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Markets continue deleveraging, housing sends mixed signals,
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Financial Darwin Awards draw to a close...and so does that $1 offer,
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Plus, Bill Bonner on the Café des Dames bum and a whole lot more...
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First up, Bill Bonner, with today's reckoning from Paris,
France...
In the Café des Dames...
The damned bum takes a coffee break!
He spends all day, sitting on the sidewalk outside our office in one of
the city's marginal neighborhoods. His back to the Communist Party
headquarters building, he sits on a duffle bag. Red haired. Not bad
looking. About 35, maybe 40, years old...he doesn't ask for alms. He
doesn't do anything. He just sits there. Day after day.
But every day, at about 11:30, he comes into the café on the corner. That
is also where your editor sometimes sits and thinks...and where,
sometimes, he just sits. The bum orders a cup of coffee. So do we.
He was sitting there this morning, drinking his coffee when the adulterers
came in...more below...
We almost forgot. Our beat is money. And we won't make any money hanging
around the Café des Dames watching people come and go. So let's turn to
the financial world...
Yesterday, the Dow was down 150 points the last time we checked it. And
this morning, Asian stocks are falling again. China's stock market has
fallen below its 200-day moving average - a bad sign.
Is this a little correction in the long upward climb of stock prices? Is
it a pause in humanity's march to perfection? Or is it a resumption of the
bear market that began 2 years ago?
The way we see it, things go up and down...round and round...back and
forth. Human life may become more comfortable, with technical progress and
innovation. But every life still ends in the same place it did a million
years ago. Ashes to ashes...dust to dust...
And what about the life of a company? Or a stock? Or a bull market? You
know the answer. They end up where they began, nowhere. Everything ends up
in the same place...back where it started. The challenge, as near as we
can tell, is to get there with grace and dignity.
Speaking of stocks, the Dow hit a low of 6,547 on March 9th of last year.
Most observers believe that was THE low...the nadir of the bear market
movement. We doubt it. Even at its low, investors were still fairly
confident that stocks would perform well 'over the long run.' They saw the
problem as a banking crisis...a liquidity crisis, not a fundamental
failure of the economy.
And even at 6,547 the Dow had lost only about half of its value...leaving
P/E ratios well above typical major bottoms. At major bottoms, you can buy
almost any stock on the exchange for 5-8 times earnings. If you were
buying the whole company, you'd get a yield on your investment of 15% to
20%. Nice deal.
But in March of last year, when the bear market found its first
resistance, corporate earnings were falling too...leaving investors with
P/E ratios closer to 20 than to 5.
The bounce lasted more than 9 months and recovered about half of what
stocks had lost. If the bulls are right, stocks could correct here...and
then go back to their bullish trend. If we're right, on the other hand,
they will fall all the way back to their March 9 low...and keep going,
until they finally arrive at their ultimate low. Then, you'll be able to
buy major listed companies and get a decent return on your money - from
the dividends.
If we're right, the economy is in a multi-year period of correction,
de-leveraging and depression. The stock market has to notice, sooner or
later. And it is bound to get a little gloomy when it realizes what is
going on. That should take the Dow down to about 3,000-5,000 on the Dow
index. It could be much lower...
The latest figures - keeping in mind that we don't believe any statistics
unless we fiddled them ourselves - show new jobless claims down last week,
but not as much as expected. Bloomberg quotes a 'senior
economist' who tells us that the numbers are going in the right direction,
but 'very slowly.' The four-week average number, meanwhile, is going in
the wrong direction - it shows increased unemployment.
And what about the housing market?
It's hard to get a clear picture of what is going on. According to Case/Shiller
prices are rising in many areas. But so are inventories. It now takes a
record 13.9 months to sell a new house - up 50% from a year ago. This must
discourage a lot of sellers. Those who can afford it may prefer to hold
houses off the markets - waiting for a better season.
The housing market is probably like the stock market, in other words. Just
a little slower. The first wave down was driven by defaults, foreclosures
and marginal, desperate sellers. The next wave down will be driven by
inventories...population trends...and the depression. Many owners still
believe prices will come back, when the 'recovery' really gets underway.
Most likely, they will be disappointed.
If there is any recovery at all...it will be weak, lame and tentative.
People wanting to buy houses will look for bargains. Owners will take
advantage of every positive move to release more inventory - depressing
prices for many years ahead.
What would change things? Well, there is little hope that the crisis will
go away. Mistakes gotta be corrected. Leverage gotta go. Depressions gotta
do their stuff.
But the nature of the depression could shift suddenly - from deflation to
hyperinflation. We don't expect it. But it could happen. And if it did
happen, people might rush to get rid of paper dollars as fast as possible.
You'd see a big boost in prices for just about everything - including
stocks and real estate.
Even in this case, however, the increases may be less than the losses on
the paper money itself. Very hard to predict. In hyperinflation all bets
are off.
Do we expect hyperinflation in the US anytime soon? No. We expect years of
Japan-like suffering. But we could be surprised...
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The Daily Reckoning
Presents: |
Gold vs. Paper. It's not just a question for our age...it's one for
the ages. Before intelligent investors look forward, they might
first like to see how things panned out in the past. In today's essay,
Bill takes a look at the history books...
The Descent of Money
By Bill Bonner
Paris, Fance
Science and technology have produced many wondrous breakthroughs. But
there are some things it cannot improve. A kiss from natural lips is
still the lover's choice. Baby formula proved no match for the real
thing. Ersatz money is a flop too. That last item is not so much a fact
as a prediction.
The first modern competition between gold and paper money ended like the
pre-modern ones. Gold won. Herewith, a short summary:
A rogue, John Law, was the protagonist of the story. He killed Beau
Wilson in a duel. Then, he went on the lam...first to Scotland...then to
Amsterdam...and finally to Paris. Like Alan Greenspan or Ben Bernanke,
he made himself useful to people in high places - in this case the Duke
d'Orleans, who needed money. Law had a way to get it:
"I have discovered the secret of the philosophers' stone," he is said to
have remarked, "it is to make gold out of paper."
We need to look no further. Law may have been good with figures; it was
at philosophy that he failed. A thing cannot be both one thing and a
different thing at the same time. It is either gold. Or it is paper.
Rarity and durability give gold value - as money. Paper's most
conspicuous properties are just the opposite - it is common...and has a
tendency to curl up and blow away.
Law's new, easy money helped France to an economic recovery - or so it
seemed. But in the end, the philosophical error caught up with him. Gold
has real value. If you can create it at will, why not create more of it?
It was just a matter of time before he had created too much. Soon, there
was an angry mob outside Law's office on the Rue Quincampoix. People who
held his paper gold had come to see it in a different light. Where once
they cherished it as paper gold...now they despised it as nothing but
paper.
Law's scheme increased France's money supply - including banknotes and
shares in his Mississippi company - by 300%. Prices in Paris doubled
between 1718 and 1720. Then, when the new money system began to give
way, the Duke d'Orleans "cranked up the printing press." By 1721, Law's
money was worthless. "Banque" was a dirty word in France for the next
200 years.
The current experiment with paper money began on the 15th of August
1971. Henceforth, said Richard Nixon, foreign countries that wished to
exercise their right to trade US dollars for gold could drop dead. From
that point forward, the dollar was worth only what someone would give
you for it. Philosophers held their breath. But nothing happened. Many
have died since, waiting for the dollar to succumb first. Still, the
millstones of monetary history may grind slowly, but the more slowly
they grind, the more fingers they pinch.
The new paper money standard allowed for a worldwide credit boom - just
as in Paris following the establishment of Law's scheme. The US created
dollars. Its citizens spent them. The dollars accumulated as reserves
all over the world...and every central bank raced to keep up. Soon, the
exporters were producing too much. The importers were consuming too
much. And there was too much money and credit everywhere.
The Japanese economy was the first to blow up - in 1989. The tech sector
on Wall Street was next to go - in 1999. Finally, in 2007, the
planet-wide bubble popped. Suddenly, the whole world was Japan. And now,
every nation in Christendom, to say nothing of the others, is following
Law's example. All issue paper gold - in the form of bills, notes, and
bonds - as if they were the Banque Royale. Europe is estimated to need
$2.2 trillion in deficit funding this year. America will need at least a
trillion more. If the depression deepens, maybe $2 trillion. How long
can this go on? Where will it lead?
"There are no means of avoiding the final collapse of a boom brought
about by credit expansion," wrote Ludwig von Mises. "The alternative is
only whether the crisis should come sooner as a result of voluntary
abandonment of further credit expansion, or later as a final and total
catastrophe of the currency system involved."
On Tuesday, the S&P rating agency issued a warning. If Japan continues
in the direction it is going, it will have Hell to pay. Japan leads the
way into the future. And into a monetary minefield. Her current deficit
- a record - is more than her tax revenue. And her public debt is nearly
7 times as great. Her feet grow larger.
No natural life survives the lifecycle. And no paper currency standard
has ever survived a complete credit cycle. It is just a matter of time
until we hear the explosion and see body parts flying.
Regards,
Bill Bonner
for The Daily Reckoning
---------------------------------------------------------------
Over to Joel Bowman, who has a quick reminder from his
out-out-outpost in Taipei, Taiwan...
Readers will recall that our Daily Reckoning Financial Darwin Awards
celebration ends this weekend. We've enjoyed reading the many emails
nominating failures, including, but by no means limited to...
"The Fed"... "Bernanke"... "USPS"... "CIT"... "AIG"... "GM"...
We even received a nomination for the "entire State of California"...and
another for "the year 1913, for spawning the Fed..."
The list is long. The incompetents are plenty. And we're sorting through
them with a mixture of amusement...and extreme amusement. Winning
details in tomorrow's Weekend Edition.
Now, as a special Darwin Awards bonus, all readers still have
the chance to grab a $1, one-month trial of Dan Amoss' Strategic
Short Report. Dan's research actually identifies the walking
corporate dead...then seeks to profit as they come clean with bogus
accounting...
When we first cooked up this dollar deal a couple of weeks back, we
mentioned that Dan had his eyes on a trucking company that "expanded too
aggressively during the bubble years." Dan showed his readers a few ways
to play that downside...
..and, last week he urged his readers to close the position...for a 92%
gain.
Did you get in?
We're going to keep the dollar offer open until Monday. Readers who got
on board when we first brought you the opportunity are laughing. But, if
you want in on Dan's next play, you'll have to be quick. Spots are
filling up fast.
Details here.
We'll have the results of the Darwin Awards in this Weekend Edition, out
tomorrow. See you then...
---------------------------------------------------------------
And now back to Bill for the rest of today's reckoning...
"They are married..." said our companion, "but not to each other."
We were sitting in the Café des Dames...having a coffee with a female
colleague. Nearby, the red-haired bum was drinking his own coffee.
At the next table, a group of middle-aged communists was trying to
figure out what caused a financial crisis; they had no more idea than
Ben Bernanke.
A couple entered the bar. They looked around, trying to find a quiet
corner. The way they looked around, it was obvious that they have never
been in the Café des Dames before, which meant that they were not from
the quartier. In this neighborhood, everybody knows the Café des Dames.
It is right on the main drag, across from the subway stop.
They could have been business colleagues too. They were in there
40s...maybe the woman was a year or two older than the man. They wore
dark clothes; they dressed as if they were going to a meeting.
Attractive. Probably competent. The kind of people who keep the wheels
of modern commerce turning.
But there was something furtive about their regards. They were in a
place they didn't know; probably because they didn't want to be known.
These were not young lovers. Nor were they husband and wife.
When they sat down, the woman took the man's face in her hands and put
her own head down. Whatever they were up to, it made them feel under
pressure...maybe guilty.
Having an affair must take a lot out of you. You have to watch where you
go and what you say. It must make you worry and fret...and wonder...
Is something wrong with your spouse? Is something wrong with you? What
if your spouse finds out? Then what? Will you leave your spouse? Will
your lover join you? Will things be better? Or will they soon be worse?
What about the children?
Yes, dear reader, having an affair must cause a lot of tension - even if
it remains a secret. But what do we know? Maybe it's worth it.
Enjoy your weekend,
Bill Bonner,
for The Daily Reckoning
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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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