12/28/09 Ouzilly, France – We’re coming to the end of the year…
What have we learned? Here’s how we would put it, a four-word lesson that applies to almost everything:
“It’s Not That Simple.”
We were on pretty solid ground – at least as far as understanding what was going on in the markets and the economy – up until the middle of 2009. The Bubble Epoque led to the Bust Epoque…just as we thought it would.
But our view was too simplistic. We expected the feds to react…and stocks to bounce. Both of those things happened. But then, the bounce should have ended…and the feds’ massive inputs of cash and credit should have led to inflation…or at least a major sell-off of bonds and the dollar in anticipation of inflation.
You’ll recall, that even we thought this view was too simplistic. The story was too easy to tell and too easy to understand. And so many people were jumping on, we thought the bandwagon would break an axel.
But we just didn’t have a good alternative.
As usual, Mr. Market is being cagey. He’s playing his cards very close to his vest…not giving away too much information.
He’s extended the bounce for so long that most people now think we’re in a new bull market. Just read the views of Barron’s roundtable. Almost all of them expect higher stock prices in 2010. Or, ask the man in the street. He’s convinced that the crisis of ’07-’09 is over…and that the recovery, while it may be fragile, is a sure thing.
Is it a bounce or a bull market? We’ll stick with the bounce hypothesis a while longer; until we’re proven right…or people start laughing at us, whichever comes first.
Meanwhile, the man on the street is not taking chances. While he probably believes the claptrap from Washington and Wall Street, he also knows that his house has lost 30% of its value and that if he loses his job he’ll have a hard time finding another one. So, he’s cutting back – just like he should.
According to the early figures, holiday sales are coming in sub-par, as expected. The New York Times reports that retailers are offering large discounts to attract customers. Saks gave shoppers up to 70% off. Brooks Bros. cut prices up to 50%.
Sales declines are not just the fault of the weather. Consumers have less money to consume with. This is the fundamental change that makes ‘recovery’ impossible. The economy can’t go back to the Bubble Epoque. That period was irreproducible. Consumers were able to live beyond their means by borrowing against their houses (or, ‘taking out equity,’ as they liked to say.) Those days are gone forever.
And now, stock market investors judge America’s businesses to be worth about 2/3rds as much as they were in the Bubble Epoque. Is that too high? Or too low? Or just right?
It’s probably too high. The outlook for American business is not good, for all the many reasons we’ve outlined in these Daily Reckonings. Our guess is that investors are going to turn gloomy when they realize that there will be no recovery…not now…not ever…and that the businesses they own are not really worth as much as they thought.
If no recovery, then what? Well, then we have a depression.
“Hey wait a minute…this ain’t no depression…” you’re probably thinking.
Well, it doesn’t look like a depression. But we blame that on color photography. Since the ’30s, we now have color photographs…so nothing looks like it did in the ’30s.
Besides, it didn’t feel much like a depression back then either…at first. And it didn’t feel much like a depression after Japan cracked in 1990 either.
Depressions take time to express themselves. Remember, they are not pauses in the life of an otherwise healthy trend. They are what happens after the trend drops dead. Then, the economy needs to reinvent itself. At first, people don’t want to believe it. They try to revive the old business model. They bet that the old companies will quickly return to robust health; they buy their stocks. They demand that the government do something to save the poor, ailing economy.
But it’s not that simple… You can’t revive a dead economy. And when you realize the old economic model is, in fact, a corpse…it’s depressing.
The US economy (and much of the rest of the world economy) can no longer depend on increasing consumer debt. We need a new model…a new business plan… The sooner we find one, the better off we all will be.
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In 2004 Japan did not feel like a depression.
In 2005 and 2006 Japan did not feel like a depression.
By Christmas 2008 and summer 2009, Japan felt like a depression. The men in business suits crying b/c they felt cold sleeping in parks at night. The folks giving up their homes in order to be able to send money to less fortunate relatives. The difficulty in finding work, the older vehicles, housing prices staying depressed, lack of cash, the slow businesses getting slower (or closing), the longer faces. Those things revealed depression.
Well put once again Bill. What will get us out of this depression? People have told me that WW II got us out of the last depression. I don’t agree, I’d say being the only industrial economy left standing got us out of the last depression. I don’t see that happening again, looks to me like there has to be a major adjustment period in our society. And if we don’t stop making the same mistakes taken in the past we are as philosopher George Santayana said: “Those
who cannot remember the past are condemned to repeat it.”
I can’t really figure out what the new fed exit strategy is, but something like debit default swaps. Maybe that will do the trick.