World Economy: Negative Growth - Or Positive Collapse?

“Negative growth,” says today’s paper.

Yes, dear reader. Stocks are advancing to the rear…and economies are growing…smaller. How we love these oxymorons! If only we could age negatively…and eat all we wanted and gain minus pounds!

The commentators have it all wrong. Look on the bright side. The world economy is not in a period of negative growth. It’s in a period of positive collapse! That’s why the Great Depression was so great, after all. What’s positive about this depression is that it is clearing away a generation’s worth of mistakes, misallocations of resources and misplaced confidence.

Stocks are down more than 20% this year. The U.S. economy is retreating at more than 6% per year. Britain is walking backwards at a 2% pace. And Japan? Wow…when it comes to negative growth, the Japanese are experts. Their economy is growing negatively at more than 12% per year. If this keeps up, by the time the next bull market comes along, there won’t be any Japanese economy left.

The Asian Development Bank says the losses so far have cost the world $50 trillion.

The Financial Times reports:

“The ADB’s estimates take into account falling stock market valuations and losses in the value of bonds supported by mortgages and other assets, though not financial derivatives. About a fifth of the losses in dollar terms arise from the depreciation of many currencies against the dollar.”

The last estimate of the total world’s wealth we saw was $100 trillion. If these estimates are correct, the planet has lost about half its value. But who bids for planet earth?

Just about everything that existed – the real wealth of the world – still exists. What disappeared were the fantasy financial evaluations. A truck is a truck is a truck. It doesn’t become less of a truck just because the world has entered a period of financial contraction. It is just as serviceable now as it was two years ago. And the poor guy who had a trucking company keeps on trucking…

But now he has a whole lot less trucking to do than he did before. The stores aren’t moving as much merchandise…so no need to deliver so much. And so the value of his truck – in terms of how much revenue it can produce – has gone down. So too has the value of his trucking company. Maybe he should never have bought that truck in the first place…

The Dow is down near 6,500. Only 1,500 points to go. At least, that was our guess a few years ago. We figured that the Dow would have to go to 5,000 in order to get down to real bottom prices.

Will the bear market finally be over then? Nope. That’s just where you can begin looking for a bottom. Remember, markets tend to overshoot.

So far, the Dow has wiped out 43 years of gains. Adjusted for inflation, it was at this level back when the Beach Boys and the Beatles were just starting out. Actually, we don’t remember when the Beach Boys and the Beatles began…but it must have been in the md-’60s.

Back in ’66, the Dow hit a high for the cycle. It had been going up since the bottom in 1949. After the peak in ’66, it retreated…and then staged another attack on the summit two years later. But inflation was getting pumped up too…and in real terms, the ’68 high failed to better the peak of ’66.

From ’66 to ’82 it was down, down, down. Then, Business Week threw in the towel: “The Death of Equities” said the cover story. Then, it was up, up, up…until…well, you remember the rest.

We only bring this up to warn readers: these major cycles take time. So far, the Dow has only gotten down to the ’66 TOP. Now, it has to get to the ’82 BOTTOM…adjusted for inflation. Where would that be?

Well….as we recall, the Dow was barely at 1,000 when the bull market began. And if adjust that to consumer price inflation, we come to a 2,000 – 3,000.

Will it get there? Who knows?

The Dow gained 32 points on Friday…a slight bounce up at the end of a dismal week. Oil rose to $45. And gold, which seems to have finished its correction, ended the week at $942.

*** “Have you bought your gold and silver yet?” writes our intrepid correspondent Byron King.

“You ought to have 5-10% of your portfolio in gold and silver, and I mean the real, physical stuff.

“Oh, you haven’t gotten around to buying any gold or silver yet? Let me quote Rudyard Kipling, from his poem ‘Gunga Din.’ You need to ‘put some juldee in it.’ Quick! Go and get some precious metals! Don’t make me say I told you so, because I will.

“Indeed, I told you so. Or we told you so. Buy gold and silver. If you follow almost any of the publications from Agora Financial, you ought to know that in one way or another, for about 10 years, Agora has been advising people (this means you) to buy precious metals. Back then, in the good old days of Y2K, gold was selling for well under $300 per ounce. Silver was going at $2-3 per ounce. Lately, gold has been selling in the $900 range, with an excursion over $1,000 about two weeks ago. Silver is trading in the $12-14 range.

“Starting in 1999, Bill Bonner told you to buy gold. Bill even helpfully labeled it “The trade of the decade.” Over the years, Agora Financial published countless essays about gold from the Mogambo Guru, who was never subtle about it. ‘Buy freaking gold,’ said Mogambo. “Or if you don’t buy gold, buy silver,” he said. You could look it up.

“Many other Agora editors and contributors told you to buy gold and silver. Addison Wiggin, Eric Fry and Dan Denning told you to buy it. Agora Financial published guest articles from the likes of Gary North, Doug Casey, Marc Faber and many others about buying precious metals. I’ve been writing about gold in Agora Financial publications since 2003, when I was a mere “unpaid correspondent in Pittsburgh” composing occasional notes for The Daily Reckoning. ‘When all else fails (and it will),’ I said, ‘own gold.’”

*** The company that Thomas Edison started cut its dividend for the first time in 71 years. Some analysts think GE, too, could default –thanks to the company’s move into the financial sector.

*** Hotels are going into foreclosure too, says USA Today.

*** Dow Chemical is trading at a 24-year low.

*** And the “Great Red Hope” – the idea that China will pull the entire world economy out of a depression – is “pure fantasy,” writes William Pesek.

China relies on exports. And the export business sucks. It will be lucky to get through this downturn without a revolution.

*** An Economist headline: “Are Investors Still too Optimistic?”

Our guess: yes. Most of the action on the stock markets is professional buying and selling. The amateurs seem to be largely sitting on the sidelines, waiting for a rebound to get back in.

They still haven’t gotten the message. This isn’t a recession. There won’t be a quick recovery. And the bailout/stimulus plans won’t work.

This is depression. It will take years to restructure the economy. And bailout/stimulus plans just slow down the process.

Looking back at the Dow…if you take the market peak of January 2000 as the long-term cyclical top…you might expect an eventual bottom 10-20 years later…and then a new bull market that would return prices to their peak highs 10-20 after that. Between the high of ’29 and the next major high in ’66 was 37 years. Between the ’66 high and the ’00 high was 34 years.

So sit back. Relax. Most likely, we’ll see stock prices much lower…for much longer. Look for a return to ’00 highs in 2035.

Learn to make a correction your friend. Remember, this is a positive collapse, not negative growth. It is correcting the stupid ‘growth’ of the bubble years. What really grew during that period was consumer spending in the United States and Britain. And it grew far beyond the ability of Anglo-Americans to pay for it. Because they were spending too much, the whole world economy bent to sell them too much. The Chinese built too many factories. The shippers built too many vessels. The truckers bought too many trucks. The homebuilders put up too many hovels. The retailers expanded too much…the malls were overbuilt…etc. etc. etc.

Now, in this period of positive collapse, all that surplus capacity is being marked down to what it is really worth…liquidated…and restructured.

Give it time, dear reader. Let Mr. Market do his work.

Until tomorrow,

Bill Bonner
The Daily Reckoning