Pity the poor central bankers.
They are so busy – plotting the destruction of their own paper currencies…and worrying, says the news report from Montreal, about the "structural problems in Europe and Japan." They will not have time to wonder about the strange character of the U.S. recovery.
Why are there so few jobs? People are collecting unemployment benefits at the highest level in 19 years. Why are there no profits? As a percentage of GDP, profits have been cut in half since 1998…and show little sign of improving. It’s all so ‘unexplanatory’, as Eric says above.
Since we doubt that central bankers will take the time to wonder about these things…. in today’s letter, we will wonder for them.
Why such a peculiar recovery?
We know the central bankers are busy, so we will not dilly dally. Here’s the answer: this recovery is not like other recoveries because it is not a recovery at all. It is more like what ballroom dancers call a ‘hesitation.’ The beat goes on…and after a moment, the dancers will pick up their feet.
If we’re right, the latest downturn is not like any in America since the Great Depression. Expecting it to resemble a typical post-war recession is like expecting yogurt to taste like latex paint. They may look a little alike, but they serve very different purposes. Instead, as we’ve been saying for a long time, America’s economic malaise is more like Japan’s long, slow, soft depression that began in 1989. Only time will tell. in the meantime…we wonder…
The course of the U.S. economy is set, we believe, not by current policy failures in Washington nor by whatever silly feeling consumers pick up from the evening news. It is determined by the past.
"In terms of quantity of money and credit creation," writes Dr. Kurt Richebacher, "the Fed’s easing has been a sweeping success. But in terms of its effects on GDP, national income and the financial markets, it is an outright disaster. These are, of course, the only effects that matter." Fish gotta swim; birds gotta fly. Debts gotta be paid. And the sun, that shined for a long day’s boom in America, has gotta set sometime.
There are more and more signs that while the consumer’s will to spend is as robust as ever, his ability grows weaker by the day. Debt levels are at record levels – as we’ve noted many times. So is the amount of a consumer’s income that must be used to service it. A little note in the news a few days ago pointed out that real incomes – after inflation and taxes – fell in April. This should have set off alarms from one end of the empire to the other….but not a peep was heard.
But the retail stocks seem to have noticed. The retailers were the strongest group – buoyed by consistently good sales figures and bubbly poll results. Now they seem to have turned a corner…and headed down.
What’s more, a closer inspection of sales numbers from the first quarter reveal not the strength that was widely reported in the media…but weakness. "Current year-over-year rate of change in final sales," notes the ContraryInvestor.com, "rests at a four decade low…As you know, it is strength in final sales that will ultimately light the way to this recovery being something more than largely inventory driven."
Rising property values and even greater borrowing have kept consumers steadfastly on their roads to ruin. But the road is getting bumpier and bumpier. "Housing Takes More Money," reports Money magazine. Consumers are spending more and more of their money on housing costs.
They’ve mortgaged up their houses as never before. Owning less of their own homes, they have to pay the mortgage companies for the parts to which they no longer have clear title. According to the Money article, 19 million Americans now pay more than 35% of their incomes to keep a roof over their heads – up from just 16 million in a similar circumstance 10 years ago. Another item from yesterday’s papers tells us that consumers are having a hard time keeping up. "More Owners Are Behind on Mortgages," says a headline. And bankruptcies, as widely reported, are becoming more and more common – especially among older people.
In addition to other puzzling signs, there is the stock market. Stocks are said to ‘look ahead’ to changes in the economy. But if the economy is on the mend, the stock market doesn’t seem to see it. Not that investors don’t look for it. Time after time, they squinted into the setting sun and thought they saw dawn. Nearly everyday, in fact, the Republican hallucinatories – George Gilder, Lawrence Kudlow and Arthur Laffer – announced a new morning for America, thanks to the Bush administration and silicon chip.
"Nine times in the last 26 months they have followed the new era bull market mantra and bought on the dips," writes old friend Ray DeVoe (whom we’ve never met…but feel we know). Each of those times, they were wrong. Stocks are still down for this year…down for last year…and down for the year before.
"Surely, it must be time for a rally," say the patsies. But the insiders keep selling 4 stocks for every one they buy. And stocks keep going down. What does the stock market see ahead?
"It’s not going to be a dramatic upswing, but events look increasingly positive." This was Alan Greenspan’s message to central bankers yesterday. The bankers are colluding…I mean meeting…for three days to reflect on the state of the world economy. We offer them food for thought…or at least an hors d’oeuvre…below….
In the popular press, you will find few dissents from Greenspan’s view of things. "Central Bankers Say Economies Looking up," is how Reuters spun the central bankers confab.
"Service Economy Expanding at Fastest Pace in Almost 2 Years," announces a Bloomberg story. "Property Values Leap," notices the Dallas paper. "Consumers Keep Buying," says another.
Still, it is the strangest recovery. Where are the jobs? Where are the profits? Where are the rising stock prices? The central bankers might want to take a minute to wonder.
On the subject of stocks, investors are beginning to get restless. Investor’s Business Daily keeps track of leading mutual funds and reports that they are down more than 13% so far this year. Investors have suffered at least 30 months of losses. Even in the popular press, people are beginning to wonder.
"After two years of watching stock prices head steadily lower," writes Martin Wolk for MSNBC, "most investors probably concede that the outsized returns of the late 1990s are gone forever. But are they ready to accept the possibility that the broad stock market might go nowhere for years to come?"
Wolk mentions a guess by Grantham, Mayo, Van Otterloo that the S&P might register tiny losses – of 0.6% on average – over the next 7 years. That stocks might go nowhere – like Greenspan’s sluggish recovery – is considered the ‘worst case’ scenario in most minds. We can’t help but wonder…again, more below.
But first, let’s check in with Eric Fry on Wall Street:
Eric Fry like you’ve never seen him before…
– For the second straight day, the "obvious" trades failed to work. The stock market didn’t fall, the dollar didn’t fall and gold didn’t rise. In fact, gold was $6.70 less precious on Wednesday afternoon than it was in the morning. The yellow metal ended the New York trading session more than 2% lower at $322.20 per ounce. Silver tumbled 19 cents to $4.92 per ounce.
– Not surprisingly, gold and silver stocks took a breather. The XAU Index dropped 3%. But most of the non- gold stocks fared reasonably well yesterday. The Dow bounced 109 points to 9,796, while the Nasdaq popped a little more than 1% to 1,595.
– A few vaguely positive, oracular utterances from Oracle kicked off the rally. Oracle shares themselves jumped more than 10%. Perhaps the market also got a little pick-me-up yesterday from the fact that the news headlines were mercifully devoid of scandal. We learned of no new $1 billion rip-offs by corporate chieftains; nor did the SEC launch any new investigations.
– So, what was the terrific news from Oracle that so thrilled investors? Just this: Oracle will be laying off fewer than 42,000 workers and the company will not be issuing an earnings shortfall warning this quarter. Ya gotta admit, this is pretty terrific news…Layoffs won’t be quite as numerous as feared and earnings won’t be quite as bad as rumored…Does it get any better than this?…Could there be any champagne left to drink in America?
– We admire the heroic imagination that peers into an empty glass and imagines it to be half-full. At the Daily Reckoning, we lack that kind of imagination. Whenever brutish types like us look at an empty glass, we see just a plain old empty glass. Fortunately, there are enough imaginative investors in the general population to insure that overpriced stocks don’t fall straight down, all at once.
– Evidently, whatever feeds the imagination of the stock-buying investor is starving the imagination of the stock-selling investor. Why does one kind of investor buy the very same stock at the very same price that another investor is selling it? We don’t know. In the words of hip-hop artist, Kurupt, "It’s unexplanatory."
– "I wonder if it takes less of a ‘storm’ to capsize the financial system today than it did a couple of decades ago," muses Paul Kasriel, economist extraordinaire from Northern Trust. "Could it be that today’s financial ‘sailors’ are more interested in speed than seaworthiness?"
– Or, we wonder, could it be that today’s financial sailors are mostly pirates, interested in neither speed nor seaworthiness, but only in amassing enough firepower to plunder shareholder wealth?
– Continuing the metaphor, Kasriel writes, "Could it be that today’s financial system has too little ballast, or what is the same thing, too much leverage?…[Total] U.S. nominal debt (nonfinancial plus financial) in relation to the total U.S. nominal capital stock is the highest in the postwar period, and has been steadily climbing since the early 1980s." In other words, as no Daily Reckoning reader will be surprised to read, total U.S. debt has been skyrocketing.
– "Leverage is wonderful for the return on capital when the financial and economic weather is fair," says Kasriel. "But when a storm hits, leverage can quickly capsize a country, a company or a household. And this is where Commodore Greenspan of the U.S. Financial Coast Guard enters. When the financial seas start to get choppy, Commodore Greenspan comes to the fleet’s rescue, either by restraining increases in the fed funds rate or by cutting the rate."
– "The weather is now starting to take a turn for the worse, as evidenced by rising inflation expectations and a depreciating dollar," Kasriel observes. "But what if the winds start to howl and the waves build later this year to the extent that Commodore Greenspan can’t launch an effective rescue mission? Only those craft with a lot of financial ballast are likely to survive."
– If we are to heed mariner Kasriel, we ought to trim the sail and set a course for the safe harbor of cash.
Back in Paris…
*** The price of gold dropped more than $6 an ounce yesterday. Is the bull market in gold finished? Is that all there is? Who knows. But sharp declines are typical of bull markets just as sharp run-ups are typical of bear phases. In each case, the dominant trend continues over time, gradually working prices down or up…while encountering dramatic, but short-lived, moments of resistance.
*** Readers interested in protecting themselves from a further fall in the dollar may be interested in this note from my old friend, David Galland: "In terms of a way to actually take action, Everbank’s FDIC insured World Currency Accounts and CDs remain one of the few retail ways to do so."
"As you would expect, the accounts are beginning to see some interesting gains. Readers can find a lot of free currency resources, charting tools, etc., under the currency research link on www.everbank.com. Chuck Butler is also very happy to field any currency related questions from your editors, or from your readers.
"Of course, I have no ulterior motives for mentioning this…"
*** "What a blessing ‘terrorism’ is for the state!" writes Joseph Sobran, quotably. "It’s the ideal distraction from the day-to-day reality of the state’s chief activity: wringing from its subjects the wealth they produce. Last September a handful of fanatics, armed only with box-cutters, provided a new rationale for the trillion-dollar swindle. A bonanza!
"I don’t know what these "terrorists" thought they were achieving: Making the infidel respect Allah? If so, they were wrong. You might as well try to make the U.S. Government respect the U.S. Constitution. Ain’t gonna happen. They only made the average American cling all the more tightly to his state."
*** Jules stood before his inquisitors yesterday at the Institution de la Tour. He had already pleaded innocent…claiming that he had worked as hard on his homework as was humanly possible, and vowing to work even harder next year. He also had said that while he had done nothing wrong during the past year, he would not do it again. Finally, the jury delivered a verdict: he would be allowed to go on to the next grade next year.
*** Poor Henry has a big black eye, a marvelous shiner…with all the colors you might expect – green, black, brown…
"What does the other kid look like?" I asked him.
"Dad…I hit myself in the eye with my knee…when I was jumping on the trampoline at school."
"Well, at least you know what to do if you ever do get into a fight," came the paternal advice. "Sock the kid in the eye with your knee."