09/22/09 London, England
You wanna know what is going on? David Rosenberg explains…
“US consumers are cutting back, and where they are not cutting back, they are scaling down. This new cycle is all about ‘getting small’ and it is deflationary. For yet another in the litany of signs pointing in the direction of social change towards thrift, have a look at what is transpiring at the upper echelons of the income strata – Now Even Millionaires See the Benefits of Budgeting on page B5 of the Saturday NYT is a must read.
“Not only are the rich trading down, but the article quotes a high net worth financial advisor who said ‘many of our clients are very happy to be sitting on bond portfolios and cash reserves.’ And see the article on page 2 of the Sunday NYT – Beauty Products Lose Some Appeal During Recession. According to the NPD Research Group, total sales of department store beauty products are down 7% from year-ago levels. Women are apparently opting for the ‘natural look’ – “some people are selectively replacing higher-priced items with cheaper products from drug stores and discount stores.”
Right on, David!
And here’s the CEO of Pepsico:
“The age of thrift is here.”
Even in Japan, after 20 years of coughing and sneezing, people have caught “the thrift bug,” says The New York Times.
What’s a consumer economy need in order to keep growing?
Uh…it’s needs consumer spending.
What do consumers need in order to boost spending?
Uh…they need more money!
Oh, there’s where it all starts to come apart, doesn’t it? Where do they get more money? They either earn it…or they borrow it. And right now, they can’t earn it – not with 12% unemployment in California! Workers have no bargaining power. And they can’t borrow it either. The banks won’t lend – not with the value of their collateral still falling.
Word comes this morning that mortgage delinquencies have hit a new record. And here’s a headline warning of worse to come:
“$30 billion home loan time bomb set for 2010.”
Even solvent homeowners who aren’t forced into foreclosure still find it beneficial to walk away from their houses. “Strategic defaults,’ says The Los Angeles Times, are becoming a problem for mortgage lenders.
We didn’t read the article. Instead, we began to think. What if we owned a house worth $200,000 with a $300,000 mortgage? What would be the smart thing to do? Easy…walk away from it. Then, buy it back at auction!
Desperate consumers do what they have to do. Canny consumers do what’s smart. And now it’s smart to walk away from any debt that you don’t actually have to pay.
As for adding more debt, you can gage yourself from the comments above, consumers are not eager to borrow. They’ve seen what happens when they go too far into debt. They’re older and wiser than they were in the bubble years. It’s been 10 years since the tech bubble exploded. Since then, stock market investors have made nothing – zero. And now houses are falling too.
So, if a fellow needs money for his retirement, where is he going to get it? Not from his house. Not from a pay raise. And not from his stocks either. He needs savings. He needs real money.
Americans aren’t so stupid after all. When they need to stop spending, they stop spending. When they need to save, they save. Too bad about the economy.
Yes, what is good for individuals seems to be bad for the economy. When people save instead of spend, the consumer economy stalls. And then economists think there is something wrong. They think an economy needs to expand constantly. And so, they try to find ‘solutions’ to the ‘problem.’
Actually, there is no problem at all. It’s just the way capitalism works. There are booms. And there are busts. Periods of growth…and periods when the mistakes made during the boom are corrected. There’s a time for every purpose under heaven. That’s the way it works. The economy breathes in and it breathes out.
And there’s always some dumb economist trying to smother it with a pillow!
A report from the world’s biggest bank, HSBC, tells us the dollar’s days are numbered.
“The dollar looks awfully like sterling after the First World War,” said David Bloom, the bank’s currency chief.
“The whole picture of risk-reward for emerging market currencies has changed. It is not so much that they have risen to our standards, it is that we have fallen to theirs. It used to be that sovereign risk was mainly an emerging market issue but the events of the last year have shown that this is no longer the case. Look at the UK – debt is racing up to 100pc of GDP,” he said
The Telegraph reports:
“Crucially, China and rising Asia have reached the point where they can no longer keep holding down their currencies to boost exports because this is causing mayhem to their own economies, stoking asset bubbles. Asia’s ‘mercantilist mindset’ of recent decades is about to be broken by the spectre of an inflation spiral.
“The policy headache was already becoming clear in the final phase of the global credit boom but the financial crisis temporarily masked the effect. The pressures will return with a vengeance as these countries roar back to life, leaving the US and other laggards of the old world far behind.
“A monetary policy of near zero rates – further juiced by quantitative easing – is completely incompatible with circumstances in most of Asia, the Middle East, Latin America, and Africa. Divorce is inevitable. The US is expected to hold rates near zero through 2010 to tackle its own crisis.
“What is occurring is an epochal loss in the relative wealth and economic power of the old G10 bloc of rich countries compared to rising regions of the world. The euro, yen, sterling, Swiss franc and other mature currencies will be relegated along with the dollar in this great process of rebalancing, but the Greenback will bear the brunt.”
That said, we repeat a headline from Seeking Alpha:
“Dollar shorts should look out.”
We agree with HSBC and the Telegraph: the dollar will probably slide – especially against Asian currencies – for the next few decades.
But that’s the long term. In the relatively short term we still face the shock of another leg down of the credit contraction crisis. Risk is likely to make a comeback. When that happens – and it could happen in a ‘Red October’ – the dollar will seem like a relatively solid refuge. This is what happened last year. We wouldn’t be surprised by a replay of that ‘flight to safety’ we saw at the end of last year.
But we know what you’re thinking: what? When did the dollar become a ‘safe currency?’ Of course, it’s not safe. But when the end of the world approaches, it will seem safe.
For a while.
Until tomorrow,
Bill Bonner
The Daily Reckoning
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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I would not call it MISTAKES, I woult call it ROBBERY!!! That is how Capitalism works, robbery of resources of people who don´t understand why they are more poor but full of useful products, and riches making more money selling this products, jajajaja!
“But when the end of the world approaches, it will seem safe.”
Please! My god, are you so far gone now that you’re throwing out some end of the world scenario? Come on. What part of this don’t you seem to get? Economy is not only mending but growing. And as I keep telling friends, we’re looking at a mini boom cycle coming upon us very quickly.
The markets will correct to their proper levels – Dow 11,500+ makes sense – and we can manage sustainable growth going forward.
But I guess for you, that doesn’t matter since we’re coming upon the end of the world. LOL!
What if October comes and goes without an end to this bear market rally.
The foreclosures are coming. How many and when is the question. But based on the comments from the BofA spokeswoman, it sounds like foreclosures will “spike” in Q4.
DeMark’s TD D-Wave (a long term indicator) shows the earliest possible end to this rally at December, with one small correction in the meantime. I agree with this.
Countdown to exposing Harry and the likes’ moronness is still running, and I’m looking forward to its end. This will prove to be a grand moment of comical drama.
Bernardo, capitalism is based on a profitable exchange for both parties through the action of trading something.
If that exchange is not profitable for one party, but he still engages in it, it is called being dumb or making a mistake. And through mistakes we learn, grow and become wiser. And that is exactly what Capitalism teaches. It forces you to stand in your power and self-respect and to move out of your comfort zones or victim role.
Capitalism you could say, is the Law of Life. You can see it happening in Nature all around you.
“But when the end of the world approaches, it will seem safe”.
Harry, I consider the above to be a part of this writer´s dry humor, which after reading for some time now, I find quite amusing.
Bill is correct that thrift is making a comeback and is probably here to stay an extended period of time. I read an article yesterday about Macys and 9 other co.s on the verge of bankruptcy. CBS and I believe Sprint? were included in the list. The debt of all 10 was incredible and I’ll bet that debt is high for many of the public co.’s that Harry has so much faith in. Capitalism in theory is not a problem, but in practice I can see how Bernardo arrives at his conclusion. I’ve worked for 2 pub. traded co.s. One, a tech was more interested in its stock price than their product, which was crap, but its stock price at one time was higher than a much better product on the market. How could this be possible I asked myself and the only conclusion was that investors are as dumb as the folks who watch Jerry Springer, or lack the inside knowledge necessary to make a good judgment. The other an HC company, which created a pharma sub. that allowed its stock price to soar and for good reason as the pharma co. was raking in huge profits. However, the co. sold the pharma bus. raking in millions, which it doled out to its upper managment. The bandits could not resign, or retire quick enough as the stock price fell. It reminded me of a verse in an ol’ country song: “She got the gold mine – I got the shaft”.
The market is not going to “Just Crash” one day. It needs a catalyst for the selling to start.
But who knows what the catalyst will be, or when it will be. As long as the big boys on Wall Street can keep pushing the market higher, they will.
They are so close to 10,000 on the DOW, why would they possibly stop short of that?
“And through mistakes we learn, grow and become wiser. And that is exactly what Capitalism teaches.”
“Capitalism you could say, is the Law of Life. You can see it happening in Nature all around you.”
Here, here Daniela. Here, here!
Congratulations Daniela. You qualify as one of the few individuals on this planet whose brain is actually connected to reality.
An extremely small minority I grant you.
The markets will correct to their proper levels – Dow 11,500+ makes sense – and we can manage sustainable growth going forward.
===========
Dow at 11,500 make sense to whom?
You are right on a correction, but companies paying dividends while not making profits…
We admire(?) the unfounded enthusiasm, though.