01/22/10 Paris, France – Fear. You can almost smell it. So far, there’s just a whiff of it…a faint odor…a little trace in the air…like the smell in a subway car after a bum has left.
Yesterday, the Dow fell 213 points. Oil dropped to $76. Gold lost $9.
What caused it? What sets off a crash? Yesterday was hardly a crash. But our Crash Alert flag still flies. Because this is a market in danger. It is a market looking for a reason to crash.
You never know for sure when or why markets crash. At a certain point, markets become like drunks who want to play a game of Russian roulette. First, they have to find the revolver. Then, they find the trigger.
It looked to us as though investors were flexing their trigger fingers yesterday. Some blamed China’s recent move towards tighter credit (or what they thought would be a move to tighter credit)…others blamed news from the US:
“Jobless claims in US unexpectedly rise,” said the Bloomberg report. Here is how the Associated Press described it:
“A surprising jump in first-time claims for unemployment aid sent a painful reminder Thursday that jobs remain scarce six months into the economic recovery.
“The surge in last week’s claims deflated hopes among some analysts that the economy would produce a net gain in jobs in January and help fuel the recovery.
“A Labor Department analyst said much of the increase was due to holiday-season-related administrative backlogs at the state agencies that process the claims. Still, economists noted that that would mean claims in previous weeks had been artificially low. Those earlier declines had sparked optimism that layoffs were tapering and that employers would add a modest number of jobs in January.
“The January employment report will be issued Feb. 5. But the surveys used to compile that report were done last week, so economists are paying close attention to the jobless claims figures from that week.
“‘The trend in the data is still discouraging,’ Diane Swonk, chief economist for Mesirow Financial, wrote in a note to clients. ‘Hopes for a positive employment number in January…are rapidly dimming.’”
Anyone who was ‘disappointed’ by the jobless numbers hasn’t been paying attention. Consumer and business credit are falling. That means businesses are not expanding. They’re contracting. And that means they need fewer employees.
People without jobs can’t shop like they used to…and they can’t pay their bills. One out of 4 mortgaged houses is underwater. One in 10 is in foreclosure. Many more will probably go into foreclosure as the depression continues and default becomes more socially acceptable. Previous generations regarded default and foreclosure as a disgrace. Lenders priced this aversion into their lending rates. But now, default is just a shrewd financial move. When the financial costs of defaulting are lower than the costs of paying…that’s what borrowers will do. Just like Wall Street.
As the depression continues, attitudes will change… Voters will probably want real change in Washington; that’s what the Massachusetts election may be telling us.
But back to our story…
This morning, we see another itchy trigger finger. Stocks are falling in Asia. This time it’s blamed on Obama’s pledge to punish the banks with higher taxes.
But the real cause of the wobbles on Wall Street is the economy. Trillions’ worth of fiscal and monetary stimulus aren’t stimulating at all. They’re just shifting control of the economy to the feds…and shifting the debt bubble in their direction, too.
Does that make a nation more prosperous? Of course not.
The stock market has been ignoring the fundamentals. It’s priced dozens of big companies over 50 times last year’s earnings. Overall, stock prices are closer to a top than a bottom. And yet, a depression brings a bottom, not a new top.
We say this with caution. A few years ago, we might have said it with reckless confidence, but we were smarter back then. Now, we even place our breakfast order with caution. You just never know…
No one ever knows exactly what Mr. Market will do. If he wants higher stock prices, he’ll get them – no matter what the fundamentals tell us.
But we have to stick with the fundamentals anyway. That’s all we’ve got. And they tell us to watch out. In a ‘normal’ recession, businesses would be re-hiring by this time in the cycle. They’re not doing so. Why? Because it’s not a ‘normal’ recession. It’s something quite different. Something we haven’t seen in the last 50 years. Something we never wanted to see again. But here it is – a depression. That’s what those higher unemployment figures tell us. People who own and run businesses aren’t hiring. They know the jig is up. The insiders who own businesses are selling 24 shares for every one they buy.
Unemployment is over 10%…and it seems likely to stay there for a long time. Consumer and business credit are declining – for the first time in half a century. And those trends too seem likely to continue. There are still beaucoup mistakes to correct and a long way down to go.
So relax. Buckle your seat belts. Sell your stocks. And enjoy the show.
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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where’s harry now???
Another excellent post Bill ! Me thinks the jig is up. That Feb 5 jobs report is going to be gruesome. Of course, the Labor Dept numbers are rigged so that UE never gets too far north of 10% since people who enter the extended UE program or have exhausted benefits altogether simply “disappear” from the statistics.
But everyone knows the truth. We’re not too far off from the 1933-34 number of 25% unemployed, and may still get there and more by the end of 2010.
And as Gerlad Celente has recently pointed out, a wildcard terror strike will likely launch us into full-fledged depression that even the mainstream media won’t be able to ignore. What on Earth can gov’t do to goose the economy if we see another 9/11 type event? Back then Greenspan cut rates and Bush exhorted everyone to “spend spend spend,” but this time around the consumer is tapped out and rates are already at ZERO.
Hate to say it but Celente is likely right about Terror 2010. The UK just raised their threat level to “imminent” and the Xmas day bomber was an appetizer to an entree of terror on the way in 2010. A 9/11 type strike on the US in the next few months would drop the DOW 2500 points w/in hours. That’ll be when the jig is really up
Wait a minute Bill. At this point stocks aren’t just a reflection of balance sheet fundamentals. Isn’t this a dollar story? Isn’t the currency component to this story as fundamental as PEs and ROEs?
Basically, who cares what the ticker reads day-to-day when the real value of the market is falling anyhow? We started this century with a Dow-Gold ratio of 45-1, now it’s closer to 9-1, doesn’t that represent a hyper crash already? The Dow could easily climb to 30,000 over the next 2 years, but if Gold climbs to 10,000 the market is still crashing. Isn’t the currency depreciation the real story?
Bingo, Ben.
@ confused
Harry asked me to send you a message:
“I’m not listening I’m not listening I’m not listening I’m not listening I’m not listening I’m not listening…. naaaah naaaaaah naaaah…. can’t hear you….”
will the dump Bernanke movement gain momentum over the weekend?
look for a wild ride next mon – wed if we say bye bye Ben
or even if we don’t!
Oh sure, dump Bernanke and get Larry Summers….what a deal.
Bama is sold out to Wall Street and Banker interests no matter what the retoric du jour is.
We’re so screwed….
And now for something completely different….
Is anyone except me that “Mr. Market,” is a complete jerk and that anyone that plays in that rat race casino has lost it a long time ago and they are starting to look just like zombies with ties.
Yes, I agree with ‘confused’, where in the “h”, “e”, double hockey sticks is Harry???
Guess he’s hidin’ in his little rat hole waiting for new green shoots from QEII.
So stocks pulled back to where they were a month ago. Wow, that’s some crash! Another great buying opportunity for those who missed the last month.
…………On unemployment but not counted as unemployed. A friend of mine was laid off and going to school to get retrained on stimulus money for up to 2 years.
……….She said when she fills out the ‘unemployment form’ there is a box she checks which says ‘not looking for work’ (since she is going to school).
……….She said this qualifies her to get an unemployment check but not get counted as being ‘unemployed’.
right on Harry …buy on euphoria….sell on despair!
>> It looked to us as though investors were flexing their trigger fingers yesterday.
Horsemud. Only traders have trigger fingers. And firing guns will often cause stampedes.
US stocks are looking bad. But I can offer you a great opportunity in Hatian real estate. Email me. We’ll do lunch!
btw, dumping Bernanke isn’t an answer. Eliminating the Fed is.
Let the flames fly.
Hum the Beatles tune “Dear Prudence” to yourself…
Dear Harry, what did Bill write today?
Dear Harry, what did you have to say?
You’re here again, to be our friend
The kooks are out, the world may end
Dear Harry, won’t you please save the day?