04/23/09 Buenos Aires, Argentina Is the rally still on? We’re not sure. Yesterday, the Dow fell 83 points…after a weak bounce on Tuesday. We expected the rally to last until June and to take the Dow back to the 10,000 range. But anything could happen.
And if you depend on 91-day T-bills for your spending money, you’re in a world of hurt. The yield is only 0.13%.
But maybe things are better on the other side of the planet. How’s China doing? Analysts are “cautiously optimistic,” says a New York Times report.
Retail spending in China is said to be up 15%.
Meanwhile, a report tells us that China is stepping up its purchases of U.S. Treasury debt.
Hmmm… Why would China be doing that? The official response to that question is that U.S. Treasury debt is not only the most abundant credit in the world; it is also the most reliable.
As to the first point, no one would quibble. As to the second, only a fool wouldn’t.
The price tag for the crisis-related bailouts, guarantees and boondoggles is nearly $13 billion. The United States is setting records, of course. The biggest budgets ever. The biggest budget deficits ever. The biggest bailouts.
The U.S. budget deficit is about 13%. It was a budget deficit of not even half that amount that pushed Argentina over the brink in 2001. What are we supposed to believe…that there is no brink waiting for the United States?
Even more curious…what do the Chinese believe?
“It’s all very strange,” said a new friend who came into our Buenos Aires office today. “Americans are clearly cutting back. Their credit cards are maxed out. Their houses are going down in price…”
On this last point, we provide a quick update. Bloomberg reports that the average house price actually went up by 0.7% from January to February. But before you begin to think that the housing slump is over, another Bloomberg report tells us that house prices resumed their slide in February – down 6.5%.
Charles Hugh Smith argues that not only are house prices still going down – they’ll never recover. He gives five reasons, which we’ve paraphrased below:
1. Bubbles never re-inflate; instead, they go to a new sector
2. Even if nominal prices go up, they will be undercut by inflation
3. More likely, deflation will continue to drive down prices for a long time (Consumer price inflation just came in at a negative number for the first time since the ’50s.)
4. The low-interest rate, low-inflation world that permitted high property prices is finished
5. There is no demographic pressure on housing prices; the current stock is sufficient for years.
Low housing prices force Americans to cut their spending.
“But if Americans don’t buy, China will no longer have so much money to recycle into U.S. Treasury bonds. So who will buy all those Treasury bonds?”
Bond issuance is running as high and as fast as a 100-year flood. In Britain, recently, a bond auction found itself with more bonds than buyers. Could the same thing happen for the United States?
“Well,” our friend continued, “I have a darker scenario in mind. What if China had a different game plan? What if she intends to continue buying U.S. bonds as long as she can…leaving the United States completely dependent on Chinese lending? And what if she then suddenly dumps all her bonds and U.S. dollar assets? She would lose a lot of money. But the U.S. economy would suffer far more. The dollar would collapse…so would the US economy…completely. “
Now, we turn to Addison, who points out some telling trends now underway:
“The credit crisis has stymied a unique feature of American society,” writes Addison in today’s issue of The 5 Min. Forecast.
“According to the Census bureau, 35.2 million people changed their residence from March 2008 to March 2009 – the lowest number since 1962. And back then, there were 120 million fewer Americans.”
“The New York Times does a rather unremarkable job analyzing the trend underway, but they do point to a couple of interesting changes in American society since the 1960s: Home ownership rates have risen and owners are typically less likely to move than renters. The median age of the country has edged up…old people move less often than the young do.
But probably the most telling trend underway: two-income families have become more common and increasingly necessary to maintain a middleclass lifestyle. “Finding employment for both spouses in a new location can be challenging,” says the NY Times.
“And in this environment, it’s getting more challenging all the time. The line of American’s seeking jobless benefits grew even longer last week, the Labor Department says today. Their gauge of continuing claims – that’s people seeking unemployment benefits for more than a week – rose to a new record 6.13 million. New claims inched up 27,000 to 640,000 last week – not a record, but close.
“While these numbers look awful – and they are – they’ll be a non-event in trading today… this latest report was right in line with Wall Street expectations.”
Each weekday, Addison brings readers The 5 Min Forecast, an executive series e-letter that provides a quick and dirty analysis of daily economic and financial developments – in five minutes or less.
And back to Bill, with more thoughts:
We’re continuing our report on our trip to the ranch. This has no particular financial implication; we just want to tell you what happened.
Compuel is what we’d call the ‘back 40’ in America. Except it’s about 10,000 acres…and it’s a 4-hour trip on horseback. Still, the cattle have to be rounded up from Compuel annually. Then, they are driven down to the main part of the ranch …where they are vaccinated against brucellosis and other diseases and parasites…culled…castrated…and generally treated roughly. It takes about 7 hours to drive the herd up over the pass and down to the corrals near the ranch house.
The following day, we got up before dawn…by the time we got to the corral, the sky in the East was pink. It was still cold, but warming up fast.
Jorge gave the orders.
“Javier…you and Cosimir separate out the ‘terneros’ (young animals)… Pedro and Gustavo, get on the sluices… Senior Bonner, would you like to operate the gate?”
Javier is a young man who looks a little like Robert Mitchum, if you can imagine Robert Mitchum as an Incan with a huge wad of coca leaves in his jaw. Javier wore leather chaps and a flat, broad-brimmed Peruvian cowboy hat. He and Cosimir worked fast. They yelled. They whipped. A huge cloud of dust swirled up as they got the whole herd moving in a circle…and then forced the young animals into a second pen…generally by waving their hats at them. Occasionally, the cattle would panic and the two would run for cover. And occasionally, a cow…or a bull…would get annoyed and charge. Javier, particularly, was amazingly fast on his feet. He jumped onto the stone walls of the corral a couple of times.
The last calves were lassoed…and dragged them away from their mothers, into the holding pen. Then, they were pushed through a maze of stone walls, where the passage became narrower and narrower, until they finally came to the wooden sluice. It is tight turnstile with a gate on one end and a “sepa” on the other (we couldn’t find the word in the dictionary). This sepa is rather ingenious. It is two large pieces of solid wood that open up into a V-shaped passage and then come together – suddenly – like the jaws of a clamp. The cows come through the sluice one at a time. As they come through, the rear gate closes behind them. Then, the sepa at the other end begins to close. As it closes, the cow makes a dash for freedom. But Pedro was working the sepa lever and he rarely missed. As the cow started through the sepa opening, he leaned down hard on the lever and grabbed it by the neck.
Then, the hatches on each side of the sluice opened…and the needles came toward the struggling beast.
“Mr. Bonner…you’re going to have to operate that gate a little faster,” said Jorge. “We only want one cow at a time.”
More tomorrow…we’re out of time for today.
Until then,
Bill Bonner
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Don’t you mean that the price tag for the crisis is already $13 TRILLION?
I think the “sepa” you’re talking about is actually spelled “cepa” (in the architectural sense).
Our great friends with red flags and black boots couldn’t possibly be up to such mischief! Didn’t you see how they smiled and waved during the opening ceremonies o’er the summer? And their amazing job at autocratic control with such a population… A-M-A-Z-I-N-G!!!
They’re buying our ‘Bills because they love us and our beautiful cheeseburgers. And biscuits and gravy! It’s obvious, you xenophobes!
Hahahahahahahahaha. My. I’m rollin’. Hehehehehe. Whew.
Dear Mr. Bonner,
In Texas English “sepa” means headgate. I am part of an old ranching family and as the old man in the family my job is to stay out of the corral and to help educate the younger members of the clan in the ways of investing and finance. The ranch is passed down based on who among the younger generations loves the land, takes care of their family and has demonstrated that they are successful in business. I frequently use your writing to help them understand the reality of the world that we live in, because I find your writings to be both educational and entertaining.
I made my first fortune in technology and my second fortune in the equity and commodities markets. Also I have a digital data base of economic, market and financial data going back several hundred years. If history is any guide to the future, then the current data indicates that the US and world will have about 15 years (plus or minus 5 years) in which the economy will significantly under perform the mean performance by at least two standard deviations, i.e. we can expect a depression.
Keep up the good work.
Respectfully Yours,
Don Diego de la San Saba
Bill I am enjoying your daily updates on ranch life in the Andes. What you called a sepa, in Montana we call a headgate and the remainder of the contraption is a squeeze chute. Yep, it can get pretty western when you get two cows in the chute at one time.
After pointing out how illogical China’s maneuvering seams without some ulterior motive to explain it – my first reaction is What did we promise them? To let them invade Taiwan unmolested? That would do it. Do we have the Japanese on board?
Bill, of course the market insight is our bread and butter, but please keep including the gaucho stories.
Maybe instead of sepa it’s a cepo (look that one up in a dictionary), but I wouldn’t know since I’m a city dweller. Cosimir also sounds like a strange name; could be Casimir (very rare), Casimiro, or Cosme instead.
I am glad that I am not the only DR reader that knows what a headgate and squeeze shoot are – reminds me what a diverse group of readers the guys at Agora have put together. I can’t speak for anyone else, but when I read “Empire of Debt” for the first time, it was literally a life changing experience for me. My wife and I changed our lifestyle, investment focus, and political leanings (i.e. I am no longer a sheep being led around by the “powers that be” in the Republican party).
To Bill, Addison, and the rest of the team at Agora, keep up the great work!
Yawn…so what? Sure we had to spend a ton of money to prevent a total collapse from the Bush policies. Obama did what he had to do…the lesser of two evils by far. He spent a boat load of money to put a floor under the market and the financial system. Now we will be flat for 2 years then have reasonable, steady, real growth. Why is this so hard for your right wingers to get? The Bush policies almost collapsed the world and Obama had to spend massive amounts of money to prevent a collapse. The Chinese and others will absorb the US debt, the alternatives stink on ice. Gold is going nowhere, it is as common as air.
Chill out and help a smart, fair President work to right the mess that you right wingers created.
“The price tag for the crisis-related bailouts, guarantees and boondoggles is nearly $13 billion”
I know its hard to get use to writing trillion.
It is not in China’s interest to destroy the US economy. But neither is it in their interest to save the US economy at the expense of their own. How they walk this fine line will be interesting to watch in the years ahead.
I’ve been blogging about China’s accumulation of US debt since last October. China, indeed any non-friendly country that’s purchasing US Treasuries isn’t really buying our debt. They’re purchasing future foreign policy concessions. In China’s case, we will recognize their sovereign claims to Taiwan, Tibet, and various south sea islands. Perhaps we’ll help make sure that the Dalai Lama is brought to “justice” in China.
And I don’t think that the US has to default to precipitate these foreign policy concessions. We’ll need debt forgiveness long before we default. Yeah, third world China is going to be playing IMF/World Bank to first world America.
Thank you John Maynard Keynes!
PS: What’s a carrier battle group worth? If you’re not shipping stuff over seas, does it make sense to sell it to someone who is?