Bill Bonner, reckoning from Baltimore, Maryland... Here's a cartoon sent by one of our dear readers. We have readers all over the world. But Pamela must be one of the most remote. She lives on a tiny island in the middle of the Pacific. We've seen the photos. It looks stunningly beautiful. A South Pacific paradise.
It's a little surprising that someone who lives in such a paradise setting would trouble herself worrying reading The Daily Reckoning and worrying about macroeconomics. But the world of money is fascinating. And probably a lot more entertaining if you're not in the middle of it. Yesterday, investors must have felt like they'd rather be somewhere else. The Dow registered a loss of 268 points. Gold took a $49 beating. We won't know for sure until tomorrow. If tomorrow is another bad day - as it probably will be - then it will be clear that the last stage of the bear market has arrived. This should be the final drop...when stocks should go down to their ultimate bear market low. Where will that be? We don't know. Maybe Dow 5,000. Maybe lower. One way or another every major bull market needs a major bear market. The two go together like yin and yang, Abbott and Costello, or gin and tonic. Take one out of the picture and the other one no longer makes any sense. We've had our bull market. It took the Dow from under 1,000 to over 14,000 in the space of 26 years. We've had a bubble too. The party was a lot of fun for everyone. Now, it's time to clean up. It's time for the bust in the economy...and the bear market in stocks. That's just the way it works. Sorry. If this bear market is going to correct the entire bull market from 1982 onward, it has to take prices back to the levels they were when it began. Back then, you could buy the Dow (from memory) for about 5 times earnings. Now, (we're not doing any research here...just broadly remembering the figures...) it's at about 20 times earnings. If those numbers are correct, you'd expect the final low to come in about a quarter of where it is now...or about 2,500. Another way to look at it is to ask ourselves what the Dow of '82 would be today, adjusted for consumer price inflation. We don't know the answer to that either...but we'll guess that it would be about 4 times what it was then - or about 4,000. So, now we have a range... We know roughly where this market could be headed - if it is the yang we're expecting. And if that's where it is going, a South Pacific island paradise would be a good place from which to watch it get there. More thoughts after today's column... --- Mayer's Special Situations Resources Report --- "The Biggest Resource Breakthrough Since the 'Beaumont Miracle' of 1901" 64 publicly traded companies are already deeply invested... insiders are already raking in as much as $205,421 per day on the shares... But only one of these cutting-edge companies offers you the "secret wealth advantage" I reveal right here... --------------------------------------------------------------- | ||
The Daily Reckoning PRESENTS: When it comes to economic trend setting, Japan is way out in front. The Land of the Rising Sun suffers from a multi-decade, on-again/off-again recession. They achieve this growthless scenario by employing government policy wonks and economists to do the market's work for it. Bill Bonner explains how in today's essay... Everybody Off The Beach! By Bill Bonner Baltimore, Maryland Last August, it was reported that deflation in Japan had reached a new record. Prices were dropping at the fastest pace 38 years. By November, it was duration, rather than depth, that got the press's attention. Prices had been going down for 10 months in a row. Then, last week an update: "Japan Deflation Hits a Record Pace," reported the BBC. Prices in Japan were falling faster than they ever had since they began keeping track in 1970. The tide has gone out so far; beachcombers can't remember when there was so much beach to comb. But what follows is not offered as a prediction, but only out of curiosity. We don't know how this will turn out. Could it end in hyperinflation? Maybe. Prices fall in Japan. The yen rises. And the government uses every trick in the book - and some as yet unpublished - to knock it down. If you are in a position to borrow money from the central bank, the bankers will give it to you at practically zero interest. And if your neighborhood wants a bridge or a community center, that too will be forthcoming from the Japanese government. No government has ever been so generous. At least, not without going broke. For every yen the government squeezes from its taxpayers, it returns more than 2 yen in public spending. Investors must think the trend is eternal. Or perhaps they don't think at all. They lend money to the world's most spendthrift major government for 10 years in exchange for a yield of only 1.310%. The drama of this story is an old and familiar one. Deeply flawed heroes at the world's central banks and treasury departments think they can do a better job of guiding the economy than the markets themselves. It is they who set the price for short-term money, for example, not willing borrowers and lenders. They are the ones who fight the correction every inch of the way. They are also the ones you don't want to stand behind; every shot they take backfires. In France, the savings rate, as percentage of revenue, has gone up for the last 16 months, to 17% - the highest rate in 27 years. This comes as the Sarkozy government follows the lead of the US and Japan, with a deficit of about 8%...compared to 10% in the US and even higher in Japan. This is not the first time this has happened in France. The previous savings rate peak came when the Mitterrand government was trying to stimulate the economy out of the slump of the early '80s. The more the government tries to stimulate spending by running deficits, the more people try to protect themselves by saving. While the drama continues throughout the world, the story is most advanced in Japan. Which is to say, the central bankers have gotten themselves into deeper trouble. Martin Wolf of The Financial Times and Richard Koo of Nomura Securities applaud their performance. But by trying to suppress a correction in the private sector, Japan's central bankers have stretched out a slump over two decades and set up the nation for a bigger crisis in the public sector. And there is nothing they can do about it. Their fiscal stimulus no longer stimulates. Their monetary inflation no longer inflates. And every quack cure they offer brings the patient closer to the grave. You might think they'd give up. Instead, they increase the dosage. Fiscal stimulus hits a new record, right along with deflation. But it's the final act that interests us. With public debt at nearly 200% of GDP and 700% of tax revenues, we shouldn't have to wait much longer. Given the track record, we have to assume that it will be the exact opposite of what central bankers expect. They are aiming for the whimper of newborn growth. More likely, they will get the bang of hyperinflation. The Japanese were recently among the champion savers of the world. Directly or indirectly, these savings financed the government's stimulus efforts. Banks, pension plans, insurance companies - all bought government bonds as a safe way to store wealth. The government then drew upon this stored up wealth to finance its bridges to nowhere and its other boondoggles. The result is a misunderstanding on its way to becoming a disaster. The typical Japanese person looks forward to his retirement with a mountain of savings in his backyard. He believes he still has his cake. The government, however, has eaten it. Higher savings rates typically produce lower prices, for a while. Currencies rise. Even in Weimar Germany, there was a period in 1920 when the mark rose. Falling prices would seem to be proof that the money is still there. But the real money is gone. Then, suddenly, people notice that their savings are nothing but paper. The tide turns. Confidence disappears. The big wave of accumulated savings hits the marketplace like a tsunami. Desperate people try to get rid of paper. They want something solid to hold onto. Long-term bonds, the most vulnerable to inflation, are exchanged for cash. Cash and government securities flood the market. Prices soar. Middle-class savers drown. Meek debtors, relieved of their burdens in the flood, inherit the world. So do the arrogant debtors in the government. And the shrewd speculators. And then central bankers return to their desks and come up with a new plan. Regards, Bill Bonner for The Daily Reckoning And more thoughts from Bill... The bust in the economy ain't so bad either. Credit default swap spreads are widening. Bond yields are rising...especially in Europe. The service sector in the US is performing below expectations. Oh...and listen to this: "More weigh walking away from mortgages," says The New York Times. As anticipated, people are warming up to the idea of stiffing their mortgage lenders. Why not? Millions of houses are underwater; let the mortgage company deal with them. Delinquent mortgage payments have risen to over 10%. The Baltic Dry Index is dropping, too. And Dr. Copper is 'set for catastrophe,' says a copper expert. Copper, you'll recall, is the metal with a Ph.D. in economics. It's the metal that you find in home wiring, refrigerators, offices, automobiles, cell phones - just about everything. So, when the price of copper goes down it means something. Usually, it means business is slowing down. Copper has fallen more than 10% in 2010. It will probably go down a lot further. Chinese companies stockpiled the metal last year, causing its price to double. Now, they've got more than enough. And if the world economy is still slowing down, which is what the Baltic Dry Index is probably telling us, you can expect the price of copper to collapse. Stay tuned. Washington is waiting for a big storm. They've been talking about it on the radio all week long. More than a foot of snow is expected. School children look forward to a holiday...not to mention sledding and snowball battles. Adults are hoping for a little time off too...but dreading the drive home from work. Here at The Daily Reckoning, we can't help ourselves; we look at it like the onset of a bear market...or a depression. It's going to be rough. They'll be some wrecks along the highway. Some people will get stuck. Some will get hit by snowballs or slip on the sidewalk. See, it's going to be fun! Enjoy your weekend. Bill Bonner, for The Daily Reckoning --------------------------------------------------------------- Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor at joel@dailyreckoning.com | ||
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Friday, 5 February 2010
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