans had no choice. That is standard. Just like my fellow Americans have no choice today.
This is only a fragment of what is underway. It highlights the importance of short- and long-term strategies to build — in part resurrect — the foundations of a functioning democratic society. Concluding that the state will take risks and the free market what is left of it will know which ones work by sales and earnings and proceed with projects that make sense.
If not “rebuilding the infrastructure” of our country, putting millions to work….
What?
Revolution????
I’ve read so much about all the savings being “saved”…where, oh where is that $500 billion going to??
Bonuses??
Trading on Wall Street??
Certainly not private, good paying jobs…..
Carping on the minimum wage is bogus….you can do better than that, BB
Dear Bill,
You mentioned the “homeless grandma.” I just finished a book about the Great Depression, and noted in the book were the “Hoovervilles” that sprang up, temporary shacks and shanties in places like Central Park.
I got to thinking…I don’t think we’ve seen the worst yet. If our Great Depression II worsens, grandma could end up in a ‘Bamaville.
To Sierra,
When I was a teenager I thought it was great that there was a minimum wage – to me it meant I was guaranteed a certain wage…if I was hired.
I think the reason Bill mentions the minimum wage is because when the minimum wage is raised, employers think twice, three times about hiring someone new.
The “someone news” are often teenagers looking to break into the work force. When these inexperienced new comers gain some experience under their belts, they become more productive and can command higher wages.
However, if they can never gain entry into the work force due to an ARTIFICIALLY high minimum wage, then their future earnings, experience, and productivity are compromised.
So now, more than ever, there needs to be openings in the labor force for our young people. A government mandated minimum wage thus bars the entrance into the labor force for many who would willingly work for less than the minimum wage.
If the homeless are camping out in national forests, then things are pretty bad. On the other hand, with all those empty foreclosed houses (which is estimated to swell to 5 million), why don’t the homeless just move in and refuse to leave? Maybe if some multi-millionaire tried to move into a luxury apartment and found a bunch of unhappy, smelly hobos cooking rats over a fire, we’d see some change we can believe in.
The end game of government spending is always the same, maintain political power. The cost and consequences don’t matter to them. If their strategy doesn’t work then blame others for it. Works everytime. The problem with government risk taking to save our economy is that they never pay the debt incurred by these risks. We might be able to save our economy by simply removing burdensome taxes and regulations and making the things we buy in our own communities instead of importing them from the other side of the world. I know, it is too simple, too protectionist and doesn’t allow the corporations to make big profits off cheap third world labor. I’ve heard that stupid argument that “if goods don’t cross borders then armies will”. Its all a bunch of crap! Most wars are the product of theft and jealousy. There are always going to be people who would rather steal something than buy it or take something such as territory that produces more valuable resources, or is more beautiful than theirs.
To be against minimum wages is an idealist’s attitude. I don’t see old Bill to be an idealist. So he must have an agenda. One that I definetly don’t like.