The US Trade Deficit: Fort Sumter...And The U.S. Trade Deficit US Recession: By far the Weakest Recovery
The Daily Reckoning
Monday, January 4, 2009
Bill Bonner, with today's reckoning from Bethesda, Maryland...
We're back in the USA after 15 years of living in Europe.
Bethesda is one of America's wealthiest suburbs. Money from all over the nation rolls this way. The playing field is tilted in Bethesda's direction.
"I was sitting in the Starbucks, having a cup of coffee," Elizabeth reported. "One man next to me was on the phone. He was talking about some deal he had done with the US Army in Afghanistan. It sounded as though he was very happy with it. The man next to me on the other side was on the phone too. He was a jollier fellow, talking loudly about how much money he had made. I thought he was a stockbroker or something like that. Then, I realized he was talking about a contract with the government."
While the rest of the nation has suffered a setback over the last ten years...the Washington metropolitan area has boomed more than ever. Real estate prices are down...but less than other areas.
And when we looked for a house to rent, we expected to be able to name our price. We thought it would be a buyer's market. Not so. Nice houses in Bethesda are still being sought after. How so?
Wars...bailouts...boondoggles - this area loves them. Federal employees' earnings keep going up...and a higher portion of the US national income goes to Washington.
"Aughts Were a Lost Decade for US Economy, Workers," says a headline in The Washington Post.
"For most of the past 70 years, the US economy has grown at a steady clip, generating perpetually higher incomes and wealth for American households. But since 2000, the story is starkly different."
What was different about it?
"There was zero net job creation in the first decade of this new millennium, compared to healthy job growth in each of the previous six decades," continues the report.
"No decade going all the way back to the '40s had job growth of less than 20%."
How many jobs were created since 2000? None. Not a single one, net.
If new jobs are not being created, you can't expect working people to do very well. And they didn't. "The Aughts were the first decade of falling median income since figures were first compiled in the '60s. And the net worth of American households - the value of their houses, retirement funds and other assets minus debts - has also declined when adjusted for inflation, compared with sharp gains in every previous decade since data were initially collected in the 1950s."
Bummer.
The Aughts were a nasty decade for investors too. Bloomberg reports that the value of all the world's public companies was a bit more than $60 trillion at the end of 2007. Stocks were cut in half in '08. In '09, after the March low, the bounce began. They recovered roughly half of what they lost to end 2009 with a total value of about $45 trillion.
Bummer again.
What went wrong? According to the Post account, economists are scratching their heads wondering. What a bunch of morons!
Long-time sufferers of The Daily Reckoning already know what went wrong. GDP figures were positive throughout almost the entire period. But they were phony...they were a fraud. They just measured the rate at which Americans were ruining themselves - by buying things they didn't need with money they didn't have.
It was obvious to us and anyone who bothered to think about it for two seconds that you can't really get rich by spending money. It's NOT spending that makes you rich. It's savings. You have to save and invest...so that you can produce more. Everybody knows that.
But economists don't work for 'everybody.' They work for the government...or Wall Street. Both sectors have a keen interest in making people believe in what isn't so. 'We live in the greatest, most flexible, most dynamic economy the world has ever seen,' said the politicians. 'Yeah...and it will only get better,' added Wall Street.
But it was a fraud. It didn't get better. It got worse. And now, Americans pay the price. Ten years of work...and they're poorer than when they started.
The Aughts were ruined by Wall Street. Washington will ruin the next decade. It will take the lead in spending money it doesn't have on projects it doesn't need. It will lavish money on parasites: Those fellows in the Starbucks...39 million people on food stamps...AIG executives...much of Wall Street...most of the federal payroll.
Instead of competing actively in the world economy - providing goods and services to honest people who are willing and able to pay for them - these people depend on government.
And now, the whole US economy depends on government too - just like the Japanese economy. Now we need (or so we are told) big spending from Washington, or the economy will stop growing. But the 'growth' we are seeing now is not real growth - it is growth in government spending. And like all government spending, it rewards parasites, not the people who actually add wealth.
But heck...it's a New Year. We'll look ahead. What's coming up? Another ten years of backsliding? Or ten years of real growth? Better? Or worse? We'll bet on the backsliding... keep reading.The Daily Reckoning PRESENTS: Readers are familiar with Bill Bonner's last "Trade of the Decade." Buy gold on dips, he said, and sell stocks on rallies. That trade worked out pretty well, as you probably already know...and it may continue to do a lot better yet. But this is a new decade...and Bill has a new trade for it. That's what today's reckoning is all about. Details below...
Our NEW Trade of the Decade!
By Bill Bonner
Bethesda, Maryland
Well, that was it for 2009. Whew!
Another great year for gold. But it wasn't a bad year for stocks either. The NASDAQ rose 45%. The Dow went up about 20%.
As we guessed back at the beginning of the year, stocks bounced. What we didn't guess was that they would bounce so much for so long. All over the world, stocks went up...and continued to go up. A bounce is inevitable, following a stock market drop. And it's impossible to say how big a bounce it will be...or how long it will go on.
But a kiss is still a kiss...and a bounce is still a bounce. No kiss lasts forever. Neither does a bounce. Looking ahead, we have to anticipate that it will come to an end...probably in 2010.
If you've profited from the 2009 run up in stocks...bravo! Now, sell them... Yes, the bounce could continue. But it's not worth the risk.
And how 'bout the gold market! Gold has risen every year of the decade. It was the surest, safest place for you money - by far.
Does that mean gold will go up in 2009? Does that mean we will stick with our 'Trade of the Decade' for another ten years? Not to brag, but our trade was a big success. Even we were surprised by how well it did.
As long-suffering Daily Reckoning readers will recall, we announced our 'Trade of the Decade' in 2000: Sell Stocks; buy gold.
"It turned out to be a good plan," observes colleague, Merryn Sommerset, in a recentFinancial Times story. "In 2000, you could buy an ounce of gold for $280 (the average price over the year). Now, it will cost you about $1,100. At the time, Bonner saw what most others did not. He saw the US not as an economy carefully and cleverly managed by then Federal Reserve chairman Alan Greenspan and his passion for low interest rates, but as a massive credit bubble waiting to burst.
"He also saw the massive and growing national debt, the trade and budget deficits, and fast growth in the money supply as factors that would naturally debase the dollar over the long term. He also saw the credit bubble as global rather than peculiar to America. So it made sense to him to hold the only non-paper currency there is - gold."
So what's next? What's the trade of the coming decade? Well, your editor has decided not to double-down on the identical trade. Gold will remain in our core holdings, but not in our Trade of the Decade for the next 10 years. Why? Because we think the US economy is going the way of Japan.
Japan went into a slump in 1990. It has come out...and gone back in...and come out again...and gone back in again. In terms of the amount of wealth destroyed - at least, on paper - it was the worst disaster in human history. The value of real estate went down 87% in some cities. Stocks fell from a high of 39,000 on the Nikkei Dow down to the 7,000 range in 2009...their lowest point in 27 years.
Why such a bad performance? As we keep saying, if you really want to make a mess of things you need taxpayer support. The Japanese put more taxpayer money into the effort to prevent the correction than any nation theretofore ever had. The result: the correction was stalled, delayed, and stretched out over more than two decades.
And now, US economists are looking at Japan...not with alarm, but with admiration. They are beginning to believe that the Japanese model is the way to go...because it prevented widespread unemployment and a deeper slump.
Here's our best guess:
Now that the US economy is caught in the same sort of de-leveraging process that gripped Japan, the same sort of "remedies" will inevitably be employed...leading to the same results, more or less.
We'll skip the details for this morning. You'll hear plenty of them in the days, weeks, and months ahead - promise!
Instead, this morning, we'll turn to our Trade of the Decade for the next 10 years. There are, of course, two sides to this trade...the long side and the short side. We had no trouble finding things to put on the short side. In a de-leveraging period almost everything goes down. We could have stuck with US stocks, for example. They'll probably continue to come down...just as they did in Japan.
But who knows? US stocks just had their worst decade since the '30s. What are the odds that they'll have another bad decade? We don't know. But what we look for in our Trade of the Decade, for the sell side, is something that has just had its best decade ever...something that has been going up for so long people think it will go up forever...something that everyone wants.
What does that describe? Well, the thing that comes closest is US Treasury debt. Yields have been going down (meaning, the price of debt is going up) since 1983. And now, despite a supply that seems to be going off the charts, demand for Treasury bonds, notes and bills has never been stronger. What's more...if our analysis of the US economy is correct...the supply of Treasury debt is going to continue to rocket upward for many years. Deficits of $1 trillion to $2 trillion per year are going to become commonplace.
How long will it be before the market in Treasury debt crashes? How long will it be before hyperinflation...or a debt default...sends investors running for cover? We don't know...but it seems a likely bet that it will happen sometime in the next 10 years.
So, on our sell side...we'll put US Treasury debt.
How about the buy side? Ah...that is something we've struggled with. While there are many things that seem likely to go down, there aren't many that seem destined to go up. Let's see, what has been beaten down, dissed, battered, and abused for the last 20 years or more? What is it that people don't want? What is it that they expect to go down...possibly forever?
Of course...Japanese stocks!
So there is our Trade of the Decade:
Sell US Treasury debt/Buy Japanese stocks.
Crazy, right?
Maybe not. Treasury debt has been going up for the last 27 years. Japanese stocks have been going down for the last 20 years.
Does this mean we're giving up on gold? Not at all. We're sticking with gold. Aurus eternis, or something like that. The yellow metal is what you buy when you think the financial authorities are making a mess of things. We have little doubt about it. So we'll continue to buy and hold gold...until the financial system blows up.
But gold at $1,100 an ounce is fully priced. It is not cheap. It's been going up for the last 10 years! At this level, it is insurance against a monetary catastrophe and a speculation on when and how the blow-up will finally come. It is definitely worth having. And holding. And using to protect your wealth.
But the trade of the decade is a way of making money...by buying/selling two opposing assets that are at extraordinary valuations. It is not a speculation on what MIGHT happen. It is merely a bet on the phenomenon known as "regression to the mean." Things that are out-of-whack tend to go back into whack...
If we're right, over the next 10 years, the most popular investment of 2009 - Treasury debt - will go out of fashion. The least popular investment of 2009, on the other hand - Japanese stocks - will surprise everyone by finally showing signs of life.
In any event, the trade is fairly low risk. What are the odds that US Treasury debt will go up? What are the odds that Japanese stocks will go down? Of course, we don't know...things that are out-of-whack can get farther out-of-whack. But we count on time to sort it out. And hope we live long enough to be able to say, "we told you so."
Best wishes for 2010!
Regards,
Bill Bonner
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Monday, 4 January 2010
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