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Friday, May 15, 2009 Is the bear market rally...the suckers' rally...over? Wishful thinking about American debt... A depression means fewer big rigs on the road... Bill Bonner on old central bank maps...and more! Truckers Tell All by Bill Bonner London, England We left off yesterday, sitting on the edge of our seats: Is the bear market rally...the suckers' rally...over? After a major fall in prices, there's nothing more reliable than a bounce. And then, the bounce reliably gives way to another, harder fall. Not that we're looking forward to seeing poor Humpty Dumpty fall off the wall again. We just like to see things turn out they way they're supposed to. Humpty has it coming. The Dow fell 184 points on Wednesday. Maybe it marked the turning point. Maybe Mr. Market figures he's lured in enough suckers. With stocks up 9 weeks in a row...and investors with a 37% gain...this would be a fairly typical bear trap. Stocks are not cheap. There is no reason to buy them unless you think the economy will improve, raising corporate profits. How likely is that? Well it depends on what you think is going on. If you think this is just a pause in an otherwise-healthy economy...then, you might believe that things will pick up. That's what's happened after every recession since 1948. The average one lasted only about 10 months...with about a 2% decline in GDP. By those yardsticks, this one ought to be over. But if you believe that this is something more than a typical Post- WWII recession, then...watch out. The Great Depression lasted for nearly 4 years...taking 27% out of the GDP. And then, when it looked as though it was over, along came another downward whack in 1937 that lasted another 13 months. And just look at what is going on in Japan. There, they've had an on- again, off-again recession since 1990. Investors who bought into the rebounds any time in the last 19 years were subsequently disappointed. Each time Japanese stocks rallied, they soon fell again. Now, they are going up - along with the rest of the world's stocks. But they're still down about 70% from the 1989 high. Yesterday, the Dow managed a weak rebound. It gained 46 points. Oil and the dollar stayed where they were. Gold rose to $928. As near as we can tell, everything is coming to pass as expected: Consumers are cutting back. Stocks are bouncing. The economy is weakening. And the government is making things worse. After 25 years of recklessly spending, borrowing, and going deeper and deeper in debt, Americans are coming to their senses. They're cutting back. They're determined to stop being the bagman for the entire globalized world economy. The breakdown of the American consumer is just one part of the triple timebomb that makes a market recovery this year or next nearly impossible. Learn about all three of these threats in this special report. "Since the early 1980s," begins a report in the Economist, "spending by households on goods, services and homes has grown faster than GDP, making it the locomotive of American - and global - expansion. By 2006 it accounted for 76% of nominal GDP, the highest since quarterly data began in 1974. "This was accompanied by a steady decline in the personal saving rate and a rise in household debt relative to income. By itself, this was not a problem; household debt has risen relative to income since the 1950s, as a growing share of the population has taken out mortgages. Despite the higher debt burden, falling interest rates kept total household financial obligations - interest payments, rent and leases - within a range during the 1980s and 1990s. "An inflection-point occurred around 2000. Income growth stagnated but debts continued to grow rapidly, from 94% of income to 133% in 2007..." But that was when house prices were rising and credit was easy to get. This year is different, the Economist tells us. The credit card industry sent out only one quarter as many solicitations for new credit card customers as it did last year. And now, with house prices falling...and the financial industry running for cover...consumers no longer have shovels to dig themselves deeper holes of debt; instead, they have to stop spending so much money. The Economist estimates that consumers need to shuck $3 trillion worth of excess mortgage debt, alone, in order to get back to year-2000 levels. If all US savings were put to the task, even that would take 4 or 5 years at the present rate. "Adding debt is always a lot faster than paying it off," explains colleague Simone Wapler. But the year 2000 was a year with very low real interest rates...and it came at the end of a 20-year period of credit expansion, not at the beginning of one. As real interest rise in the next long cycle of credit contraction, consumers are likely to want to erase debt down to, say, a 1990 - or even a 1980 - level, which would require paying off trillions more. Expecting them to stop at the year 2000 is wishful thinking. It's like expecting this bear market to take stock prices to go back to their year-2000 level, rather than to a level more in keeping with a real bottom. Or expecting to become only a little bit wrinkled...and no more... We pause for more news, from Ian Mathias in Monumental City... "The euro zone unveiled some nasty economic news early this morning," reports Ian in today's issue of The 5 Min. Forecast. "For starters, Germany dropped its first-quarter 2009 GDP number...a 3.8% contraction, worse than anticipated, and the worst since ze Germans starting keeping track in 1970. On an annual basis, that's a whopping 6.7% contraction, another German record. "Over the last three quarters, the German economy has erased all GDP gains made since 2005. "Soon after, the EU statistics agency revealed a 2.5% quarterly GDP contraction. For the whole year, that's a 4.6% plunge... both numbers are EU records, too. "These nasty numbers are putting pressure on the euro today, and helping keep the dollar afloat. The euro fell over a cent on the news and now trades at $1.35. And since the euro is the most heavily weighted currency in the dollar index, the greenback measure is up a few tenths of a point, to 82.5." Every business day Ian Mathias is on the beat for The 5 Min. Forecast, an executive series e-letter that offers a quick and dirty analysis of economic and financial developments - in five minutes or less. It's a free service only for subscribers to Agora Financial's paid publications, such as Wayne Burritt's Easy Money Options. EMO offers a unique "bread and butter" system for driving very lucrative gains...like 150% and more in as little as two weeks. Click here to learn more. And now more thoughts, from Bill in the City of London... "This process, known as de-leveraging, requires consumption to grow more slowly than income in coming years," notes the Economist. Incomes are actually falling. Not surprising, consumption is falling too: (Reuters) - Sales at U.S. retailers fell for a second straight month in April as cash-strapped consumers held back on purchases, government data showed on Wednesday, denting hopes the economy would soon emerge from recession. The Commerce Department said retail sales slipped 0.4 percent after falling 1.3 percent in March. Sales dropped despite an increase in the disposable income of some households due to tax cuts and cash transfers linked to the government's record $787 billion stimulus package. Analysts said U.S. householders, whose wealth has been decimated by plunges in house and stock prices, likely decided to save the extra income or pay off debt instead of spending it. Economists had expected sales to be flat... "Consumers still haven't decided to start spending money and the economy is still in a funk. Folks are very focused on non- discretionary items, buying staples, and people are trying to deleverage themselves," said Bob Duffy, leader of global advisory firm FTI's Retail Practice. Naturally, if consumers don't buy, there's no need to restock the shelves...and if you don't have to restock the shelves you don't have to call for a delivery. All goods need to be moved from one place to another. That's why economists keep an eye on the trucking industry. If the trucks aren't rolling, the economy isn't either. Dow Theory maintains that you only have a reliable stock market signal when the main index is confirmed by a movement in the transportation index. In other words, if the trucking and shipping companies don't confirm an up-tick, the movement of the broader market may be a feint or a fluke. So how are the teamsters doing? If you're hoping to hear that the downturn is ending, don't ask questions at a truck stop. In the first quarter of this year, 480 trucking companies went out of business. Last year, the total was 3,000 companies...representing 7% of all the nation's trucks. The more the economy contracts, the more trucks get run off the highway. Eventually, the number of trucks still on the roads is sufficient, but not excessive, for the volume of goods they have to move. Until that happens, the slump continues! This is not just another recessionary pause, in other words. This is a depression. And depressions bring changes, not just a rest. The trucking industry needs to adjust to the new levels of consumer spending. That means fewer big rigs on the road. In this case, the truckers tell all. And to adjust your own financial situation to this depression...you should consider the seven "super shields" described in this report. The auto industry needs to adjust too. In today's paper is more discussion of Detroit's efforts to break its contracts with its franchise dealers. Chrysler has 800 franchises it's trying to get rid of. GM has 1,000. The contracts need to be renegotiated. Employees need to be let go. The car lots need to be abandoned or re-built for other uses. All this takes time. Meanwhile, the latest jobless numbers are higher than forecast. Keep reading for today's essay... The Daily Reckoning PRESENTS: If you're like most people, you've probably gotten lost using an old - and out of date - map. You can recognize having an unreliable map can sometimes be even worse than having no map at all. Unfortunately, the ECB has decided to look on at the old maps other central banks have pulled out of their dusty drawers...a mistake bound to result in disastrous consequences. Bill Bonner explains why below... On to Moscow! by Bill Bonner London, England Last week, the European Central Bank squared its shoulders and joined ranks of the damned. The Times of London reported that in joining up with the US Federal Reserve Bank and the Bank of England, the European Central Bank "pulled out all the stops" in their drive to revive their economies. The ECB announced that it will cut its key lending rate to its lowest level ever and begin a form of "quantitative easing," in which it will buy corporate debt in order to reduce commercial interest rates. Details to follow, it said. "Stops" are to central bankers what safety fuses are to electricians. You may take them out when you really want to get the juice flowing; but your house might burn down. But thus did the European troops pull out the stops and get under-way. Reluctant allies, they set off to join the battle against capitalism...with no reliable maps...with insufficient supplies and a strategy elaborated by incompetents. Of course, the gods must have laughed at Napoleon too. His armies had been cut off and destroyed in Egypt. Then, his Peninsular Campaign was a disaster. But the plan to attack Russia topped them all; even the draft horses must have snickered. It doesn't seem to bother the Europeans that their American commander is the same fellow who failed to spot the biggest bubble in history until it blew up in his face. Nor that their field marshal has no idea of the lay of the land; nor that anyone on either side of the Atlantic seems to know where they are going; nor that, wherever it is, it will cost more to get there than they've got. This week the Obama government revealed its new budget deficit. If nothing goes wrong, it will reach $1.84 trillion this year - nearly 400% of the record set last year. In 2009, the US government will borrow 50 cents for every dollar it spends. Accumulated deficits to 2019 will reach $7.1 trillion, says the forecast. Moody's was so alarmed it warned that the US may lose its Triple-A bond rating, which it has had since 1917. “Spiders build their webs on America's remaining assembly lines with little risk of being disturbed; one out of every three factories is quiet.” But even as bad as it looks, Obama's budget map is still fanciful - its mountains are made of whipped cream and its rivers run with Scotch. It imagines a loss of only 1.2% of GDP in the current downturn...and a quick return to growth, with a 3% increase in 2010. Yet, the last report showed the US economy contracting at a 6% annual rate. As for growth in 2010...where would it come from? Consumer credit is falling at its fastest pace in 18 years. Consumer incomes are falling too - down 1.2% in the last 12 months. If there were any lasting consequences of this downturn, opines the New York Times, it is likely to be the "shift to savings" by the US consumer. Meanwhile, businesses aren't exactly hankering to spend either. Even if they had the money, businesses wouldn't expand; they don't have to. Spiders build their webs on America's remaining assembly lines with little risk of being disturbed; one out of every three factories is quiet. Until existing capacity is put to work, businesses will have no power to raise prices and no need to add to their facilities. And yet, Napoleon Bernanke is upbeat. The troops will be home "before Christmas," he says. But the central banks' calendars are no better than their maps. In 2004, Mr. Bernanke credited improved monetary policy with having created what he called "the Great Moderation" - the period of strong growth and low-inflation since the mid-'80s. Specifically, he was referring to the Fed's policy of 'inflation targeting,' which presumes that the inflation numbers carry all the information the Fed needs to guide an economy. This was the map the Fed was using seven years ago. Then, a tiny recession took GDP down to all of 0.2% over an 8-month period. The Fed panicked. Its emergency policy pushed the fed funds rate well below the rate of consumer price inflation and left it there for two years. This was not merely a slight miscalculation. It was a fatal strategic error, say professors Carr and Beese of the University of Akron. Not only did the Fed's map fail to warn them; it actually sent the economy over a cliff: The low interest rates signaled...that credit was inexpensive and readily available...[then] the Federal Reserve moved from a low accommodative interest rate policy to one of a steady and consistent increasing of interest rates between 2004 and 2007...and became a prime cause of the financial services mortgage crisis of 2008. Today, central banks use the same computers, same theories, and same maps they had seven years ago. With these feeble instruments, they set out to go where no central bank has ever gone before - borrowing, inflating, and intervening on a scale that would have been unimaginable a few years ago. Where will they end up? We will take a guess: this grande armee sets off on the road to recovery with the wind at its back; it will end up in Moscow with snow on its face. Enjoy your weekend, Bill Bonner The Daily Reckoning Editor's Note: Bill Bonner is the founder and editor of The Daily Reckoning...and this year marks our 10th anniversary! Come celebrate with us at the Agora Financial Investment Symposium taking place this July in Vancouver, Canada. In honor of the DR, the theme is a "Decade of Reckoning," and throughout the four-day event you'll receive tremendous insight into the most profitable opportunities that will shape the next decade. Bill will be one of the many top-flight speakers presenting, so secure your spot today! Call Opportunity Travel at (800) 926-6575 or click here for more information... The Agora Financial Investment Symposium: July 21-24 In addition to founding the DR, Bill is the author, with Addison Wiggin, of the national best sellers Financial Reckoning Day: Surviving the Soft Depression of the 21st Century and Empire of Debt: The Rise of an Epic Financial Crisis. Bill's latest book, Mobs, Messiahs and Markets: Surviving the Public Spectacle in Finance and Politics, written with co-author Lila Rajiva, is available here: