Economic Correction: Too Much Danger on the Downside

Oh my…oh my…

Locusts…earthquakes…tornadoes… What next? Fire and Brimstone!

There’s a plague of locusts eating crops in Australia…

Earthquakes are becoming more common…after devastating quakes hit Haiti and then Chili.

“We could definitely feel it in Buenos Aires,” said our friends. “It was very unsettling. The heavy blinds we have up outside began smacking against the house as if there were a wind storm. But there wasn’t any wind.”

Then, a volcanic eruption in Iceland grounded air travelers between Europe and the US…

And now deadly tornadoes have ripped into the Southern US…and a “giant fireball” was spotted in the Midwest.

Is it the “end of time”?

Probably not.

At least, you’re probably better off betting against it. That is, 9 times out of 10, time continues. Every time people think that something totally new has come along, it turns out that it’s not so new after all.

Like all those goofballs who thought a “new paradigm” meant eternally rising stock market prices in ’99…or real estate prices that went up forever in 2006.

You’d think these people would have learned their lesson when the crash/Great Recession of ’07-’09 wiped out $30 trillion worth of nominal wealth. But they’d been exercising their optimism for so long that it’s in pretty good shape. Now, comes the rebound and they’re ready to flex their good-time muscles again.

The Los Angeles Times reports, for example, that people are “flipping houses in South LA again.”

Emerging markets have soared – almost recovering all that was lost. And consumers, who had retreated from spending money once they realized they didn’t have any, are once again on steroids – pumping up sales to give the impression of a healthy recovery.

And there’s a report that the small fry are finally getting back into the stock market. After staying on the sidelines for the last two years, they’re now getting up the confidence to tempt the fates. Good luck to them…

Of course, it’s perfectly normal for people to believe the de-leveraging is over. Who wants to cut back? Who wants to accept a lower standard of living? Who wants to admit that he’s been a fool? Instead, he’ll tell himself:

“It’ll all blow over…” “Things are back to normal…” “The feds have the situation under control…” “Now it’s safe to get back into stocks…”

Meanwhile, the key indicators are still weak or undecided.

New jobless claims went up unexpectedly last week. The Baltic Dry index is still telling us that there is no genuine pick-up in world trade. The feds’ new homeowner tax credit will expire soon – with property auctions and bank repossessions at record levels…and foreclosures taking their biggest jump in five years.

Robert Shiller warns that we should expect another dip in the housing market.

And the Fed itself tells us that it will keep its “extended period” of emergency low rates a while longer.

What is all this telling us?

That the Great Correction continues…and that there is far more danger on the downside than there is reward on the upside.

Barron’s Big Money Poll tells us that bonds are the most detested asset class. Frankly, we don’t like them either. But the Great Correction will eventually take a whack at stock prices…and real estate prices…and commodity prices…

…bonds could be the only major asset to escape!

The big money could be dead wrong…just as the small money is almost always wrong. Bonds might go up as the de-leveraging continues.

We’ll wait to see what happens…

Bill Bonner
for The Daily Reckoning

The Daily Reckoning