by Bill Bonner
London, England
"It was at Rome, on the 15th of October, 1764, as I sat musing amidst
the ruins of the Capitol, while the barefooted friars were singing vespers
in the Temple of Jupiter, that the idea of writing the decline and fall of
the city first started to my mind."
- Edward Gibbon
Warren Buffett famously says that people do not make money by betting
against the US economy. But two years ago we decided to take a chance.
"We are short the United States of America," we announced
from the comfort and safety of our headquarters in London. "Sell its stocks.
Sell its bonds. Sell its money. Sell its real estate. Sell the equity. Sell
the debt. Sell everything."
What we saw was an over-stretched empire getting ready to snap. But we were
also allowing ourselves to be lazy. Rather than deconstruct the capital
structure of the world's largest economy, we decided to sell the whole
damned thing.
All Hell broke loose in September 2008. Since then, US stocks have gone down
about a third. Real estate too. Unemployment has doubled. Consumer prices
are going down at the fastest rate since the '50s. And the economy is in the
worse recession since WWII.
Meanwhile, Americans' per capita wealth has fallen from $172,000 in
September from $212,000 two years earlier. And the UN reports that the
quality of life in America has gone down too...from #5 on its list in 2000,
it fell to #13 in 2007. No doubt it is below #20 now.
Buffett has lost billions betting on the US economy while our gold
positions are handily up; gold was the most profitable major asset
over the last ten years.
So you see, we were right; America was a sell two years ago.
And now it is the dollar that is falling. It's gone down 12% in the last six
months - a huge move for a major currency.
"Asia tries to slow dollar fall," is the lead story in
today's Financial Times.
Today, a buck and forty-seven cents will buy you only 1 euro. Ten years ago,
you could have gotten a euro for less than a single dollar. A falling dollar
makes imports more expensive, say analysts...raising the cost of living in
the homeland. But you wouldn't know it from walking around on the streets of
Miami or Las Vegas. You can get a house at 50% off its price three years
ago. As for the breakfast special - for less than 3 euros you can get enough
food to kill a Pakistani.
By European standards, America is cheap.
"Europeans again interested in Florida houses," says a headline in The
New York Times.
House prices are down 30% to 50%. The dollar is down about
a third too. That makes the United States a bargain.
But is the United States of America about to become even cheaper?
One thing we were wrong about when we issued our 'sell America' call two
years ago was US debt. Treasury bonds have resisted the general downward
trend of things with the stars and stripes on them. Bonds have not gone
down; they've gone up.
Private households are buying them for their retirements. Banks are buying
them for risk-free profits. Speculators are buying them in anticipation of
deflation.
David Rosenberg:
"The big story yesterday was the further massive $12 billion decline in
outstanding consumer debt in August - the consensus was looking for an $8
billion contraction. This was the seventh month of debt retrenchment in a
row. In other words, the tidal wave of the credit collapse continues
unabated, and this is the primary reason why bond yields are still in a
fundamental downtrend.
"Over the past year, consumers have run down their debt by a record $113
billion (and this does not include mortgages). This is an absolutely
epic shift in household attitudes towards credit and discretionary
spending."
Americans are saving. And they're buying US Treasury bonds. (More below...)
But how safe is their money? Is it a good idea to buy US debt now?
On Wednesday, Latvia tried to raise a trivial amount of money. It offered
$17 million worth of 6-month bonds. How likely is it that Latvia will
default before Easter? We don't know, but investors judged it not worth the
risk. Not only did the bond auction failed, it failed with no bids.
That's what happens when lenders lose faith in a government. They refuse to
lend it money - except at high rates of interest. But the high rates of
interest work like a noose on the neck of a cattle rustler. They block the
vital flow of oxygen - not to mention breaking his neck.
Note that the US federal government is still functioning like an empire at
the peak of its power. The Pentagon is still rustling up trouble all over
the world - at a cost of trillions. US government employees are growing more
numerous and richer - with twice the annual incomes of the private sector.
And the Obama Administration - apparently unaware that the total unfunded
debts and obligations of the federal government have soared to nearly $120
trillion - is considering new ways to get rid of cash.
Remarkably, investors still lend the US government money -
asking only 4% annual yield on a 30-year loan. As for 91-day money, they
practically give that to the feds for free; it sports only a yield of
0.066%.
This will surely be a point of puzzlement for the financial historian of the
next century. It is certainly a point of puzzlement for us.
[We wrote a book with Addison Wiggin, Empire of Debt that looked at
the similarities between the United States and the Roman empire - right
before its fall. We recently updated this New York Times
bestseller...and
you can get your copy here.]
More below, after the news, from The 5 Min. Forecast:
"Thirteen months ago, the government took over Fannie Mae and Freddie Mac,
both on the verge of failure," writes Ian Mathias in today's issue of
The 5. "What have we learned since then? Jack...
"The Federal Housing Administration, 'appears destined for a taxpayer
bailout in the next 24 to 36 months,' Edward Pinto said at a Congressional
hearing yesterday. As the former chief credit officer for Fannie Mae, he
should know.
"But it doesn't even take an industry insider to figure this one out. Just
a year after bailing out the overleveraged Fannie and Freddie, the FHA has
managed to paint itself into the exact same corner. When the free market -
in its infinite ignorance - stopped issuing easy money home loans last
year, the FHA stepped in and became a huge player in the mortgage loan
biz. They went from insuring 6% of new mortgages in 2007 to over 21% last
year, and even more in 2009.
"Now the FHA insures 5.4 million single-family home mortgages - most of
which require only a 3.5% down payment - at a value of $675 billion. Their
cash cushion? Oops... Must have forgotten to beef that up too... It's just
$30 billion. That's the same 20-1 leverage our government's been
pooh-poohing on Wall Street. Funny how that works.
"And since the FHA has become the insurer of last resort, famous for their
crazy-low down payments, the loans they cover are souring at an
accelerating pace. The more recent the loan, the worse it's performing...
Can you hear the wind sucking out of this one?
|
 |
"So what happens if the FHA goes belly up? Hey, don't call us alarmists:
'Let's be clear,' said Congresswoman Maxine Walters at the hearing,
'without the FHA, there would be no mortgage market right now.' As we've
forecast before, look for the FHA to be the next multi- billion dollar
bailout."
You can get The 5 in your inbox 5 days a week, free of charge.
It's one of the many perks that come along with being a subscriber to
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And back to Bill, with more views:
Yesterday, gold hit a new record at $1057. Doesn't gold go up when inflation
rates rise? And don't bonds go down when inflation goes up?
So why are people buying bonds with such puny yields?
There is a lot of whispering in this market. Gold is trying to tell us
something. Bonds are trying to tell us something. The dollar seems to have
something on its mind too. Stocks are just babbling.
If gold is trying to signal that inflation is coming, the bond market is not
paying attention. Bonds seem to be saying that it is deflation we should be
worried about; but the stock market doesn't seem to hear.
And there's the dollar. The greenback is in the same choir with stocks and
gold, as near as we can tell. They all seem to be chanting about
inflation coming back.
But what if they're all wrong?
Just look at what is going on in Washington, if you can bear it.
The feds have a budget that anticipates inflation and growth. Spending is
supposed to remain flat until 2013. Tax receipts, which are no higher today
than they were 10 years ago, are supposed to rise, gradually filling in the
Grand Canyon of deficits. The number crunchers think we're headed back to
the Reagan years - when the tough-love policies of the Volcker Fed squeezed
out inflation and created a real boom. Then, tax revenues rose 9% per year
between 1984 and 1989.
How likely is that today? Not very. Instead, what is likely to
unfold is a deflation story. Instead of staying flat, federal
expenses are likely to rise as one failed stimulus gives way to another
failed stimulus. Then, instead of going up, tax revenues will go
down...digging an even grander canyon between out-go and income.
Then, or long before, there will be a panic out of bonds, the dollar, stocks
- practically everything. Everything goes down!
At this point, the US will be in about the same situation as the Roman
Empire as it approached retirement. Expenses kept rising. Rome had to pay
the Blackwater-type military contractors of the era...in addition to keeping
Roman mobs supplied with food stamps and unemployment benefits...while its
tax base fell. Gradually, the empire lost the ability to defend
itself.
When Edward Gibbon began his history of Rome's decline and fall, Roman real
estate had probably been in a bear market for at least 1300 years. Rome's
population fell from over a million to under 20,000. Politically, Italy had
broken apart more than 1,000 years before Gibbon was born, and it wouldn't
be put back together again until nearly 100 years after he was dead.
It's far too early to write the story of America's decline and fall. That
job will fall to some future historian, perhaps seated on the ruins of the
Lincoln Memorial, wondering how people made such a mess of things.
Our guess is that he will come to the same conclusion we have: Stocks?
Bonds? The dollar? Investors should have sold them all!
[But we'll hang onto our gold...and you should do the same. Don't be turned
off by the high price of the precious metal...there's a way you can get gold
at just a penny per ounce.
See how here.]
Keep reading for today's essay...
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The Daily Reckoning
Presents: |
The maestro himself, Sir Alan Greenspan, has
declared a recovery underway in the United States. The same man who didn't
see the world's biggest financial bubble until it exploded in his face. This
revelation seals the deal for Bill Bonner: the country is clearly not
recovering. Keep reading...
Chronic Depression
by Bill Bonner
London, England
This week, the Australian central bank became the first to declare victory.
It raised its key lending rate 0.25% and gave a whoop...signaling an end to
the slump. The European Central Bank fidgeted and vaguely threatened to
raise rates too. But the Americans stayed in their trenches. New York Fed
governor Bill Dudley said that even though the economy is recovering, any
rate hikes in the United States would be over his dead body.
Then, word came that even Alan Greenspan thinks a recovery is
underway.
"This is what a recovery looks like," said the maestro. That settled the
matter as far as we are concerned. Alan Greenspan didn't see history's
biggest financial bubble until it exploded in his face. In the following few
words we undertake to show that Greenspan is as blind as ever.
"Great time for US consumers, America is on sale," says an item at
YahooFinance. The "discounts are unbelievable," adds a blogger known as
Frugal Rhode Island Momma. All across the nation, merchants are no longer
selling the merits of their products; they're selling price. McDonald's
advertises its "dollar meals." Hotels have cut room prices by 20% in the
last year. House prices are down about 30% since 2006. Sellers are offering
bargains and they want buyers to know it. "Sold for $365,000 in 2006. Now
$195,000," says a typical house ad.
Foreigners have noticed too. Colleagues in London say they are
thinking of moving to Florida where they will get far more for their money.
The dollar falls; foreign purchases go up. Stocks, for example. In the first
quarter, foreigners were unloading US shares. Now they're buying more than
$100 billion worth per month.
It is a deflationary world, at least that part of the world between the Rio
Grande and the 49th parallel. The CPI in the United States is negative and
falling faster than at any time in 59 years. Households can only be induced
to spend money by cutting prices. "Cash for Clunkers" cut prices on new cars
by about 20%. As soon as it ended, so did auto sales. Most new house sales
could be traced to a tax credit - which reduced the down payment by at least
20%. That program is scheduled to end in November.
And now, the White House frets about jobs. Unemployment is supposed
to be a lagging indicator, but this time it seems to have dropped out of the
race all together. Still, Congressional elections are coming up.
Unemployed voters are surly and unreliable. So, the Obama administration is
considering a $3,000 tax credit to bribe businesses to hire them. If the
typical employee costs his firm about $40,000, this effectively reduces the
cost of labor by 7.5%.
It's beginning to look more and more like the Roosevelt years. By the end of
this year, all the jobs created during the bubble era - 2002- 2007 - will
have been eliminated, making it the first decade with no job growth since
the '30s. We're expecting a fireside chat any day.
|
"The authorities still do not understand what is going on. They are
used to fooling most of the people most of the time. They think they
can dupe them again – with bailouts and boondoggles." |
|
Typically big businesses cut workers in a recession. Then, when the economy
recovers, small businesses are quick to take them back. But this is unlike
the typical post-war recession. This time, deprived of capital as well as
customers, small businesses don't have a chance. Neither does a genuine
recovery.
The authorities still do not understand what is going on. They are used to
fooling most of the people most of the time. They think they can dupe them
again - with bailouts and boondoggles. But real demand has vanished as
households try to pay down their debt. That is not going to change anytime
soon. Not while the federal government is sabotaging a genuine recovery.
It's savings - capital - the US economy needs. A capitalist
economy in which the capitalist have no capital won't work. Why is there no
capital? Because the feds take it.
Supplying cash-for-this and cash-for-that is an expensive proposition,
especially when tax receipts are falling. The money has to come from
somewhere. As it turns out, the feds borrow it from the very people who are
trying to rebuild their personal balance sheets. Of the $1.6 trillion the US
government will borrow this year, the biggest single lender is the private
sector, chipping in $700 billion. But instead of being put to use in a way
that might stimulate a real recovery - providing credit for small business
and consumers - it is taken up by the US government and then frittered away.
The banks are happy to play the government's game too. They
can borrow overnight money from the Fed at only one quarter of 1%,
annualized. But lending to small business is hard work. And it is risky. Why
bother? The US Treasury will pay them 4 % for lending back to the
government, long term. This is practically free money to the banks. Both the
bankers and politicians end up ahead - with a bigger piece of the economy
under their control.
Meanwhile, the real economy staggers. "Drought of credit hampers recovery,"
summarizes The Wall Street Journal. The United States needs to
create a million and a half new jobs each year just to keep up with
population growth. Currently there are 15 million people without jobs
already...and a couple hundred thousand more unemployed every month. And if
this recovery continues long enough there won't be a single person left in
America who still has a job.
Even if the economy could be stabilized, it will leave millions without jobs
- more or less permanently. Add the people working reduced hours, and those
who have been looking for work so long they are no longer counted, and their
families, and you have a quarter of the population without money to spend.
That's why this slump is not going away any time soon. As in Japan in the
'90s, we may have to live with this depression for the rest of our lives.
Enjoy your weekend,
Bill Bonner
The Daily Reckoning
Editor's Note: Bill Bonner is the founder and editor of
The Daily Reckoning. He is also 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. He is also the author of, along with Lila Rajiva,
Mobs, Messiahs and Markets: Surviving the Public Spectacle in Finance
and Politics.
Bill's latest book, an update of Empire of Debt,
can be found here.
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