Trends in the Post-Bubble Era

Let us begin with a chart, which was sent to us by Dr. Eberhardt Unger:

Savings are going up. Spending is going down. That is the fundamental economic trend of the post-Bubble Epoque era.

“Without a genuine return of the tendency of households to consume,” says Dr. Unger, taking the words out of our mouth, “there can’t be, in the United States, a durable economic recovery. Manufacturing is still in sharp decline. It’s only the presence of a large volume of liquidity that permits Wall Street to fantasize about a new phase of economic growth.”

Forget the rally; it’s fake. And forget the ‘green shoots.’ They’ll soon shrivel up in the hot summer sun. There ain’t going to be any real recovery in the immediate future until the mistakes of the recent past are corrected. And that, as we keep saying, takes time.

Yesterday, the Dow rose 58 points. Oil and bonds both stayed put. Gold lost a dollar. And the dollar itself is back to $1.38 per euro.

Nothing very exciting.

But what’s this? It’s the end of the housing decline! For the first time in two years, property prices in Southern California went up last month. Is that good news, or what?

But wait…they only went up because more expensive houses were sold. Apparently, the mortgage market has loosened up enough to permit larger houses to find buyers. Good news for people who want to buy or sell a house for more than $500,000. But we’re not sure it is any indication of a strengthening housing sector. Half the houses sold had been foreclosed.

It’s hard to imagine people bidding up house prices when their savings rates are going up and their spending rates are doing down. The three just don’t go together. Like a top hat, morning coat, and a pair of sneakers. Like Moe, Larry, and Omar…or the father, the sun and the holy tomato. Nah…not likely. Prices should stabilize…but they’re not likely to rise.

And here’s a new forecast from Deutsche Bank that says house prices in the New York area will drop by 40%. All real estate is local, of course. There are bound to be some areas where property prices fall more. And some areas where price declines have already overshot the equilibrium points. These latter areas may experience gains in the bounce-back…but don’t expect any broad recovery in the housing market any time soon.

Meanwhile, investors take comfort from the employment figures too.

“Fall in jobless claims raises hopes,” says an item in the Financial Times.

Continuing claims dropped off in the first week in June, the report explained. But each week still brings more claims. What, exactly, is happening, we don’t know. But we doubt that there is any significant increase in employment in the works. The U.S. economy is still in a downward trend…and this summer, we predict, it will get worse.

Take another look at the chart. If this is really the deflationary/depressionary trend we think it is – lower consumer spending with higher consumer saving – there is no way that businesses are going to increase their production or their payrolls.

Producer prices are falling faster than they have for five decades – at a 5% rate. Capacity utilization is at an all-time low. Factory output is falling faster than at any time since the shut-down following WWII. The price of labor, the major cost for most businesses, is falling. Ergo, businesses have no pricing power…and no way to increase margins. So, don’t expect consumer price inflation…or a business cycle upswing…any time soon.

Of special interest to us is whether or not Mr. Market will be given the time to correct his errors and mend his ways. Except for our heroine, Angela Merkel, practically every major world leader is against him. They’re spending trillions to try to make sure that what should happen doesn’t.

And they have extravagant hypotheses and bumptious pretensions. What they don’t have is any experience or proven theory that justifies their trillion-dollar interventions.

Above, we said that you shouldn’t expect inflation. Well, we take that back. ‘Normally,’ we should add, you shouldn’t expect inflation under these circumstances. But there’s not much normal about these times…

Shadow Statistics’ John Williams explains why inflation, even hyperinflation, lies ahead:

“The Fed’s efforts at U.S. dollar debasement have been instrumental in recent dollar weakness, which in turn has contributed to the upside pressure on dollar-denominated oil prices. Irrespective of near-term currency market gyrations and central bank intervention, the dollar ultimately is headed much lower against the major currencies. Such helps to generate inflationary pressures in the United States that are not reflective of strong economic activity.

“While the excessive growth in the monetary base (100%-plus year-to-year) only has begun to trickle slowly into the broader money measures, the flow can accelerate sharply and quickly. The weakening dollar and Fed activity aimed at dollar debasement have contributed to declining demand for U.S. Treasuries. With low fundamental investor demand for Treasury securities, the Fed increasingly will have to monetize U.S. Treasury borrowings, whether directly or by stealth (such as Federal Reserve largesse flowing to the Treasury through banks now obligated to and/or controlled by the government), despite official protestations to the contrary.

“As non-demand-driven inflation and money growth begin to pick-up, so too should the velocity of money (see Money Supply Special Report at www.shadowstats.com) and inflation. Risks never have been higher for the onset of a U.S. hyperinflation within a one-year period. While my timing forecast for such an event remains in the range of 2009 to 2014, given where we sit on the calendar, early 2010 looks increasingly dangerous.”

We search the history books looking for case studies. How many times before have economies walked in front of a bus? What happened to them afterwards?

We have already looked at Japan in the ’90s…and the United States in the ’30s. Today, our weary eyes turn to the pampas, where they seem to step in front of busses every day.

At the beginning of the last century, Argentina was roughly comparable to Europe and America in terms of its industrial growth and wealth. Britain was still considered the richest nation; but an Argentine worker earned almost as much as his British confrere. Argentina had a growing middle class, a democratic government, the world’s grandest opera house and its widest boulevard.

“As rich as an Argentine,” was a popular expression in England at the time. Argentine planters did the shopping in London and Paris…and took their vacations on the Cote d’Azur. New York was a bustling metropolis, just like Buenos Aires. But New York was grimy. Buenos Aires was beautiful…with grand buildings in the Belle Epoque style and mild weather.

But something went very wrong on the pampas. A Wikipedia search brings up this:

“Argentina went through steady inflation from 1975 to 1991. At the beginning of 1975, the highest denomination was 1,000 pesos. In late 1976, the highest denomination was 5,000 pesos. In early 1979, the highest denomination was 10,000 pesos. By the end of 1981, the highest denomination was 1,000,000 pesos. In the 1983 currency reform, 1 Peso argentino was exchanged for 10,000 pesos. In the 1985 currency reform, 1 austral was exchanged for 1,000 pesos argentinos. In the 1992 currency reform, 1 new peso was exchanged for 10,000 australes. The overall impact of hyperinflation: 1 (1992) peso = 100,000,000,000 pre-1983 pesos.”

What happened?

We’ll have to look at that on Monday…we’re out of time for today.