09/16/09 London, England
These are the times that try our souls…
…well, maybe not our souls…but at least our convictions.
But look at gold this morning!
Yesterday, we got word that the PPI rose 1.7% in August. Let’s see, if producer prices are rising…consumer prices follow, right? Well…usually…
…but these are strange times…
We also got word that retail sales were up…that’s UP…2.7% last month – the biggest increase in three years.
Now hold on. We’ve been saying that retail sales were going down. Not up. Our view of the big picture has a consumer in the center of it. And it’s a consumer who is NOT increasing his spending. Instead, he’s reluctant to buy anything.
There’s a reason for that. He’s a guy who didn’t save anything over the last 10 years. Now, he’s 10 years older…facing retirement with insufficient funds…and scared to death that he’ll run out of money before he runs out of time.
The US consumer was counting on rising house prices to pay for his retirement. Now, he’s disappointed…and worried. What can he do? He has to cut back. He has no choice. He can’t depend on his house. He can’t expect pay increases. Having neglected his savings during the fat years…he has to tighten up in the lean ones. He has to save at the worst possible time – in a downturn!
We don’t see any way around this situation. We don’t see any shortcut. We don’t see any way to make it disappear or ignore it. THE CREDIT CYCLE HAS TURNED…from expansion to contraction.
Meanwhile, the feds are muddying the waters. They’re trying to fool the consumer…to trick him…to make him think that up is down and down is up. They want him to believe that the fat years are coming back…that he doesn’t have to save. In fact, they want to cause inflation…to encourage him to get rid of his money as soon as possible. That’s why that PPI figure is important. If they can successfully inflate consumer prices (not just producer prices) the whole picture might change. Then, we’d have an inflationary depression rather than a deflationary one.
Our commodities man, Alan Knuckman, was on Bloomberg Television yesterday, talking about this very phenomenon. (You can watch the whole interview here.)
“What do you make of the PPI numbers?” the host asked him. “They did come in higher than expected. Is inflation going to be a concern for the market?”
“That is always a question,” answered Alan. “The fed was trying to spark inflation and get money moving again. There is a delicate balance there, but we’re coming off record lows and inflation numbers from last month. That is to be expected. I am not that concerned, but I think you are touching on something very important as far as the market momentum. If the market momentum is so strong right now – the one disconnect is crude oil. It is failing to make the highs, even though the market is. That is something to really pay close attention to I think.”
For now, it appears to us that retail prices are still going down. And we doubt that the feds can cause a genuine recovery – simply by throwing money into the economy. You can boost spending when you’re in a credit expansion…but not when you’re in a credit contraction.
That’s why we’re suspicious of that retail-spending figure. How much of that is just spending funded and coaxed out by the feds? 60%? 80%? 100%?
David Rosenberg says it’s 100%. He’s probably right. And what would the economy look like without the phony demand ginned up by the feds? It would be shrinking at a 6% rate. And what will happen when the feds stop goosing it up? It will fall back.
But can’t the feds continue stimulating the economy indefinitely? Maybe. Even so, the lesson we learned from the Japanese is that even with huge inputs from the government (the Japanese passed 11 separate stimulus measures totaling some $30 trillion yen) the real economy won’t budge. Over nearly 20 years, the Japanese economy went from on-again, off-again recession to on-again, off-again deflation. The government muddied the waters. Still, consumers saw clearly what they needed to do. They had lost money in the crash of ‘90. Their Bubble Era stocks went down first. Then, their property went down too. They needed to save money for their retirements. This they did, resisting all of the government’s efforts to get them to save.
Will the situation be any different in the United States?
Probably not.
Without extra earnings, the only way the consumer can increase his spending is by going further into debt. He is unwilling and unable to do that himself. The banks won’t lend him money and he wouldn’t take it if they would (at least, that’s our view). So what’s happening? The feds are borrowing big time – IN HIS NAME. They’re running up federal debt – that he’ll have to pay, one way or another. This money is then funneled to him in various devious and mostly ineffective ways…resulting in enough activity to make it look like something is happening in the economy.
It’s a fake. It’s a fraud. It’s fundamentally counterproductive. But it’s all it takes for people such as Ben Bernanke to believe the economy is recovering. Today’s headline news:
“Bernanke says recession ‘very likely’ has ended.”
And so, our convictions are put to the test. Everything seems to be improving. The numbers – many of them – show an increase in business and retail activity (New York’s manufacturing index is at a 2-year high…).
The commentators, economists, and analysts all say things are getting better (except for those who know what they are talking about)…
And the stock market is still going up. The Dow finished up 56 points yesterday. Gold closed at $1006 yesterday. This morning, it’s up to $1017. (More about gold later in the week…we’ve done a lot of drinking on the subject…) And oil is just under $71.
So, who’s right? Who’s wrong? Us? Or them? We say there is no real recovery going on…and there won’t be one. They say the recovery is already here.
Stay tuned.
“You can still sell property,” said brother Jim. “But only if you’re willing to discount it.”
Jim is visiting from Virginia. He is a real estate agent of some renown in Charlottesville, VA, dealing only with large farms and estates. His customers are on the golden side of the light spectrum; they tend to pay cash.
“Yes, these are not people who need to mortgage property. But the story is not very different. They still have their lives…and their problems.
“What’s happening now is that there aren’t many buyers and those who are buying expect to get very good deals. So, you can still sell a nice property, but only if you’re willing to heavily discount it.
“Prices are down, say, 20-30% from where they were a few years ago. But the buyer wants another 30% discount. Not many sellers are willing to give up that much, so in my area there aren’t many sales that go through.
“I’m lucky because I’ve been at it a long time. People know me. So when they want to move a property…or to buy one…they contact me. But I have to tell them what’s going on. And I tell them that if they’re not willing to sell at a big discount, it will be hard to sell at all.
“As I said, most people just sit tight. But a few get into situations where they don’t have a choice. One poor woman has gotten sick. She is going into a nursing home and apparently the children need the money to pay her medical expenses…so they’re forced to sell. Sometimes there’s a divorce that forces a couple to sell a place. Otherwise, not much activity.
“And I feel sorry for all those real estate agents who came into the market over the last ten years. What do they do? There aren’t enough transactions to keep them in business. But what else can they do? They’re not a lot of jobs open in other areas either.
“My guess is that they are all treading water…hoping for a change…living off savings…until they have to make a big change.”
We wonder how much of the economy is treading water…hoping for a lifeline…hoping that all this talk of ‘recovery’ is going to make it possible to avoid any unpleasant changes… hoping that things go back to the old normal…that somehow, everything will be all right again…
Until tomorrow,
Bill Bonner
The Daily Reckoning
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I’m confused as to who wrote this. BB or Greg? Seems like all the perma bears are in disarray now: Ritholtz, Roubini, David Rosenberg – all scrambling. Rosenberg looked like he got hit by a bus on CNBC as he moonwalked his way toward revised upward projections. What a joke.
Now add BB to the list. Was so sure of himself. Kept repeating it over and over and over, trying to convince himself. But now, even he’s lighting his stance. Bulls are in charge of an economy that is ready to boom with growth. Lots of fuel left in a big rally.
You take the stocks road, and I’ll take the gold road, and I’ll get to Scotland befo-o-o-ore ye!
the sales increase is illusory – government sponsored malarky to continue the deception of recovery – bernanke’s double speak, bifurcated speech is evidence of that….
john williams reports core retail sales up .2% when cash for clunkers and inflation are removed….that is surely within sampling error and thus absolutely and entirely meaningless….even the 2.7% would probably have high enough sampling error to make it nonsense….
people who think that stock market activity reflects economic activity betray a vast ignorance about the two entities….stocks rise because of enormous qe money and continued dividends which cannot be sustained with current earnings….
we are in for decline and no growth for the long haul…..too many structural problems to create a return to normal…
ps….this just in from chrysler:
Yet based on a speech by Chrysler boss Sergio Marcchione at the Frankfurt Auto Show, even the “conservative” 9.5 million SAAR that we estimated for September, after the 14.1 million number in August, is going to be an optimistic number. The Fiat/Chrysler boss warned that “we are going to see harsh reality in September.”
gm made similar comments….
and the pom-pom girls at msnbs cheer on…
green shoots! green shoots! rah rah rah!
well written, interesting read
Harry…It is apparent that you sir are….Knee deep in the proverbial SHAM… you think you know but you have NO idea…Don’t keep taking the time to comment on something you obviously do not understand…Go stimulate your local economy in the midst of this (SUCKERS) rally…the nation needs boobs (BIG BOUNCING ONE’S) like you to save us all from utter doom…you’r A HERO Harry and we all envy you’r insight and wisdom – So in tradition of the steriotipical (HERO) GO TAKE A FLYING LEAP OFF THE TALLEST BUILDING… IN A SINGLE BOUND.
This morning all the talking heads were all smiles, talking about how we are now in a recovery and the economy is getting back on track. But I look around me and so many people I know are losing their jobs and can’t find another one. Reminds me of 1984.
I spent 2.7% more of my discretionary income last month, because I feel things are a little better than a year ago. BB apparently lives and breathes in Europe. I’m not sure he’s big on the U.S. or a patriot. He’s looking for doom and gloom and with no hope for the US. We all still live day to day, with either caution or pessimism. BB chooses pessimism.
But, on a global scale, there are billions of folks who want a TV, a laptop, a burger, a car and a set of golf clubs. Billions of them. Sooner or later they will get their burger. And that will create financial opportunity for those who want to work, think and invest.
Just another knucklehead: Very well said! More great economic news this morning. At some point all these doomers have to face the reality of a growing economy. IMO, I believe we’re setting up for a nice boom in economic growth.
BB is correct in my opinion, overall. It’s the timing that counts. Namely, when do all of these doom and gloom predictions finally manifest themselves?
Well, they’ve been showing up bit by bit, for quite some time now. The puzzle remains incomplete, but give it time.
My current concerns are that a real estate bubble is ongoing in China and the money-printing bubble continues growing unabated in the U.S. Bubbles replacing other bubbles; some popped, some not.
The only way for “prosperity” to return in all of its magical American Empirical “Happy Motoring” universe, Mr. Kustler advances, is when the G20 countries compose and sing a single economic anthem from the same song-sheet, all in harmony and volume, allowing the rest of us to skid through this giant Ponzi scheme and out the other side unscathed.
Otherwise it’s to Hell in various-sized handbags, handcarts, used cars, empty Twinkies boxes and other detritus of Modern Civilization.
A crystal clear analysis of the state of the economic old world, i.e. EU and USA. And most people in those economies agree wholeheartedly by their behaviour. More savings, less holiday, less travel, less hotel, less employment etc. Atm, it might seem that the stock exchanges disagrees, but that is purely due to reasons proper to that same stock exchange. Just reread the Book, freely available on the web. In the end, stocks cannot deny your analysis, but whether that is today or in a month, is a matter of how much money the people in the know can get out of the suckers.
Dear Harry and knucklehead. Keep up the good work! Tho government-(insert sector) complex needs flag waving-rubes like you. WHy does the central govt always ALWAYS revise unemployment #’s upward the week after they are released. I didn’t think anyone was stupid enough to buy it. I guess you two actually are. PS you’ve got some Bernanke bearnaise on your chins.
Even the supermarket chain Kroger is not making their expected profits because people can’t afford to eat near the end of the month.
“THE CREDIT CYCLE HAS TURNED…from expansion to contraction.”
Ding!Ding!Ding!Ding!Ding! We have a winner! That line nailed it. And the credit cycle has turned because social mood, which influences action, has turned, from expansion to contraction. That means we are about to see a MAJOR contraction in the quantity of (money + credit) (about $64B currency, about $52,000B credit). When those trillions of credit get wiped out (mostly by debt defaults), we will see a HUGE deflation. McMansions that went for $1.5 million, you could easily see go for $30,000. Those $25,000 automobiles you’ll be able to buy for $500. A minimum-wage job today will appear very richly-paid when deflation makes itself felt. We will be able to buy gasoline for 25 cents a gallon, if even that much. Dollars that survive will buy many times what they buy today. Be prepared.