Britannia Radio

Today's Daily Reckoning: World Economy: Negative Growth - Or Positive Collapse? London, England Monday, March 9, 2009 --------------------- *** The world economy is growing - smaller...when it comes to negative growth, the Japanese are experts... *** Fantasy financial evaluations have disappeared - but the real world of wealth still exists...major cycles take time... *** Have you bought your gold and silver yet?...investors still haven't gotten the message...learn to make the correction your friend...and more! "Negative growth," says today's paper. Yes, dear reader. Stocks are advancing to the rear...and economies are growing...smaller. How we love these oxymorons! If only we could age negatively...and eat all we wanted and gain minus pounds! The commentators have it all wrong. Look on the bright side. The world economy is not in a period of negative growth. It's in a period of positive collapse! That's why the Great Depression was so great, after all. What's positive about this depression is that it is clearing away a generation's worth of mistakes, misallocations of resources and misplaced confidence. Stocks are down more than 20% this year. The U.S. economy is retreating at more than 6% per year. Britain is walking backwards at a 2% pace. And Japan? Wow...when it comes to negative growth, the Japanese are experts. Their economy is growing negatively at more than 12% per year. If this keeps up, by the time the next bull market comes along, there won't be any Japanese economy left. The Asian Development Bank says the losses so far have cost the world $50 trillion. The Financial Times reports: "The ADB's estimates take into account falling stock market valuations and losses in the value of bonds supported by mortgages and other assets, though not financial derivatives. About a fifth of the losses in dollar terms arise from the depreciation of many currencies against the dollar." The last estimate of the total world's wealth we saw was $100 trillion. If these estimates are correct, the planet has lost about half its value. But who bids for planet earth? Just about everything that existed - the real wealth of the world - still exists. What disappeared were the fantasy financial evaluations. A truck is a truck is a truck. It doesn't become less of a truck just because the world has entered a period of financial contraction. It is just as serviceable now as it was two years ago. And the poor guy who had a trucking company keeps on trucking... But now he has a whole lot less trucking to do than he did before. The stores aren't moving as much merchandise...so no need to deliver so much. And so the value of his truck - in terms of how much revenue it can produce - has gone down. So too has the value of his trucking company. Maybe he should never have bought that truck in the first place... The Dow is down near 6,500. Only 1,500 points to go. At least, that was our guess a few years ago. We figured that the Dow would have to go to 5,000 in order to get down to real bottom prices. Will the bear market finally be over then? Nope. That's just where you can begin looking for a bottom. Remember, markets tend to overshoot. So far, the Dow has wiped out 43 years of gains. Adjusted for inflation, it was at this level back when the Beach Boys and the Beatles were just starting out. Actually, we don't remember when the Beach Boys and the Beatles began...but it must have been in the md- '60s. Back in '66, the Dow hit a high for the cycle. It had been going up since the bottom in 1949. After the peak in '66, it retreated...and then staged another attack on the summit two years later. But inflation was getting pumped up too...and in real terms, the '68 high failed to better the peak of '66. From '66 to '82 it was down, down, down. Then, Business Week threw in the towel: "The Death of Equities" said the cover story. Then, it was up, up, up...until...well, you remember the rest. We only bring this up to warn readers: these major cycles take time. So far, the Dow has only gotten down to the '66 TOP. Now, it has to get to the '82 BOTTOM...adjusted for inflation. Where would that be? Well....as we recall, the Dow was barely at 1,000 when the bull market began. And if adjust that to consumer price inflation, we come to a 2,000 - 3,000. Will it get there? Who knows? The Dow gained 32 points on Friday...a slight bounce up at the end of a dismal week. Oil rose to $45. And gold, which seems to have finished its correction, ended the week at $942. *** "Have you bought your gold and silver yet?" writes our intrepid correspondent Byron King. "You ought to have 5-10% of your portfolio in gold and silver, and I mean the real, physical stuff. "Oh, you haven't gotten around to buying any gold or silver yet? Let me quote Rudyard Kipling, from his poem 'Gunga Din.' You need to 'put some juldee in it.' Quick! Go and get some precious metals! Don't make me say I told you so, because I will. "Indeed, I told you so. Or we told you so. Buy gold and silver. If you follow almost any of the publications from Agora Financial, you ought to know that in one way or another, for about 10 years, Agora has been advising people (this means you) to buy precious metals. Back then, in the good old days of Y2K, gold was selling for well under $300 per ounce. Silver was going at $2-3 per ounce. Lately, gold has been selling in the $900 range, with an excursion over $1,000 about two weeks ago. Silver is trading in the $12-14 range. "Starting in 1999, Bill Bonner told you to buy gold. Bill even helpfully labeled it "The trade of the decade." Over the years, Agora Financial published countless essays about gold from the Mogambo Guru, who was never subtle about it. 'Buy freaking gold,' said Mogambo. "Or if you don't buy gold, buy silver," he said. You could look it up. "Many other Agora editors and contributors told you to buy gold and silver. Addison Wiggin, Eric Fry and Dan Denning told you to buy it. Agora Financial published guest articles from the likes of Gary North, Doug Casey, Marc Faber and many others about buying precious metals. I've been writing about gold in Agora Financial publications since 2003, when I was a mere "unpaid correspondent in Pittsburgh" composing occasional notes for The Daily Reckoning. 'When all else fails (and it will),' I said, 'own gold.'" So what's stopping you, dear reader? The high price of gold? Don't let that be a roadblock - Byron has helpfully laid out a route for you...that doesn't involve digging a hole in your backyard and filling it with gold bars. You can get the precious metal for just one penny per ounce...no shovel required. Learn all about it here. *** The company that Thomas Edison started cut its dividend for the first time in 71 years. Some analysts think GE, too, could default - thanks to the company's move into the financial sector. *** Hotels are going into foreclosure too, says USA Today. *** Dow Chemical is trading at a 24-year low. *** And the "Great Red Hope" - the idea that China will pull the entire world economy out of a depression - is "pure fantasy," writes William Pesek. China relies on exports. And the export business sucks. It will be lucky to get through this downturn without a revolution. *** An Economist headline: "Are Investors Still too Optimistic?" Our guess: yes. Most of the action on the stock markets is professional buying and selling. The amateurs seem to be largely sitting on the sidelines, waiting for a rebound to get back in. They still haven't gotten the message. This isn't a recession. There won't be a quick recovery. And the bailout/stimulus plans won't work. This is depression. It will take years to restructure the economy. And bailout/stimulus plans just slow down the process. Looking back at the Dow...if you take the market peak of January 2000 as the long-term cyclical top...you might expect an eventual bottom 10- 20 years later...and then a new bull market that would return prices to their peak highs 10-20 after that. Between the high of '29 and the next major high in '66 was 37 years. Between the '66 high and the '00 high was 34 years. So sit back. Relax. Most likely, we'll see stock prices much lower...for much longer. Look for a return to '00 highs in 2035. Learn to make a correction your friend. Remember, this is a positive collapse, not negative growth. It is correcting the stupid 'growth' of the bubble years. What really grew during that period was consumer spending in the United States and Britain. And it grew far beyond the ability of Anglo-Americans to pay for it. Because they were spending too much, the whole world economy bent to sell them too much. The Chinese built too many factories. The shippers built too many vessels. The truckers bought too many trucks. The homebuilders put up too many hovels. The retailers expanded too much...the malls were overbuilt...etc. etc. etc. Now, in this period of positive collapse, all that surplus capacity is being marked down to what it is really worth...liquidated...and restructured. Give it time, dear reader. Let Mr. Market do his work. Until tomorrow, Bill Bonner The Daily Reckoning P.S. Savvy investors have already made the correction their friend, and are pulling in major gains without worrying whether the market goes up or down. In fact, these investors are benefiting from falling stock prices - in a big way. Join them in taking outsized triple-digit profits in a market downturn. See how here. [Editor's Note: As our long-time DR sufferers have probably noticed by now, we've made a few tweaks to our website - including replacing the 2cents forum. Now, instead of using the forum to share your invaluable insights and opinions, you can do so right below each and every article we post, in the provided comment box. Let your voice be heard! We love hearing what you have say - so keep those comments coming.] --- Special Offer --- None of the Work; All of the Profits In three minutes a day, you could be raking in triple-digit profits...without ever touching a single stock. This 'Zero Stock Solution' has been making hefty, consistent gains over its nine-year tenure, with 130% average gains on every play in 2008 alone. Don't miss out - you can start getting your Zero Stock recommendations every week - with a guaranteed doubler every month or you pay nothing. Act now. Guest Essay: The Daily Reckoning PRESENTS: Dividend payouts are going down, and for obvious reasons...that ain't good. When investors used to used these dividends as "a cushion in bad times", it begs the question... What kind of times are we living in when these cushions turn to rocks? The Mogambo Guru explores... DIVIDEND DROP-OFF: WHEN CUSHIONS TURN TO ROCKS by The Mogambo Guru I thought that my eyes were playing tricks on me, but it looked like the earnings of the S&P Industrials Index went down last week, plummeting to $65.86 from $85.90 the week before, all of which probably explains why the Wall Street Journal reports that railroads "have seen shipping volumes drop by double-digit percentages in recent months", and that "the nation's five largest railroads have put more than 30% of their boxcars - 206,000 in all - into storage." Yikes! A third less volume! In a similar vein, Giovannie Bisignani, director general of the International Air Transport Association, says that volumes of air cargo traffic are in "free fall", dropping 29.5% from a year earlier, and 17% of it in December alone! One of his associates quipped, "It's gone from terrible to unprecedented" which is clever and humorous, and thus the only bright spot in the whole mess, as far as I can tell. Then Bloomberg.com notes that it's not just earnings that are falling, but dividends, too! They report "The fastest reduction in U.S. dividends since 1955 is depriving investors of the only thing that gave stocks an advantage over government bonds in the last century." The explanation for this cryptic remark is provided by James Swanson, chief investment strategist at MFS Investment Management. He says that dividends are what matters, and "It's a greater fool theory if we always buy stocks based on earnings and we never get a penny out of it, hoping for someone to buy that stock at a higher price." In fact, he says, "Dividends have been a cushion in bad times" and the Really Bad News (RBN) about this drop in dividends is that "If they go to zero, it's a disaster". Now, as a bad husband, a worse father, a terrible neighbor and an incompetent employee, I obviously know a lot about "disasters", and trust me when I tell you that it's going to Cost You Plenty (CYP). Bloomberg, taking no interest in my insightful observations gleaned from a lifetime of paying for my screw-ups, is still talking about dividends, and reports that "Twenty-six companies in the S&P 500 saved more than $21 billion by cutting or suspending outlays this year, more than all the reductions from 2003 to 2007. On a per-share basis, S&P 500 companies may trim payouts 13 percent this year, the biggest drop since 1942." This big drop in dividends is plenty bad by itself, but the news is doubly bad because "saving more than $21 billion" means that a lot of companies got $21 billion less in revenue! Which doesn't even talk about the multiplier effect as that money cascades through the economy! Econometrically, applying a mysterious "constant growth version of the so-called dividend discount model", which "values a stock as the sum of all its future dividends," the Really Bad News (RBN) is that it "shows equities are still overpriced. With S&P 500 companies projected to pay a combined $25.57 in dividends this year, the index would need to fall to 526.46 before investors are compensated for owning shares." This means another drop of 25% in the S&P 500 index, assuming that there are no more dividend cuts, and I would have to be an idiot to think that! Okay, I really AM an idiot, but I am still freaking out here! This is not, as you could expect, a dire economic forecast based on the "velocity" multiplier-effect of a third less volume in transportation traffic, meaning a huge drop in transactions, which implies that less money is coursing through the economy, or about dividends being cut and stocks falling precipitously in price as a result, but about gold - glorious, wonderful gold - and how if you aren't buying it, then there is something Very, Very Wrong (VVW) with you if you can look at this stuff, and look at economic history, and look at the Austrian school of economics which you can get free at Mises.org, look at the dismal economic situation of the world and then not buy gold. It amazes me! Until next time, The Mogambo Guru for The Daily Reckoning P.S. Through all of this, I remind myself that "the majority of investors must lose money", which means that the only reason I can make so much money with gold is that I am in the minority, who are the guys who make the money that the majority loses!