Financial Reckoning Night
The Daily Reckoning PRESENTS: Bill has found Thomas Friedman’s British counterpart: columnist Anatole Kalesky. He’s just as wrong as Friedman, but puts more thought and originality into it. Read on…
FINANCIAL RECKONING NIGHT
A financial pundit who is always wrong is much more valuable than one who is occasionally right. You need only remember to do the opposite of what he says all the time. That is why our favorite British columnist is Anatole Kaletsky.
Kaletsky is a smart writer and a good thinker, but his wrongness is profound and reliable.
For instance, in 2004, after years of being bullish, he turned to a “much more cautious stance.”
That should have been signal enough – back up the truck, buy U.K. stocks. And, indeed, in the following two years, stocks rose nearly 30%.
But now, the man suggests the storm to have passed. The “dreaded ‘day of reckoning’ for the British economy may be over already, before it even began,” he writes.
We did not merely read that sentence; we stared at it like a child at a jack-in-the-box, willing something to pop out that would make sense. We presume Kaletsky drives a car as safely as anyone else. We suppose he pays his bills and puts his pants on without falling over. But when it comes to economics, he so misunderstands the way the world works, he cannot take a step without falling on his face.
The “day of reckoning” suffered by Britain must have been an odd duck. It neither quacked nor waddled. Nor did it have any feathers. And according to Kaletsky, it died before it was even hatched.
We have yet to read the weather report that tells us of a storm that ended before it began…or the history book that describes wars that never took place.
We imagine a very old man, awaking from a dream:
“Well, hey, this is not bad. I can still watch television. I still have my family. Heaven is not so bad.”
“You haven’t died yet, honey,” his wife reminds him.
Why no “day of reckoning” in Britain…or America? The most likely explanation is that it hasn’t come yet.
American readers can readily draw a picture of Mr. Kaletsky: He is Thomas Friedman with a brain. Just as wrong, but more thoughtful and original.
Exploring Mr. Kaletsky’s world is like entering some magnificent science fiction world. There are the gleaming towers of the future. There are the handsome industries and innovative enterprises. And there are the wizards and wonks – the captains and commanders – who make it all work so well. It is a world with challenges, to be sure, but no challenges so great they can’t be met with courage, intelligence, and a positive attitude. Solving problems, in the Kaletskian world, leads to constant forward motion – progress.
In this strange world, days of reckoning can end before they begin, because there is never really anything to reckon with.
Mind you, it is not a bad place. Indeed, many might prefer it to our own world. And you can see why. In Kaletsky’s world, the pieces fit together. There is action and reaction. Thought, word and deed all work together without sin, without accident, with hardly ever a surprise or a snafu. And, the sun shines all day long, everyday.
Comparing the real world to this wannabe world is like comparing the Amazon jungle to the Baltimore City Zoo. In the zoo, there are wild animals, but apart from taking an arm off an occasional visitor, the zoo critters stay where they’re supposed to stay, and do what they’re supposed to do. Out in the real world, on the other hand, you never know what the animals will do.
Currently, in the NYSE jungle, investors reckon a stock is worth about 17 times what the company behind it earns in an average year. There is no cosmic law that decrees that a stock is worth that much…or even half that much. Nor, is there any God in Heaven that prevents them from changing their minds about it.
Which is just what they do. After a long period of reckoning stock prices up, they begin to feel like they’ve overdone it. They get nervous. Something happens. At 17 times earnings, it takes 17 years before the company makes enough to repay the investment. Investors begin to figure that 17 years is too long to wait and they reckon it’s time to sell.
Then, the long march begins from positive to negative, from bull peak to bear trough – taking about 15 to 20 years, and usually, a gentle, downhill stroll. But, sometimes, it is sudden, precipitous…heart stopping.
And lenders, too, have their moods…of the same sort. Twenty-five years ago, who would lend long term at less than 15%? People judged it too risky. They knew their government was in the hands of mountebanks, and their currency managed by swindlers. If they didn’t get a high return on their lent money, they figured, they might never get it back at all.
Now, lenders will put out perfectly good dollars for 10 years or more and only ask 5% interest. Consumer price inflation, including energy and food, was most recently clocked going almost exactly the same speed – 4.8% annually to be exact. This puts the real return on such lending at nearly zero…before taxes. If the current rate of inflation continues, the real rate of return after tax will be negative. If the rate of inflation rises, the real rate of return even before taxes will be negative.
Reckoning in the bright sun of daylight can be done without alcohol or sleeping pills. But at night, a man’s palms sweat, his breathing turns shallow, he tosses and turns, and wonders if he’s reckoned aright. He’s bet his entire net worth on a couple of houses in the neighborhood; he’s got big mortgages, which keep going up. And now, rumors are beginning to circulate.
The guy down the street put his house on the market a month ago, yet the sign is still up. Now, the papers say the bubble has burst. But what do they know? You can’t go wrong with real estate. Can you? Even if it goes down for a year or two, it always goes back up, right? Oh stop worrying…go back to sleep.
What is it that brings on these mood swings? Is it something in the water? Something in the air? Or is it something deeper…some momentary recognition of the way the world really works…some instinct that hints that for every yin there really is a yang…a boom for every bust…a fit for every start?
Why did the man buy houses he didn’t need? He thought they would go up. Why did he think they would go up? Because that is what they have been doing. Why are they still going up? Because everyone is buying them!
They believed a thing, and made it so. And then, they believed it so much, they made it outrageously so. Investors and speculators drove up prices so much that the average house now sells for more than the average buyer can afford. Rents can’t keep up with expenses. Now, the house has to go up in price just to break even.
Looking around the neighborhood, a man sees nothing has changed: same houses, same cars, same families. But cometh the dark night, he sees visions of Armageddon. What if the houses won’t sell? What if no one puts in a bid? What will his wife say, when she realizes she has married an idiot? Will he have to work a few more years? Will they have to sell the beach house, too?
The poor man is not alone. There are thousands…millions of people all reading the same reports, listening to the same news. They are all reckoning with the same things. If one man decides to sell his properties, so might a million others. And so might the whole mood of the investing public switch over from optimism and sweet anticipation to sour regret and recrimination.
Even Mr. Ben Bernanke has his reckoning to do. He’s like a witchdoctor who hears a volcano rumbling and doesn’t know which virgin to sacrifice – the one that appeases the god of inflation…or the one that placates the deflation deities.
“Don’t take any chances,” he says to himself. “Throw them all in.”
But the gods are not so easily propitiated. Toss in the virgin of higher rates, and deflation is jealous. Push in the damsel of deflation, and the other gets in a huff.
Yes, the poor Fed chief must have his dark and lonely tea times, for the volcano could also erupt no matter what he does, and blow the whole economy to smithereens.
Ah…wouldn’t there be a night of reckoning then?
But Mr. Kaletsky can’t believe it.
Instead he believes two absurd things at once.
The first, that you can have a day of reckoning without ever reckoning with anything. And the second, that if it comes to it, London will save Britain from any reckoning.
As to the first – here’s a simple way to tell if you have had a day of reckoning or not. If the economy is as lopsided and unbalanced at the end of the day as at the beginning, you haven’t.
As to the second – privatization, globalization and market liberalization protect the United Kingdom from a downturn because London has become such an important financial center. We don’t doubt that financial services may remain an important industry in Britain, as they are for New York.
But every industry has its ups and downs. Booms beget busts, and riches beget rags. That’s what days of reckoning are for. The one industry that has most profited from the boom in credit – financial services – will be the one that most feels the bust in credit. When U.S. consumers stop buying what they don’t need with money they don’t have, the whole world economy is going to have excess capacity it doesn’t want.
That is when globalised, liberalised, privatised commerce slows down…and the duck waddles over and bites the financial industry on its fat derriere.
In the real world, every day is a day of reckoning…and any night could be a night of terror.
The Daily Reckoning
August 18, 2006
Editor’s Note: Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of The Wall Street Journal best seller Financial Reckoning Day: Surviving the Soft Depression of the 21st Century (John Wiley & Sons).
In Bonner and Wiggin’s follow-up book, Empire of Debt: The Rise of an Epic Financial Crisis, they wield their sardonic brand of humor to expose the nation for what it really is – an empire built on delusions. Daily Reckoning readers can buy their copy of Empire of Debt at a discount – just click on the link below:
“United We Owe,” begins a Newsweek report on the subject, noting that credit card debt has gone up three fold in the last 20 years:
“The Center for American Progress estimates the cost of medical, food and household needs has risen more than 11 percent over the past five years – with seven in 10 households using credit as a safety net to cover basic living expenses…Meanwhile, wages have simply not kept up, remaining virtually flat since early 2001.
“‘The data shows that people are borrowing more money not because of over-consumption but because they’re caught in a bind,’ says Christian E. Weller, a senior economist at the Center for American Progress and author of a May report ‘Drowning in Debt.’ He adds, ‘In that bind, the only escape valve for middle-class families is to borrow more money.”
And now, the papers are beginning to connect the dots. Without a real economy that can support higher property values, prices will go down.
“Consumer group warns of adjustable rate mortgages,” reads a headline from the New York Post.
Where have they been, we wonder? Why didn’t they say something when people were lining up for them? “Why didn’t they say so when people were putting themselves in ARMs way?” asks colleague, Lila Rajiva.
Meanwhile, the price of gold fell to $625 yesterday. Oil dropped below $71. And bond yields seem to be declining. Even mortgage rates have actually been going down for the last four weeks. On the other hand, stocks bounced up – celebrating lower oil prices and the Fed’s decision not to continue increasing rates.
Faced by two enemies – inflation on the one hand…and deflation on the other – Ben Bernanke hopes for a Napoleonic victory against both. Holding to the center, the Fed looks to crush inflation decisively, and then wheel its army of economic experts and camp followers around to face down the threat of a slump…a menace more and more immediate.
Now, the danger is glaring straight into our face; property prices are stable or even falling, while mortgage payments are rising.
“Southland Homes Sales at 9-year Low,” reported the Los Angeles Times earlier this week.
And from Dallas comes this news item:
“The annualized rate of housing starts fell 3 percent to 1.795 million in July. Starts have plummeted 21 percent since peaking in January and are at their lowest level since November 2004. Building permits plunged 7 percent in July to their lowest level in four years.
“‘Builders are responding as one would expect,’ Mr. Fisher [Fed governor from Dallas] said. ‘They are cutting staff, renegotiating prices and getting concessions from subcontractors, and either walking away from or renegotiating planned land purchases and other contracts. This is disinflationary activity that impacts economic growth.’
“A few days ago, Moody’s Investors Service chief economist John Lonski made a more memorable remark: ‘The harder the Fed fights core CPI inflation, the greater the risk of a bout of home price deflation on a scale perhaps not seen since the 1930s.’
“As the housing market worsens, there will be more downward pressure on prices to rent and buy. Deflation could swiftly replace inflation as the main focus at FOMC meetings. And that would be an unfortunate development, given monetary policy’s limited ability to fight deflation.”
Where does deflation come from?
Say there were 100 million houses in America, each one worth $200,000. Now, let’s not even imagine that they go down in price. Let’s just say they don’t go up 10% this year. That’s $2 trillion in “wealth” that people expected that never came in. And now, there are all these large houses, SUVs, and expensive lifestyles – all acquired with real estate money – that have to be supported. And every month, there are gasoline bills, electricity, taxes, and insurance that have to be paid out of actual income.
At the same time, all of those ARMs are being adjusted upwards…on the condos they were hoping to flip…on that extra house they can’t really afford, despite leveraging it with yards of carpeting and granite countertops. And now, they can’t kick the habit they’ve got hooked on all these years of spending more than they earn, and letting their house pick up the slack – by borrowing on their mortgages.
USA Today adds this:
“The loss of manufacturing jobs helped drive down home prices in 26 metro areas between April and June compared with the same period last year, the National Association of Realtors said Tuesday.
“That’s 10 more areas than in the first quarter, and it spotlights how joblessness in industrial states such as Illinois, Michigan, Ohio and Indiana is shivering the housing markets.
“The hardest-hit this year: Danville, Ill., where prices at which existing homes were sold fell 11% in the second quarter after a 12% drop in the first quarter.
“General Motors (GM), General Electric (GE) and Hyster (NC), a maker of forklifts, were among the companies to close plants in Danville, leaving behind hundreds of unemployed residents. The median price for a home has fallen to $65,200 – the cheapest in the country.
“The exodus of auto, textile and other factory jobs has a direct effect on home prices. People leave town to look for work, boosting the supply of homes for sale. Others sell their homes because they can’t keep up with the mortgage. At the same time, foreclosure rates in these cities are among the highest in the country, and banks are quick to cut prices to get the homes off their books.
“‘There were a lot of divorces, a lot of single mothers – all they could do is refinance their house or put it on the market and let it go cheap,’ says Jerry Urich of Century 21 Home Team Realty in Danville.”
But single mothers aren’t the problem, we think. We’ll stick to our analysis, until disproved or laughed off stage:
The U.S. consumer is being squeezed. With his bedroom ATM machine on the blink, he will have to cut back spending. This will put the entire economy into a slump, marked by falling prices for residential real estate. Trillions of dollars worth of supposed wealth – in the housing market – will disappear. This is the deflationary threat that the Fed now turns to face.
That is what rising bond prices are telling us now. It is why the Fed’s next move is likely to be a cut in rates.
More debate from the blogosphere…
Justice Litle comments on Dan Denning’s latest post:
“I would disagree with the notion that war always destroys wealth. Not because I’m pro-war by any means, but because high-impact events can lead to feedback loops one did not expect, in both directions.”
Read more at the Desidooru Saloon.
And more miscellaneous thoughts from the land of wine and cheese…
*** “The only source of ‘expansion’ in the U.S. economy now is ‘credit expansion’,” continues the conversation in Cannes.
Dr. Richebächer: “Mindfull of past experiences, the Fed’s decision to halt its rate hikes… have triggered strong rallies in the stock market. Investors, apparently, rush to jump on aboard the train before it leaves the station. It reminds me of a sarcastic remark by Keynes: ‘Men, like dogs, are only too easily conditioned and always expect, that, when the bell rings, they will have the same experience as last time.’
“In the past, indeed, stock prices regularly took off when a central bank eased. What these people completely fail to see is that today’s conditions in the U.S. economy and its asset markets [stock, bond and housing] have nothing to in common with those days when monetary easing had these magnificent effects.
“Monetary easing in the past regularly followed prior tightening, which also had created pent-up demand in the economy. Rate cuts were equivalent to removing existing tightness. As a result, the economy and the markets took off.
“But those conditions that used to provoke strong economic and asset rallies are not at all present today. There never was any monetary tightness. Instead, there has for years been a sharply accelerating credit expansion that has grotesquely run out of relation to economic activity. We see an economy and financial system that have pathologically become addicted to a permanent credit and debt deluge.”
*** It is a dark and windy day here in France. The weather always turns on Assumption Day…or so everyone says. This year was no exception. It changed from cool and cloudy to cold and cloudy. Summer seemed to come to an end at the beginning of August. Since then, it has seemed more like October than late summer.
The month of August was an invention of Octavian, otherwise known as Emperor Augustus Caesar. The Caesars seem to have been vain. His adoptive father, Julius, is the only other person to have a whole month named after him. Augustus, wanting to eclipse him in imperial glory even stole a day from February, so that his month would be as long as July.
Augustus was a great one for P.R. and propaganda of that sort. His profile adorns more Roman coins than anyone else’s and he even commissioned poets and historians to flatter him and Rome, which he transformed from a city of brick into a city of marble.
“Roman, remember,” wrote Virgil, as if to Augustus himself, “by your strength to rule Earth’s people – for your arts are to be these: To pacify, to impose the rule of law, to spare the conquered, battle down the proud.”
Augustus was a murderous dictator, but fortunately, Virgil knew how to tell a good story.
*** Colleague Lila Rajiva writes that telling a good story has been an imperial priority ever since. Even in the United States, which prides itself on a free press, the government hires propagandists to plant fake news stories in the media. For instance, it paid a P.R. firm to tell the world that Saddam Hussein had WMD hidden in Iraq. And then it used the phony stories to justify its war:
“[P.R. firm] Rendon [was] hired by the CIA in 1990 to help ‘create the conditions for the removal of Hussein from power,’ [and] went on to earn a hundred million dollars in government contracts in just the five years following. It got together anti-Saddam militants, gave them a ‘brand’ – the Iraqi National Congress, and advised them on P.R. strategy. It also hand-picked Ahmad Chalabi, the ex-bank con turned peddler of pro-war propaganda, and primed a flyspecked assortment of defectors in the fine art of bluffing polygraphs. All to further neo-conservative plans for creative destruction in the Middle East.”
*** It is too bad Americans don’t know more history. They might have a better idea where their imperial role is leading them. At least, they might pick up a few tips on the way. Like Sir George Murray.
While fighting the French in Egypt in 1801, Murray and his men were in dire need of water. But Murray, having read the classics, knew that Julius Caesar had once had the same problem on practically the same spot (just outside of Alexandria). He checked the copy of Caesar’s writings he always carried around and found that the Romans had stumbled on water at a certain depth underground. He dug in the region and soon had plenty.
Of course, Hitler’s generals studied Napoleon’s Russian campaign carefully too, but they didn’t seem to have learned anything from it. At least one of them had a copy of Caulincourt’s history of the campaign in his greatcoat, when the Russians captured him.
*** History would tell us that in the pantheon of imperial spectacles, the War on Terror is only a crude, silly one. Terror is, after all, only a tactic…the last resort of a weak enemy unable to mount a real threat. As near as we can tell, the War on Terror is actually a kind of P.R. move meant to boost support for military spending, for dismantling civil liberties at home, and for heavily armed meddling abroad.
P.R. is the lie with which the public spectacle starts…then we get the farce…and only finally, the disaster that ends them. Yesterday’s news reminds us which stage we are still in:
“Two fighter jets were scrambled Wednesday to escort a London-to-Washington flight to an emergency landing in Boston after a passenger became so agitated she needed to be restrained, authorities said.
“The federal official for Boston’s Logan International Airport said there was no indication of terrorism and denied reports that the passenger aboard United Flight 923 had a screw driver and a note referring to al-Qaeda.
“Gov. Mitt Romney said the 59-year-old woman was from Vermont and became so claustrophobic and upset that she needed to be restrained…”
Devious, those terrorists.