07/22/09 Vancouver, British Columbia
They’re wrong. We’re right.
Now The Wall Street Journal says, “recovery likely in second half.”
And Goldman Sachs calls for a stock market rally similar to the rally in 1982.
Who are we to say they are wrong?
Well…we’re The Daily Reckoning, that’s who. And we’ll say it: they’re wrong.
This ‘recession’ is already the second longest since the first leg down of the Great Depression. That downturn of the early ’30s went on for 43 months. This one is now at 19 months – officially – which makes it longer than any other since the Great Depression.
Is it over? Is it going away? Is that all there is?
Nope. Nope. Nope.
Instead, we are merely proceeding as we should, into a “deepening structural depression,” as John Williams puts it.
Yes, he uses the ‘D’ word too. Because a ‘D’ is what we have. Not an ‘R’.
It’s a depression because it requires major structural change. A recession only requires time. And not even much time…just a few months to work down inventories. But a depression takes a lot of time…to restructure industries and rebuild balance sheets. Debt needs to be paid down – or inflated away. And businesses need to redirect their efforts towards a more profitable line of activity.
Both the increase in unemployment and the slump in industrial production are worst than at any time since 1945. As for retail sales and housing starts, they’re the worst in the post-war record books.
The figures tell us that something important is going on. But what’s the key to understanding what it is? And how will it be cured?
This key is to understand that this is a major structural depression. It can’t be cured by more stimulus, because stimulus is what caused it.
This time, we need a real cure…bankruptcies, workouts, deflation, defaults…and maybe, eventually, hyperinflation.
None of those things happen easily or quickly. Businesses don’t want to go bust. Families don’t want to lose their houses. So if they get a lifeline from the feds, they grab it and hold on. And the longer they hold on, the longer it takes to make the structural changes that the economy needs.
The length of time spent in unemployment is now longest since 1948. And consumer debt, at only 12% in 1982, is now at 18% of GDP. “With that kind of debt, there is no question that the feds will implement a tight money policy,” said Marc Faber in his speech here in Vancouver yesterday. Instead, look for easier…and easier…money policies, he says.
We learned that the feds have put up an amount equal to more than 150% to GDP to bailing out Wall Street: $23 trillion. No wonder Goldman is reporting record bonuses!
“We have to spend money to keep from going broke,” says Joe Biden, a man who is out of his depth in the bathtub.
But when you’ve got that kind of money covering your mistakes…how much restructuring are you going to do? Not much.
“Wall Street Learned Nothing,” is a headline at Forbes, making the obvious point.
The feds still believe in stimulus. And Wall Street still smiles and takes it. That’s why the recovery is still a long way off. Now, the feds are in charge of the money…and in charge of key industries, including automobiles, banking, insurance…and soon, healthcare. They’ll block innovation. They’ll prop up ailing institutions. They’ll provide more and more stimulus.
A growing group of analysts and strategists now calls for another big stimulus package. You see, the current stimulus program hasn’t worked. Why not? Well, because it was not enough…or not properly focused, say economists. In either case, the solution is not hard to figure out. Even Nouriel Roubini says, “More stimulus is needed.”
So more stimulus is what we will have…and a collapsing economy…and a falling dollar…and more!
Opposite us on the flight to Vancouver was a nervous man with a short beard and a swarthy look. He appeared to be from the Middle East. He fidgeted. He seemed to sweat. He took off his shoes and crossed his legs like a yoga instructor. It was a remarkable feat for such a fat man. He prayed.
Was he afraid of flying? Was he planning to blow up the plane?
After the plane took off, he got out what looked like a cellphone…or a detonator. We figured we should remind him that the War on Terror is over, just in case. But now we were getting nervous. So we leaned over and asked.
“Are you a Christian?”
“Allahu akbar!” he replied.
We took his response as a negative.
“Are you planning to blow up the plane?” we continued. If he were, we knew we wouldn’t be able to stop him; we just wanted to know before everyone else.
“Allahu akbar!” came the reply again.
“Just let me know if you need any help with any electronic devices,” we offered.
Then we realized that he didn’t speak English, so we left him alone.
If he was going to blow up the plane, he’d have to do it on his own.
We only watch television in hotel rooms…and then only to be appalled. As for radio, we only listen to it in taxicabs and restaurants – against our will. On our way to the airport, for example, the cab was tuned into a talk show. The subject: a man who was upset because he was not dead.
The story, which we think was set in England, was of a man who had been given only six months to live by his doctor. The man had cancer; the doctor said he was a goner.
So, he drew out his retirement funds and decided to enjoy the last of his days. He fixed up the house. He took a vacation. He did whatever sensible people do when they realize they are checking out.
But then, wouldn’t you know it, he didn’t die. And now he’s really cheesed off. He charges that his doctor gave him bum advice. He wasn’t really dying of cancer at all. Instead, he says he had some other ailment that went away on its own. And now, he’s as healthy as a cow pie weed – but he has no money left. So he’s suing the doctor and the National Health Service.
Poor fellow.
But do you think the callers were sympathetic? Not at all. Universally, they denounced him as an ingrate. He should accept the judgment of the deities and be thankful, said one and all.
“He’s lucky to be alive,” said one radio activist from Leeds. “But it kinda makes you want to kill him, doesn’t it?”
“Yeah,” said another from Manchester. “Think about all the people who really are dying of cancer. Every one of them would gladly trade his retirement funds for a cure.”
All true, of course.
But the man has a point too. Imagine that on the day you were scheduled to be hanged, the hangman had a heart attack? How disappointed you would be.
Until tomorrow,
Bill Bonner
The Daily Reckoning
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You state: “Both the increase in unemployment and the slump in industrial production are worst than at any time since 1945. As for retail sales and housing starts, they’re the worst in the post-war record books.”
What you didn’t state is the fact that, with the exception of unemployment, which is lagging anyway, all of those numbers are indeed getting BETTER. Not only that, the numbers are indicating that our recession ended in May. I agree. We’re out of it and into a slow growth phase now.
And, as I like to mention each day, my Apple stock is up nicely once again. If the consumers were dying, when then would they be gobbling up expensive phones with expensive plans?? Answer: most people have money and are spending it.
Mr Bonner
You are a very complicated man.
Ed watkins
972 424 5999
I have to agree with Harry this time. Economic indicators are getting stronger. The question still remains what will the post housing/financial bubble economy look like?
My guess is 1970’s style stagflation. Gold if you all remember performed well in the 70’s, as did junior mining stocks. Banks did poorly. And we have all ready seen one oil crunch. More to come there, as tight supplies will act as a brake and put a drag on economic growth. I wish, I knew Mr. Bonner was in town. I could of invited him over for some smoked salmon!
Harry-
Apple is down 6% over the last year and pays no dividend. What does a bad stock look like to YOU?
I have a problem. I agree with everything you write and have done for years, but as of 7/23 closing prices the Dow theory has signalled a coming Bull market. This is very astonishing but true.
How do read this ?
Harry,
I believe you are confusing the initial effects of flooding the economy with new paper/credit with an actual recovery based on fundamentals.
Both will initially produce similar and positive economic effects. One is illusion, one is reality. Doubling note/credit supply in just months creates an ILLUSION of “recovery”. Restructuring the allocation of resources on a macro-scale (fundamentals) provides for a “recovery” based in REALITY.
The economic fundamentals, some of which were mentioned by Mr. Bonner above, HAVE NOT CHANGED. There is another steep decline coming in equities for that very reason. You are being pumped right now, and soon you will be dumped.
Stick with that Apple stock though – at almost 30 times earnings. It’s not like the earth isn’t completely flooded with “luxury” electronics in an economic downturn or anything, and their CEO’s health is certainly irrelevant to the valuation of the company…it’ll still be 30x earnings if he dies tomorrow right?
You might want to look at some different investing strategies Harry…
Harry,
Are you living on the same planet as the rest of us? Granted, I’m in Japan now, where are you? And what are you smoking? And do you share it?
Before you label me as an Apple-basher, I’ll tell you I’m not. I did PR for Apple from the late 90s until just past the opening of the Apple Stores. I dumped my stock a while ago. As the other posters have mentioned, please please please stop drinking the Steve Kool-Aid. No more than 4% of your portfolio should be in any one equity. 30X earnings? Come on, man, how high do you think it’ll go?
People have cash? Who? Last I checked the whole consumer-led economy was based on housing, and that’s crashing hard, along with consumer lines of credit. Party’s over for like…10 or 15 years. Time for the hangover.
How is unemployment a lagging indicator? Our economy is what, 2/3rd consumer driven?
Unemployment is a dynamic indicator, perhaps it starts as a lagging indicator, but it turns into a self-fulfilling leading indicator.
The government realizes if they convince enough people the economy is recovering, they will start spending again. After they do this they point to the fact people are spending as proof the economy is recovering.
It’s such circular logic: why is the economy recovering? Because people are spending.
Why are people spending? Because the economy is recovering….What a joke.
Good for Harry for making a buck but…better keep that parachute handy. The markets getting high enough that you’ll need one if you fall.