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Bill Bonner, speaking his mind from London, England...
Okay! We'll say what we've been thinking...
..that our children are going to spit on our graves!
First, Americans made a colossal mistake in the '90s and the '00s. They
partied...they spent...they borrowed...running up huge debts in the
private sector. Most kids could forget about inheriting anything from
their parents; the geezers spent it years ago.
The boomer generation also made a mess of the biggest success story in
world history - the United States of America. In the '60s and '70s -
when boomers matured and began to take over - the US was still on top of
the world. It had a positive trade balance...huge savings...massive
investments abroad...and the strongest companies in the world.
They ruined it. The financial industry took over...replacing
manufacturing. Instead of making things we could sell at a profit, Wall
Street sold debt - mostly to us! In government, imperial ambitions
pushed aside the restraints and good sense of the old republic.
Overseas, military bases were set up in 120 countries. We now have
unwinnable, trillion-dollar wars that could go on forever. At home, the
sheep look to the government to solve every problem. Thirty-five million
Americans - almost as many as the entire population of Spain - depend on
the feds' food stamp program for their daily bread.
At least, most Americans are making amends in their private lives. The
old days, when the US was "the world's mouth," are over. We can no
longer be counted on to buy up every gadget and gizmo produced in the
world. We're rediscovering the old virtues of thrift and savings.
Frugality is back in style. If this continues, the Baby Boom generation
may not leave the next generation with much net wealth, but at least it
will not leave behind huge net debts.
But over in the public sector, the debt toll mounts up. The boomers want
the government - which means, the next generation - to pay for their
health care...their unemployment insurance...their bailouts and their
handouts. The deficit for this year is expected to be about $1.5
trillion. Next year, it will be about the same. The feds say it is too
early to pull back on their stimulus efforts. Housing credits and
unemployment benefits have just been extended. A trillion-dollar
overhaul of the healthcare system is in the works. Even assuming a real
recovery - don't hold your breath - the deficits are supposed to run $1
trillion per year for the next 10 years. More likely, as we reported in
this space a few weeks ago, the deficits will be $2 trillion per year.
By the time today's 30-year-old gets a family...a house...and a
mortgage, he will also have his share of a $20 trillion dollar deficit -
not to mention the "off budget" obligations of the US government, a
total of more than $100 trillion!
But wait...aren't these spending efforts paying off? Isn't the stimulus
helping the US economy get back to into the pink? Don't all these
federal spending programs create a safer, more prosperous world?
Ah...tell that to the kids! "We were just trying to get the economy back
on its feet...so you could find a job in a thriving economy," we might
say.
Take any two young people, 16-24 years old. Odds are, one of them will
be unemployed. Joblessness among the young has hit 53% - a post WWII
high.
Seven million jobs have been lost in the last 24 months. Employers are
still cutting payrolls. And when business picks up...what kind of jobs
are they going to offer? Will the next generation compete with the
Chinese for low-cost production? Are they going to compete with the
Europeans for high-cost/high quality production? Are they going to
develop more mortgaged-backed securities? Or are they going to put on
waiters' aprons and take orders from clients who no longer dine out?
Good jobs will be hard to come by. Because the 'growth' of the bubble
period - 2001-2007 - was a fraud. Instead of building up capital assets
and creating more jobs, people borrowed money ...and then squandered it.
And now, the recovery is a fraud too. Now, the government pumps up the
economy with cheap credit...borrows trillions...and wastes the money on
pointless 'stimulus' programs.
And day after day, the debt builds up. Soon, it will be too big to
handle. And then, these same young people - who can't get a foot onto
the lowest rung of the employment ladder - will be asked to shoulder
this huge burden of debt left to them by their parents. You can imagine
their reaction...
..they will spit on our graves!
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And more thoughts...
What happened yesterday? The Dow sold off 93 points. Investors had been
hesitating. There's supposed to be a recovery going on. But the latest
news is unsettling. Housing and employment numbers are weak. What's
going on? Maybe this recovery is not a sure thing after all.
"Record numbers late on US loans," says a headline in The Financial
Times.
The story is easy to understand. People without jobs can't make mortgage
payments. So, payments are late on 1 of every 6 FHA mortgages. Mortgage
defaults are at a 3-decade high. Of all mortgages, nearly one homeowner
in 10 is running late in his payments.
As predicted in this space, problems in the housing finance sector are
now shifting from sub-prime to prime mortgages. The subprime borrower
had few resources. He washed up as soon as the crisis began. But now the
prime borrower, who lost his job and is running out of options, is
sinking too.
What's the smart money doing?
The Dow is now up more than 50% from its March low...and has regained
more than 50% of what it lost. Are the insiders taking advantage of this
dip to get bigger stakes in their own companies? No... They're selling
18 times as many shares as they're buying. Go figure.
The insiders know that their businesses are not really in good shape.
They've been able to maintain profit margins by cutting staff. But sales
are down. And they don't see where additional sales will come from.
Meanwhile, investors have been hallucinating about a real recovery.
They've bid up the price of shares as though they expected a stunning
period of growth. Generally, earnings have held steady...but stock
prices have gone up.
This has brought a 10-point increase in the P/E ratio, to greater than
27.
What would justify such an ambitious P/E? Only growth. Where might
growth come from? We don't know. David Rosenberg says stocks are priced
as if investors expected profits to double next year. But it usually
takes profits 5 years to double. And then, only when they have a reason
to double - such as higher sales and lower costs.
Don't count on it, dear reader. More thoughts below, but first, here's
today's essay...
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The Daily Reckoning
Presents: |
Too many and too few people...too much and too
little money...a history so rich many would rather forget it and a
future so uncertain everyone is willing to gamble on it. The subject, of
course, is China. This week we brought you a couple of essays on The
Middle Kingdom, both of them bullish. In today's installment of our
little China Series, Bill Bonner offers a seasoned contrarian's
perspective. Please enjoy...
Bare Branches
By Bill Bonner
London, England
Last month, a Hong Kong apartment set a record. It sold for $56.6
million, which works out to $11,350 per square foot - the highest price
ever paid for a pad in China. The buyer may have just needed a roof over
his head. More likely, he is bullish on China. We are too, in the sense
that we expect the Middle Kingdom to mature in wealth and power in the
21st century. But here's a better bet: that China will blow up before it
grows up.
China is a country of hyperbole. There's scarcely anything you can say
about it that doesn't end with 'est.' In some ways, it is the world's
oldest society. In other ways, it is its newest. It is the world's
richest - with more than $2 trillion in reserves. It is also the world's
poorest, with some 200 million people who get by on less than $5 per
day. It faces the world's biggest problems too.
Even in its calamities, China is second to none. People inside the Great
Wall were about as rich as people outside it, man for man, until the
19th century. Then, China missed the industrial revolution. Nearby Japan
missed it too, but quickly corrected its mistake. It kept the barbarians
at arms length, but still managed to pick their pockets. The Chinese, on
the other hand, played it cool. The barbarians had nothing to offer,
they believed. They still think so. Said Xue Chen of the Shanghai
Institute of International Studies, just last week: "The US has a lot to
ask from China. On the other hand, the US has little to offer China."
In the early 19th century, traders from Britain and America bought
porcelain (china), silk and tea. Trouble was, they could find nothing to
sell in exchange. The trade balance with China went negative, with China
building up substantial monetary reserves (in silver). In 1830, a
Chinese merchant, Hao Gua, who enjoyed a near monopoly on trade with the
gweilos [foreign devils], was said to be one of the richest men in the
world. Then, the English found something the Chinese would buy - opium.
The fruit of the poppy was popular in many countries but, as usual, the
Chinese over-did it. First, it was a favorite of the leisure classes.
Then, it trickled down to ordinary workmen. Soon the coolies were
neglecting their labors and China was in crisis. When the authorities
tried to stop the drug trade, the English opened fire, humiliating the
government and almost bankrupting it. People lost confidence in Manchu
rule. By mid-century, nearly half the country was in open revolt. A
Christian revolutionary had set up the "Heavenly Kingdom" in Nanjing. He
raised armies and challenged the Qing Dynasty to battle. For a time, it
looked like he might win.
In the north, meanwhile, infanticide of female babies had become common
in Nien territory - a reaction to famine and scarcity. By mid-century,
one out of four young men in the region couldn't find a bride; "bare
branches," they were called. By 1855, these bare branches were ready to
break. They armed themselves and organized. They drove out government
forces and controlled a large part of the country before they were
finally put down. Between natural calamities and war, some experts put
the 19-century death toll at an unimaginable 200 million. And then came
the 20th century! The Middle Kingdom staggered forward, from error to
accident to catastrophe! From the Taiping insurrection to Mao Tsetung.
Then, 30 years ago, Deng Tsaoping announced the new line: "To get rich
is glorious," he said. Suddenly, the Chinese began saving every penny.
Building factories. Cutting prices. And beating the barbarians at their
own game.
Again, they exaggerated. While Americans built too many shopping malls,
the Chinese built too many factories. Then, in 2008-2009 came the
"greatest collapse in world trade in history," says Nobel-winning
economist Paul Krugman. Americans - their biggest customers -
rediscovered thrift. You might think China would realize it had too much
capacity and back off. Instead, it rolled more steel. It built more
factories and offices...entire cities.
If stimulus spending is a measure of stupidity, the Chinese are three
times as dumb as Americans. Both governments respond to correction by
doing more wrong than they did before. Loans in China are rising by
about 40% of GDP annually. The money supply is soaring at nearly 30% a
year. "We estimate that [fixed capital formation] accounted for 70% of
China's growth in 2008 and close to 90% of China's first half of 2009
growth," says a report from Pivot Capital.
It is just a matter of time until this capital spending bubble blows up.
But China is full of bubbles. In another example of its central
planning, it made the ancient practice of infanticide state policy. One
couple/one child was the rule. Missing girls was the result. Then, when
the boys grew up, they discovered that their brides were missing too.
The working age population of China is collapsing. There were 7 workers
to every old person in 1990. Now, there are barely 4. By 2035, there
will be only 2. What happened to the workers? They are the missing
children of the missing girls who then became missing mothers. And by
2040, 397 billion old people - more than the total populations of
France, Germany, Italy, Japan and the UK combined - will be missing the
support of those missing workers.
Where this leads, we don't pretend to know. But bare branches bend...and
then they break.
Regards,
Bill Bonner,
for The Daily Reckoning
P.S. Long suffering readers are reminded that we'll be
presenting an exclusive interview with dear friend and colleague, Dr.
Marc Faber, in this space next Tuesday, November 24th at 2 PM. His views
on China are creating quite the stir...
You probably already know Dr. Faber as editor of The Gloom, Boom and
Doom Report. Put simply, he's one of the finest contrarian
economists working today. Below is a preview of the interview and
instructions on how to make sure you can
access it for free next Tuesday.
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And finally today, a few conversations with cabbies...
We spent much of the week in taxicabs, going from one meeting to another
in London. For some reason, the taxi drivers were unusually talkative this
week.
For example, a traditional black cab stopped for us on the ramp to
Blackfriar's bridge. The driver was not at all the typical English cab
driver. Instead, there was a woman behind the wheel - an attractive woman
of about 30, with long dark hair and a black dress.
"Where do you come from," she asked.
"Originally, from the US," we replied.
"Yes, you have a bit of a southern accent. I just melt when I hear a
southern accent."
"Well young lady," we shifted our accent quickly...from the tidewater of
Maryland...across the Potomac...and down along the Virginia piedmont. By
the time we got to the other side of the bridge we were moving across
Georgia faster than William Tecumseh Sherman.
"Well...aaah aam veairy paleeezed to make yawr chawmen acquaintance," we
told her. Our accent was so thick with pecan pie and grits it was amazing
she could understand a word. But we were determined; by the time we got to
Charlotte Street she was going to be a puddle.
Instead, she did the talking...
"I lived in America for about 5 years," she continued. "I had such a good
time. I loved it. Let's see, I visited New York, of course...but also down
in Virginia...and even Florida. Then, I went out to the West Coast. That
was fun too. It's such a big, beautiful country.
"It's a pity about the people, though. I probably shouldn't say this to
you. Because I can see you are a gentleman. A real Southern Gentleman, of
course. But not all Americans are very well mannered. They're all very
nice. Well, they're mostly very nice. But that's different. They're just
not always very polite. In New York, they act like they don't have time to
be polite. I mean, I can tell New Yorkers when they are visiting London
and they get in the cab. They don't say, 'Thank you,' when I pick them up.
They don't bother with 'good morning' or 'good afternoon.' No, they say:
'I wanna go to Buckingham Palace.' I mean, I guess it saves time. But it's
not very nice.
"The southerners are more polite. But even there, you get some parts of
the population that don't seem to be very well brought up. You go into a
fast food store and they don't look you in the eye...or say anything. It's
strange. And then when they do talk you can't understand what they're
saying...
"The West Coast is a little different. But sometimes I got the impression
that they thought being polite wasn't very cool. It was as if they were
imitating New Yorkers. I don't know. I probably don't have a very good
grasp of American customs, but that was just something I noticed."
We continued a lively conversation.
"You're probably wondering how I came to be driving a cab. Well, I tried a
number of things. But I like driving a cab. My father is a cab driver. So
is my sister. It's a little game with us...trying to remember all the
little streets in London and how to get from one place to another without
getting stuck in traffic. That's what we talk about when we get together.
And it's not a bad way to earn a living anyway. Because you can work as
much or as little as you want.
"As long as people have the money for the fares, it's not bad. For a while
there earlier this year, it was pretty grim. But now, people seem to have
money to spend again. They're going out...they're taking taxis. It's like
old times."
Another taxi driver misunderstood the American financial system:
"One of my sons works in New York. I don't know how he does it. They don't
get any vacations. I couldn't live like that. But he says he likes it.
Says it's stimulating. And he's with a bank. He works 12 hours a day, as
near as I can make out.
"But what I don't get is how come you have one fellow working 12 hours a
day and others not working at all? It doesn't make sense. Why not split
the work up...spread it around? Let others have a shot at it. Wouldn't
everyone be better off?
"The whole US financial system makes no sense to me. I don't know why
working people put up with it. They get no vacations to speak of. And they
don't have a system of health care. If you get sick, you have to pay for
your care yourself. But if you're really sick, you can't work. And if you
can't work, how can you pay for your treatment. The whole thing seems
balmy to me.
"But what do I know, I'm just a cab driver..."
Still another had more personal matters on his mind:
"I'm just here a few days a week. My wife and I live in Shropshire. Way up
north. That's where her family is from. Our children are all grown up.
They've moved away from London. And my family has passed away. We just
have her family, and they're up north. So, she wanted to leave London and
move up where her family is.
"I can't stand it, to tell you the truth. It's beautiful. And you go into
a shop and the shopkeeper knows your name. It's charming; you know what I
mean? But I'm used to London. Up there you can't go get a cup of tea after
5pm. Everything is closed. So, I get bored. That's why I drive this cab. I
should have retired years ago. But I can't bear sitting around. I'd rather
drive the cab...get out...meet people. It's just much more interesting.
And I can do it when I want. Nobody tells me what to do. If I get tired, I
just stop.
"I come down here and spend a few days driving the cab, then I'm ready to
go back to my wife. That's a nice thing about it too. She gets tired of me
after a few days. I probably get on her nerves. And she probably gets on
my nerves. So I come down here and work...and then when I go back, she's
happy to see me again. It works out real well for everybody.'
Enjoy your weekend,
Bill Bonner
The Daily Reckoning
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