Not Depressed Yet

When we left three weeks ago, it was cold and rainy in Europe…and the world was in the midst of a terrible financial crisis.

But now we’re back…and everything has changed. The trees along the Boulevard de la Villette have leafed out. Flowers are in bloom. People are sitting at sidewalk cafes. Life seems to be returning to normal.

As expected, the financial world seems to be walking with a lighter step
. It feels the sun on its face…and guesses that the long winter is behind it.

“Encouraging signs” are everywhere, says Le Monde. In fact, all the news reports say they see them. Consumer sentiment isn’t as bad as it used to be. Stocks are rising. The banks are back in business.

“How to profit from the recovery,” says one headline.

“Stocks point to end of downturn,” says another.

The Dow rose 119 points on Friday.

Newsweek probably speaks for millions. It looks at the recession so far and thinks: is that all you got? US GDP is contracting at a 6% annual rate. Prices are falling. Unemployment is 8.5% in the whole of the United States…as high as 13% in some areas.

But “if we’re in the middle of a new Great Depression,” asks the magazine, “why are we still ordering $17 cocktails?”

It may be a depression, in other words, but it doesn’t seem like one.


We can think of two reasons. First, the world is a lot fatter than it was in the ’30s. More people have more money – even in a recession. Some of them will want to buy $17 cocktails no matter how bad things get. Today, the Okies have air-conditioning, unemployment comp and Social Security. They won’t sweat quite as much as they did 70 years ago. At least, not until the government goes broke.

The basic problem is that too many people lived beyond their means for too long.
Now, their means are shrinking and they’ll have to live within them. Still, they should be able to earn enough to be comfortable…unless all Hell breaks loose.

The other reason it doesn’t seem like a Great Depression is that we are still only in 1930. The stock market crashed in ’29. Then, there was a rebound, in which people came to believe they saw “encouraging signs”…and began to look for ways to profit. They bought stocks, hoping to recover what they had lost – only to get hit again – harder. The bottom didn’t come until July 8th, 1932, when the Dow hit 41. And the misery didn’t reach the news photos until the mid-’30s…after Hoover and Roosevelt had successfully prevented a quick recovery.

If the pattern of the ’30s holds, we won’t see the stock market bottom until 2011.
Then, it will begin to feel like a real depression. And interestingly, The Richebacher Letter’s Rob Parenteau notes that 2011 is when the second wave of toxic property loans (Alt-A and Option ARMs, to be exact) is set to reset.

And you will recall what happened when the first peak in subprime loan “resets” arrived smack dab in the middle of 2008: billions in bank write-downs… along with trillions of dollars in market losses immediately followed.

That gives us a good idea of what will happen in 2011… Millions more consumers will freeze up as their finances go over the cliff… more bank losses will drag down even more so-called ‘blue chip’ retirement portfolios… and the impact of the consumer bust we’ve been following in these pages will get “multiplied” yet again. Millions more Americans could lose everything.

So, don’t be impatient, dear reader. Everything will happen…when it’s ready.

Now, we turn to Addison reporting on the outlook for the U.S. economy:

“The Chicago Fed’s latest National Activity Index,” writes Addison in today’s issue of The 5 Min. Forecast, “which crunches dozens of numbers to come up with a near-term economic forecast with a not-bad track record, shows the economy still hovering near the lows of the 1973-75 recession.”

“‘The message, as we have seen in other key cyclic indicators,” says Rob Parenteau, “is that free-fall phase of the recession appears to be done in the United States. But that should not to be confused with ‘the recovery has begun’.'”


“‘Could this be a head fake?’ Rob asks. ‘We know that the auto production recovery under way in Q1 will peter out this summer as GM has announced a nine-week furlough to reduce inventory, and set off another round of equity investor fear and uncertainty. We also know Treasury issuance will be ramping up through the rest of the year as fiscal deficit spending increases.

“‘Who, besides the Fed, will be willing to take up all these Treasury bonds?’

“Heh. Who indeed. The Chinese? We believe they’re now buying gold.

“The president’s chief economic advisor, Larry Summers, chimed in with his own near-term outlook yesterday.


“Sleepy figures the U.S. economy will contract ‘for some time to come.’ The head of the president’s National Economic Council also expects ‘sharp declines in employment for quite some time this year.’ But apparently, that prospect bores him.

“Of course, he is the only member of the Committee to Save the World still collecting a government paycheck.”

Each weekday, Addison brings readers the 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:

How about those Chinese? Inscrutable, huh? Well, the world’s financial media seems to have ‘scruted’ them last week, when news came out that our friends in the Far East had quietly increased their gold holdings by 75%.

“China admits to building up a stockpile of gold,” says a Reuters report. And the price of gold jumped over $900 – closing at $914 on Friday – on the news.

Remember the Golden Rule? He whole holds the gold rules. The Chinese are gaining wealth and power; soon, they will claim their right to make the rules.

The big banks aren’t so dumb.

Sure, they built time bombs in their basements, lit the fuses…and then forgot about them…

Sure, the resulting explosion obliterated $50 trillion in wealth…

Sure, the world economy, according to the IMF, is in its worst recession since the Great Depression…

Sure, the banks’ shareholders have been killed as their profits and share prices collapsed…

But the bankers themselves? Don’t worry about them. The New York Times reports that pay levels in the banking industry are about as high as ever. As a percentage of revenue, pay at Goldman Sachs and Morgan Stanley, for example, are higher than ever. Average pay at Goldman has gone up from $377,000 in 2005 to $569,000 in 2009. At JP Morgan Chase, the average person got $108,000 in 2005. He’s up to $138,000 this year. Same thing at Bank of America.

How is this possible?

You can thank their trade association – the Federal Reserve. The big banks can borrow from the government for practically nothing and then lend the money to house buyers for 600 basis points of income. Or, they can lend it back to the government for about 200 basis points.

And now Newsweek reports that the big banks are gaming the bailout programs by buying toxic debt at 20 cents on the dollar and selling it to the government at 60 cents a dollar.

As we said last week: What do you expect? Put food out in the alley and you’re bound to attract rats.


Two Dear Readers came to our aid last week. The word we were looking for was not ‘sepa,’ but cepo. It means “stocks” – like the kind of stocks they put the pilgrims in when they were bad. And it’s used down on the farm in Argentina for the heavy wood pincers that grab cows by the neck so the cowboys can work on them.

As you will recall from last week, your editor spent his vacation running 1,300 head of cattle through the cepo. It was round-up time down at the ranch. Each animal had to be examined, tagged, vaccinated…and, if they were a young male, usually castrated. Your editor was given the job of closing the back door on the contraption, so the animals couldn’t back up after they’d gotten into the box. Seemed simple enough. Indeed, he got the job because Jorge judged it so easy that even a complete greenhorn couldn’t mess up. But there were times when brains were called for…and other times when brute force was needed. In both instances, your editor sometimes came up short.

The cows were not always well behaved. Sometimes, they’d refuse to enter the wooden box. Other times, they’d try to jump out…or jump onto the cow in front of them – often getting so tangled up it took four or five men to pry them apart.

And then, there were the bulls.

Bulls are huge, dangerous animals. We gave them special attention. Especially one of them.

“Toro,” we yelled when a bull came through the maze and arrived at the sluice gates. The big Braford bulls were gray with stripes on their backs, a little like the pictures of a Tasmanian wolf. Hundreds of small flies lived on the bulls’ backs too. The bulls were so big they could barely get through the narrow corridors of the stone maze. Then, when they arrived at the sluice box, where the cepo waited for them, they could barely enter; once inside, they were so long that the rear door couldn’t be closed.

If they put their weight into it, they probably could have broken through the cepo. Earlier in the day, a pair of fighting bulls had knocked the front gate off its hinges – a gate of heavy wood reinforced with iron bars.

One of the bulls was especially troublesome. None of the cowboys dared go into the corral with him – he would charge them quickly. And despite their yelling…lashes…and stones (Omar threw rocks at him from on top of the wall…) he refused to enter into the maze that led to the cepo.

“He must know we’re going to get rid of him,” said Jorge.

“Why? He looks like a magnificent animal…”

“He is. But his testicles are too small. He mounts the cows…but they don’t get pregnant.”

Finally, Jorge got on his horse and entered the corral. The bull watched but did not charge. Jorge is 56 years old. But he must have been born on a horse. He and the horse moved swiftly, together, with no visible sign of communication between them. They pushed the bull from the right…the bull moved to the left. Then, they quickly turned to cut off his retreat…moving back and forth…forcing him toward the gate of the maze.

“Hyyaah….Hyyaah….” Jorge yelled at the bull, waving at him…pushing him back…

The bull seemed to realize his situation was hopeless. He couldn’t escape Jorge on his horse…and dared not attack him. He entered the maze.

Once inside, the gate closed behind him and the cowboys on the stonewall urged him forward with sticks, stones and loud whoops…

This time, there was no need to yell ‘toro’ – everyone knew he was coming – the last of the cattle…and the toughest of them all.

By then, Jorge was back at the side of the sluice box…waiting to get to work on the bull once he was locked in place by the cepo.

“Watch out…” he said.

The big bull hesitated. Then, all of a sudden, he charged into the sluice.

“Grab him! Stop him!” the cries went up all around. Pedro put all his weight on the cepo lever; his feet were in the air, trying to hold onto the bull. Jorge joined him…so that both of them had all their weight on the bar. “Close the gates!” they yelled when they realized they couldn’t hold him.

At the other end of the maze was Edward, 15, whose job it was to open and close the gates, depending on which paddock we wanted the cow to go into. He rushed to close all the gates…trying to keep the bull from getting away. He had no time to put the chain on the downhill gate; however, so he and Cosimir stood behind it…putting their weight behind it and hoping the bull wouldn’t test it. But a second later, the huge animal pushed against the wooden gate…Cosimir beat a fast retreat… Then, Edward, realizing he was alone against an unstoppable force…stepped aside too. The bull butted open the gate and ran down through the paddock and out into the field. He was free.

“What are we going to do?” we asked Jorge.

“Let him go…he earned it.”

The Daily Reckoning