08/03/09 Ouzilly, France
What’s new? Nothing much….
Markets still moving up…
Oil rose $2.50 on Friday…to $69. Gold rose $18 to $953. The Dow was up 18 points. And the dollar fell to $1.42 per euro.
And governments are still doing the wrong thing…trying to increase demand. It’s not possible…for reasons we describe below…
Well, it’s August…and we’re on vacation. But just because we’re on vacation doesn’t mean the world stops turning. It just doesn’t turn quite so fast.
“Why don’t you just stop writing for a while?” our mother asked this morning. She is visiting for the summer.
“I don’t know how you write every day anyway. You must say the same thing…”
Richard Russell has given a Dow Theory bull market signal. When you get a signal, he says, you don’t argue with it; you go with it. Stock prices are going up.
We don’t doubt it. The Dow would have to clime to about 10,300 just to give us a classic 50% bounce.
But we are in a depression. We don’t gamble on stocks in a depression. It’s too risky. Instead, we go with the flow. And the flow over the next 10 years or so is probably going to be down.
By our reckoning the Dow hit its high in January of 2000. Adjusted for inflation it’s been running downhill ever since. Investors have made nothing for their trouble. And if we’re right, they won’t make anything in the years ahead either. Instead, they’ll have to wait until stocks are cheap again.
You know, dear reader…investing is really very simple. Buy low. Sell high.
Okay…now that we got that figured out…let’s move on…
Sticking with the basics, what we notice is that stocks, bonds and commodities move in broad patterns that last for many years. Not to put too fine a point on it, but they go up and then they go down. Or vice versa. Just looking at the last 50 years, stocks were very expensive in 1966. Then, they dilly dallied around for a couple of years…and headed down. This bear market continued until August 1982. That was when BusinessWeek magazine declared that stocks were not merely ailing, they were dead: “The Death of Equities” was the cover story that month. Naturally, equities got up from their deathbed the very next month and entered the marathon. They ran for the next 18 years.
Well, you know the rest of the story as well as we do. It’s not complicated. The problem is that it takes patience to see it…to understand it…and to take advantage of it. The way to make money in stocks is to buy them when they are very cheap. But you may have to wait for 15-20 years. They’re not cheap towards the end of the bull cycle. Since you never know exactly when it’s going to end you don’t want to buy anywhere near the top. So you wait…and then stocks keep getting more and more expensive. Finally, the top arrives…and then you have to wait another decade or more until they reach bottom.
“Well, why don’t your write The Daily Reckoning once every 20 years?” mother wanted to know. “Just tell them when to buy…wait 20 years…and then tell them when to sell.”
But we’re going to ignore our dear, sweet momma this morning. She just doesn’t understand the complexity of the financial world!
For the last nine years, stocks have been going down (albeit with a major countertrend to the upside). We’ll probably have to wait another few years before they are cheap enough to buy. And when the end comes, stocks will be very cheap – between 5 to 8 times earnings.
When will that day come? Probably around August 15, 2018. Don’t forget to read The Daily Reckoning that day!
Stock market cycles tend to coincide, more or less, with broad trends in the credit cycle. When people borrow and spend it causes business profits to grow. The businesses then expand; they hire more people; they build more capacity.
Then, when the credit cycle turns, everything goes in the other direction. People stop borrowing and begin paying back. Sales decline. Unemployment grows. Profits fall. Credit contracts.
We are now in the early stages of a major credit contraction. This is not a pause in a credit expansion; it is a change of direction, a credit contraction with all that goes along with it – joblessness, bankruptcies, foreclosures, and so forth.
Bloomberg tells us that the numbers have already been revised – downward. “Worst recession since the Great Depression,” says its headline.
It is the worst recession since the Great Depression because it’s not a recession at all; it’s a depression. And the government is doing its level best to make it a great one.
The key to understanding a depression – or the downswing of the credit cycle – is that demand contracts. Consumers have less to spend. For a very simple reason: they already spent it.
Listen up, because this is important. When you borrow in order to consume, what you are really doing is consuming something today that you would have normally consumed in the future. You spend money you haven’t earned yet on something you’re not really ready to buy. You’ve heard the expression, ‘time is money.’ That’s why borrowing money is really borrowing time. Later, you have to make it up. You have pay off the debt. When you do, you take money out of current consumption; you’ve already consumed it!
This is what economists refer to as “demand destruction.” It’s what happens in a depression. People are replacing what they took from the future. They’re can’t consume because they’ve already spent their money in the last boom. Demand collapses.
We’ve seen that happen in the last two years. Savings rates went from zero to 7%. Sales have declined (the latest revisions show them off more than was previously thought.) Profits are shrinking.
This is, of course, a completely natural and necessary adjustment. You can’t take things from the future without putting them back eventually. The future won’t stand for it. But the feds, in their benighted confusion, fight the problem like a farmer who plows backwards to fool the crows. They think the problem is too little demand. So, they try to add demand…with tax cuts…spending programs…low rates…easy credit…cash for clunkers and other fixes. What do these policies achieve? Do they really increase demand? No, they can’t do that…that would require a richer population with more money to spend. What they try to do is to move demand forward.
The problem, of course, is that too much demand has already been moved forward. But they’re nevertheless trying to steal even more of it…taking away demand that would normally show up two, three, four…ten years from now. That car that you might buy next year, for example. With the ‘cash for clunkers’ program, you might make the purchase now instead of waiting until you actually have the money. Or, that new parking lot behind the town hall. We won’t really need it for a few years, but heck, if they’re giving away money now… Or how about that trip to Europe? With a big tax rebate check, you might decide to take it on your 20th wedding anniversary, rather than wait ’til your 25th.
Real demand increases only when real wages increase. Then, people have more purchasing power. Trying to increase demand by borrowing – or stealing – from the future is a scam at best. Even if it works now, it fails later.
Our gardener, Damien, came over yesterday…carrying a big wheel of cheese and a huge loaf of bread.
“Finally…you are back,” he said.
“Yes, it’s been a long time. But it’s August again…so we’re back…”
We explained how we had followed the annual bicycle migration out of Paris on Friday night. On the last day of July, Parisians load their bicycles on racks behind their cars and head for the country. We followed the bicycles out of town. The highways were jammed…traffic was start and go for hours.
“Look, I was just down in the Auvergne,” Damien continued, “so I brought you some cheese and bread. These are specialties from the region. They’re very good…
“And now that you’re back, let’s celebrate…let’s have a drink. How about some pineau?”
“Sorry Damien,” Elizabeth interrupted. “He’d love to, I’m sure…but he has another engagement. We’re going to the Berry (about 45 minutes East…where Georges Sand lived) to attend a play. Shakespeare…in English.”
“But who’s going to understand it,” Damien wondered. “The French can’t understand Shakespeare…”
“Even native English speakers have a hard time following Shakespeare,” we added.
But there was not time for a drink…we were off to see As You Like It performed at a friends house by an itinerant English group…
And so…the summer vacation begins…
Until tomorrow,
Bill Bonner
The Daily Reckoning
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This is a great article! So clear. Thank you for sharing your thoughts.
Waiting for the next correction when the sucker´s rally is over.
Mére Bonner seems to have a gift for succinctness. Perhaps she could be persuaded to pen a guest column… or a guest paragraph?
“You know, dear reader…investing is really very simple. Buy low. Sell high.”
Yes, I’ve been commenting every day saying this through this amazing rally. And, I’ll continue to say it because you can still buy low and be able to sell a lot higher within the next several months.
And my Apple stock is now over $166.00.
It is worth reading
Hunky Dory
By James Howard Kunstler
on August 3, 2009 7:36 AM
At kunstler.com
Bringing spending forward isn’t exactly zero-sum. Spending now rather than later increases the velocity of money. The consumer dollar goes to the businesses the provide the product, employing people and generating dividends, thus allowing more consumption and contributing to a virtuous cycle of creating value that people can trade. It creates a vibrant economy where finding work is easier so people don’t feel like tomorrow will be a rainy day so they better save everything they possible can today.
If everyone decides that all borrowing is evil and that they need to save all their disposable income, then the economy seizes up. People lose jobs and become even less inclined to borrow, invest or consume. Eventually, everyone dies either a pauper or with a pile of gold coins under their mattress after living a life of austerity.
That’s not to say that consumption for consumptions sake is good, or that spending like there is no tomorrow will end well. I’m just trying to say that its not as simple as one slice of pie borrowed today reduces tomorrows pie by exactly one slice. Saving all your pie indefinitely will end in mold and disappointment!
Bill – pleased you are ignoring your mother’s advice re frequency of writing your blog. Hopefully you will live as long as she, writing daily, and keep us entertained and enlightened for a long time to come!
You certainly know how to write so entertainingly about the scary future awaiting us. I am afraid it will take us a long time to unwind. I could not come up with any other word to describe it. Certainly, it would not be called recovery, after the kind of misery that this depression will inflict on the population. I think it would be anybody’s guess as to how the world will look like 5-10 years from now and under what kind of economic or political system we will be living at home.
After the last depression, it was said that FDR somehow saved the capitalist system. Of course we now know that it wasn’t FDR, but rather it was Japan.
Churchill once said “The United States invariably does the right thing, after having exhausted every other alternative”. Were he alive today, he would have had second thoughts.
I am sure there are others who clearly see the predicament that we are in but they certainly don’t have the talent to put it the way you do.
Please don’t listen to your wife and keep writing. We need your wonderful black humor when everything else is so depressing.
As you like it indeed! Enjoy the war,the peace will be unbearable. Ask your German friends, if you have any, who said that when.
It appears we are in winter, as those who follow the Kondratieff wave, will tell you. It is during this bitter winter, says the Kondratieffs’, that investment grade bonds, gold and commodities, will be the safe places to put your money.
When I read the Daily Reckoning on August 18, 2018, it will coincide with spring on the Kondratieff calender. I hope Mr. Bonner has the time, to write some more books. Something to read by the fire, as I sit out the long cold winter.
Thank You and Congratulations on one of the Best written exposes so far written explaining in simple terms why we are in the current Economic Crisis. It’s a pity that most people in the U.S., Politicians included will never get it or understand it. Keep up the Great Work, some of us are listening ! The Swiss Genome.
I read you every day, if I had to wait 20 years or 20 months or 20 days for this kind of analysis, I would be very sad!
Poor Bill. It seems it is always the women trying to make a mess out of one’s life. Even during holidays.
Bill,
Enjoy your vacation. And (I’m sure she’s a sweetheart), ignore your mom’s advice, keep writing. You’ve taught me alot.