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The Daily Reckoning Monday, August 10, 2009 The stock market is in a bear market rally, not in a bull market... More big spending cuts for the US consumer... The only durable things of the last decade are Google and debt... The Mogambo on how you like your books cooked...and more! The Bounce Phase of the Economic Depression by Bill Bonner Ouzilly, France "It looks like things are finally turning around," said a friend at Saturday night's dinner. "Not at all..." we replied. Paul Krugman says the world "avoided a second Great Depression." He's wrong too. The stock market crashed in '29. The market then bounced. After a few months almost everyone was persuaded that the "worst was over." But the worst was just beginning. It wasn't until 1932 that the stock market finally hit bottom. By then, it was beginning to seem like a depression...and only years later did economic historians tag it as a 'great' depression. This depression is still wet behind the ears... We're still in the bounce phase. On Friday, the Dow went 113 points higher. And as the bounce continues, more and more investors will come to believe that stocks are in a new bull market and that the economy is back in growth mode. Neither will be true. The stock market is in a bear market rally, not a genuine bull market. The economy is entering a long depression...possibly a 'great' one. How can we be so sure? Well, we're not sure of anything. But all the signs point in that direction. Household debt as a percentage of disposable income hit a low of about 2% just at the end of WWII. It's been going up ever since. By 2005 it nudged against 15% - seven times higher than it had been 60 years earlier. Household debt represents spending that has been taken from the future. But you can't take an infinite amount from future earnings. You reach a point when the future can't handle it. As more and more future earnings are absorbed by past consumption, pretty soon there's not enough left to live on. At some point, so much of earnings are devoted to paying the interest and principle on past borrowings that the poor householder cannot to pay his expenses. And imagine what happens if his disposable income goes down. Guess how many jobs the US private sector has added over the last 10 years? Almost none. Private sector employment is back to levels of 1999. There are more jobs in restaurants and health care...but many fewer in manufacturing. Net gain: zero. The only job gains have been in the parasite sector - government. On the evidence, this trend is going to continue. Now, the feds have a new post called "pay czar." As near as we can tell this is a busybody who undertakes to control salaries in the industries that the feds have bailed out. There will be a lot more jobs running the regulatory/bailout apparatus. Then, too, there are all the make-work jobs of the shovel ready boondoggles the feds began in an effort to replace private spending. Back in the private sector, 72 banks have failed so far this year. And a record 34 million Americans are getting food stamps. Naturally, incomes are falling. Now, imagine the consumer...he's already paying 15% of his disposable income to debt service...and then his income is cut in half! This means that 30% of his remaining income must be used just to service the debt. Impossible to do without big cuts in spending... The poor consumer hit the wall in 2007. He was spending all he earned...and paying more of his income in debt service than at any time in the last 60 years. He couldn't continue to living on future earnings - there just weren't enough of them. That is why the finance industry has topped out. It loaded Americans up with enough debt already. And it's why the credit cycle has turned. All of a sudden savings rates are back up to 7%. Consumers are cutting back...raising chickens in their back yards...driving less...planting gardens and squeezing their nickels. The private sector is de-leveraging. And there won't be any durable economic boom or lasting bull market on Wall Street until this process is finished. [This process isn't at an end yet...and the US consumer isn't going to be able to bail out the world economy this time. And the government certainly isn't going to be able to bail out those who are funding these stimulus packages...but due a to certain legal 'loophole', you don't have to kiss your hard-earned money good-bye. See how you can start collecting - in just a couple weeks.] Let's see what The 5 Min. Forecast has in store for us today: "The US budget deficit rose $181 billion in July to a record $1.3 trillion, the Congressional Budget Office reported over the weekend," writes Ian Mathias in today's issue of The 5. "You know the drill by now...tax receipts are plunging while bailout spending is soaring. In budget parlance, revenues in this fiscal year are down 17% while outlays are up 21%. "That's a $530 billion increase in spending from fiscal 2008. "The CBO still projects the government budget deficit to exceed $1.8 trillion, about four times 2008's record $455 deficit. More to come tomorrow, when the Treasury unveils official budget numbers. "Sounds like a great time for the government to buy a bunch of fancy jets! Congress recently earmarked $550 million in a defense-funding bill to buy themselves eight private passenger jets. That would be the same Congress that went out of its way to publicly embarrass Big Three execs for jet setting from Detroit to DC. "Prepared for a public backlash, Congress has several lame talking points at the ready...that the current fleet of private jets is outdated...that having new high tech planes will be better for the environment and ultimately lower cost...and that these planes will be used mostly by the pentagon, only about 15% of the time for lawmakers. "But here's our favorite: Legislators are eager to complete the transaction so that they can have a new fleet in time for the busiest Congressional travel period of the year... August, when they are all on holiday! Ian writes every day for 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. It's a free service available only to subscribers of Agora Financial's paid publications, such as the Hulbert #1 Performing Investment Letter, Outstanding Investments. And back to Bill, with more thoughts: Harvard professor Ken Rogoff says it will take 6-8 years for households to reduce their debts to a more sustainable level. Let's see. We reported on Friday that the big upswing in credit over the last 60 years added about $35 trillion in excess debt to the system. But not all of that is private debt. Taking the period of the bubble years, in 2000 total debt in the United States came to $26 trillion. Now, it's twice that amount - $52 trillion, of which $38 trillion is private...or more than two and-a- half times GDP. At this level, the private debt absorbs roughly one out of every seven dollars in consumer earnings - in interest and principal payments. If the private sector undertook to reduce debt back to 2000 levels, it would mean eliminating all the debt accumulated during the bubble years - or about $19 trillion. How long will it take to pay down, write off, inflate away and otherwise shuck $19 trillion? Well, inflation is running below zero - so that is not now a source of debt reduction. Between write-offs and pay-downs, about $2 trillion has already been cut - over, very roughly, the last 2 years. At least the math is easy. At that rate, it will take 19 years. Now, let's go back and look at the Japanese. How long have they been deleveraging? Gosh all mighty...19 years. From 1990 to 2009. Are we looking at a 20-year period of on-again, off-again deflation...of bear market rallies followed by real bear markets...of weak employment and weak or no growth? That's what we argued, along with Addison Wiggin, in our first book, Financial Reckoning Day. Then, the stock market took off...and the bubble years came. It looked like we were dead wrong. Maybe we were just early. Or maybe those bubble years were just a feint...a fake-out that convinced the entire world to invest in stocks and property, just before the biggest crash in history. In that book, we guessed that the crash in the tech sector marked the beginning of the end. By 2005, it didn't seem at all as though we were in a down-cycle. But adjusted for inflation, stocks never beat their January 2000 high. And outside of government, the economy has no more jobs than it did in 1999. We've had wars against terror, bubbles in practically every sector, trillion-dollar boondoggles, bailouts, bamboozles and Michael Jackson's tragic cooling...but what is the only durable thing to come out of the last 10 years? Just Google and debt. [Incidentally, the newly-updated second edition of Financial Reckoning Day was just released. Get your copy here.] "When you have a big family there is always someone in the family who is in trouble," said another friend. "I thought that when the children left home to go to college, we'd be more or less free from problems. They'd be on their own. We could turn our attentions to other things. "Well, it didn't turn out that way. There's always one of them that has a problem. And we spend a fair amount of time worrying about them...even if there's nothing we can do to help. Or trying to help them if we can... "And then the grandchildren come...and then we worry about them. It just goes on and on. It's not disagreeable, of course. I'd rather have children and grandchildren to worry about than not have them. But there doesn't seem to be any end to it..." Until tomorrow, Bill Bonner The Daily Reckoning --------------------- Special Offer --------------------------- You're Seconds Away From Your Shot at Life-Changing Ultra-Wealth Changing lives. Raking in huge fortunes. Just last week, in fact, saw a 235% gain...and there's more to come... Timing is critical here...parts of what you'll see in this special report are extremely time-sensitive. So critical, in fact, that your immediate reply is absolutely essential. Keep reading for all the details... --------------------------------------------------------------- The Daily Reckoning PRESENTS: With so much economic data being reported by so many different sources, it's often difficult to know what numbers to trust. Well, as the Mighty Mogambo points out, a lot of that might depend on where you're getting your numbers. Read on... How Do You Like Your Books Cooked? by The Mogambo Guru Tampa Bay, Florida Even knowing that the economy is in a recession/depression, it is the kind of headline that grabs your attention: "Recession Worse Than Prior Estimates, Revisions Show" by Bob Willis at Bloomberg.com. "The first 12 months of the US recession," he writes, "saw the economy shrink more than twice as much as previously estimated, reflecting even bigger declines in consumer spending and housing, revised figures showed." By this time I am losing interest, as I suspected as much, and would have been surprised if things had turned out otherwise. I say this with a certain haughty-yet-snotty attitude because the Austrian school of economics is so easy to grasp, so intuitively correct and now so provably correct, that it is easy to anticipate the long-term when a central bank is creating excessive amounts of money and credit, especially when the majority of it is used to expand government spending. Child's play! So seeing the future clearly in economics is easy, unlike forecasting other social institutions, like marriage, which I thought meant that I would be happy for the rest of my life, but which meant that I did not remotely understand the full ramifications of such an arrangement that was not, and I emphasize NOT, even hinted at when we were dating, which should be grounds for some kind of legal action so that I can get my life back, instead of having it wasted by her, and the stupid kids, and the stupid relatives, and the stupid neighbors, and the stupid job, and all the stupid stuff you have to do as a result of being so stupid as to say "Goodbye!" to a life of mindless, selfish hedonism in the first place where, with any luck, you would be dead by now, lying in some gutter with a big smile on your stupid face, instead of putting up with spouses, children, neighbors, et al who are all so stupid that they don't buy gold, silver and oil even after I always deliberately end the "Happy Birthday" song with, "And if you're not buying gold, silver and oil, then you are not going to get your wish because the Wish Fairy knows that you are too stupid to know what to do with that kinky stuff for which you are secretly wishing." But this is not about any of that, but about the way that the government has now "changed the way it accounts for natural disasters, such as Hurricane Katrina," which ought to make you suspicious, especially as it was done for "eliminating much of the prior volatility in income calculations", whatever in the hell that means. I imagine that the government could use it as an excuse to "find" more money to spend by reducing accrued costs or disguise the fact that government is incompetent. Either one. I personally think it is the latter, and not just because I am a suspicious and paranoid little rat who thinks that the government is an expensive, disastrous, giant dead-weight loss that is out to get me, but because another interesting change is that "Personal income was revised up over the last decade, after the government boosted its adjustments for the underreporting and non-reporting of income using more recent data from the Internal Revenue Service." Of course, I think this is so the government can now say, "Hey! Income was up over the last decade, so shut up about how we are a bunch of incompetent and dangerous bunch of arrogant pinheads who actually believe the stupid stuff we say, like how we say that continual government deficit-spending and continual expansions of money and credit by the Federal Reserve are some kind of blessing and not the most stupid things that we could have possibly done!" The "found money", in case you were wondering, apparently comes from income increases as a result of the housing boom, and "in the most recent years reflect gains from rents, interest and proprietors' income", as if that distorted boost to income is now "the new norm" or something! Hahaha!. "If blatant corruption to disguise inflation and incompetence is not enough to convince you to buy gold, then there is nothing I can say to change your mind." Finally, the Commerce Department "shifted food services, which include meals purchased at restaurants or served in schools, out of the food category." Paradoxically, "As a result, the Fed's preferred inflation gauge - which tracks consumer spending and excludes food and fuel - was pushed up by 0.2 percentage points for the three-year period from 2006 to 2008." Later, they explained that "The reason for this is that costs of meals away from home are not as volatile as fresh food, the government said, and therefore services should be included in the measure commonly known as the core index." They now compute inflation in "meals away from home" by disregarding the cost of the food, which is going up, and look only at the cost of the labor in preparing the food, which is going up, but not by as much right now because unemployed people are willing to work for peanuts? Hahaha! If blatant corruption to disguise inflation and incompetence is not enough to convince you to buy gold, then there is nothing I can say to change your mind. Fortunately, that means more for me, and at lower costs, until the day when you say "Oops! Oh, woe is me for not having listened to the Wonderful And Wise Mogambo (WAWM) when he said to buy gold, silver and oil, and now I rue that fateful day, just as he said I would, and I see that he was right when he said to buy gold, silver and oil, which would have made me, too, say, 'Whee! This investing stuff is easy!'" Until next time, The Mogambo Guru for The Daily Reckoning Editor's Note: Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter - an avocational exercise to heap disrespect on those who desperately deserve it. The Mogambo Guru is quoted frequently in Barron's, The Daily Reckoning and other fine publications. 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