The Recovery-Less Recovery
by Bill Bonner
London, England
We have spent the last few days holding back tears…
Michael Jackson! Robert MacNamara!
And now our heart goes out to Nantucket Island. Word came this morning that
the rich are not living it up like they used to. The New York Times reports
that it’s the slowest summer on Nantucket locals have ever seen. There are
over 600 properties for sale – and none of them are selling. Even at discounts
of up to a third off! Restaurants and bars are offering discounts too – anything
to lure in the customers.
Here at The Daily Reckoning, we champion lost causes. We join the diehards.
And we take up the banner of despised, persecuted minorities everywhere. So
we are aggrieved by the plight of the rich. They’ve lost $10 trillion in the
downturn, according to our estimates. They’re being blamed for every sin and
crime, from teen-pregnancy to shopping on Sunday. Fashion has given them its
fickle finger – their big houses, big cars, and big carbon footprints are as out-
of-style as spats. And just yesterday, a press report told us that Congress was
considering a surtax on the rich – to be slipped into the latest health care
bonanza. No wonder they’re having such a bummer of a summer.
Sniff…sniff…
Our oldest son, Will, proposes to open up our private family office as a kind of
support group for the rich. His father cleverly off-loaded the burden of
managing the family money (such as it is) onto his strong, young back. Will
figures there must be thousands and thousands of readers facing the same
challenges he is…more on this in future issues.
Yesterday, the Dow rose 14 points. Oil fell to $60. Gold lost $19.
According to the headline in the Financial Times, the International Monetary
Fund says the recession is ending. Digging deeper into the story, we find that
the IMF thinks the recovery may be “weak” and may require more stimulus to
get consumers spending again.
As usual, the bank is wrong about everything. There is no recession; it’s a
depression.
And it’s not ending; there is no recovery in sight. And more stimulus won’t
cause consumers to spend more money.
“It’s really not very complicated,” we told our audience of publishers in
London yesterday. “We’re in a depression. Not a recession.”
Sometimes when you are giving a speech, words come out more self-assured
than you expected. The occasion calls for confidence…oratorical certainty, not
doubts and nuances. Out come fully formed sentences – often elegant or
powerful in themselves – that you barely recognize as your own. You
listen…surprised at how clever the speaker is.
“It’s a depression. And it will remain a depression until this huge pile of
debt accumulated over the last quarter century has been paid down. Until
businesses and banks that are no longer viable have gone broke and been
restructured. Until consumers have real money to spend – not just more credit.
Until those things happen, there is no way for a genuine recovery to take place.
“For more than half a century, the driving force of the world economy has been
the willingness of English-speaking consumers to go further and further into
debt. That permitted businesses to expand sales and profits.
“Now, that trend – that lasted longer than the lifetimes of most of the people in
this room – is finished. Consumers aren’t going further into debt. Bankers
aren’t lending them more money. Their houses aren’t going up in price…so
they have nothing to borrow against. It’s over. And now, after working your
whole careers in a growing economy…you have to figure out how to survive in
a declining one. ”
We could have gone further. But our listeners were already looking a little
blue.
We might have told them about the latest report from Bloomberg. PMI, a
large mortgage insurer predicts that housing prices will fall for almost two
more years. Prices will be driven down by unemployment and foreclosures,
says the insurer. We could have told them about the “triple time bomb” that
The Richebacher Letter’s Rob Parenteau has been warning readers about.
Doesn’t sound too farfetched to us. (Read Rob’s full report here.)
Or we might have provided evidence that consumer credit is
contracting…not expanding. The feds have put trillions into the financial
system. And that’s where it stays. The banks don’t lend because consumers
can’t borrow. Their houses – the major source of collateral for the middle class
– are going down in price. The Financial Times is on the case; it reports that
consumer credit fell again in May, for the 4th month in a row. “Delinquencies
at record high,” says another FT headline.
We might have explained that not only is the shift from credit expansion to
credit contraction the biggest thing to come along since WWII…there’s also a
major shift of wealth and power taking place. The Anglo-Saxon commercial
(and military) empire has peaked out. The wealth and power of English
speakers has been expanding, relative to the rest of the world, for the past three
centuries. That trend, too, seems to have come to an end.
More on this below, but first, we’ll turn to The 5 Min. Forecast for more
news:
“Americans are taking on less debt and saving more… really?” wonders Ian in
today’s issue of The 5.
Now anything’s possible!
“U.S. consumer credit fell for the fourth straight month in May, the Federal
Reserve reported late yesterday. Credit inched down at an annual rate of 1.5%
during the month – a $3.2 billion drop to a total consumer debt load of $2.52
trillion. Coupled with the previous three months, we’re now experiencing the
biggest and longest consumer deleveraging since 1991. We even have a
somewhat respectable savings rate – 6.9%, the highest since 1993.
“While we welcome this deleveraging, it still doesn’t seem legit. With
unemployment at a 26-year high and the sudden disappearance of easy-money
credit, we wonder if this balance sheet restoration is a matter of choice… or if
the lowly American consumer is just playing the hand he’s been dealt.
“Then there’s this chart:
“‘The U.S. household sector is currently saving more and deleveraging,’ adds
Rob Parenteau, ‘while lenders both here and abroad remain wary of lending,
except, apparently, in the case of bank loan officers for high rollers in China.
“‘To be clear, the household and business sector debt reduction is still in its
early stages and has been dwarfed by the massive deleveraging of the financial
sector itself as the so-called ’shadow banking system’ has either collapsed or
moved onto the Fed’s balance sheet.’”
Ian writes every day for The 5 Min Forecast, an executive series e- letter that
provides a quick and dirty analysis of daily economic and financial
developments-in five minutes or less. It’s a free service available only to
subscribers of Agora Financial’s paid publications, such as the Hulbert #1
Performing Investment Letter, Outstanding Investments.
And back to Bill, with more thoughts:
Lord Rees-Mogg invited us for lunch at his favorite gentlemen’s club – the
Garrick. It is our favorite too. A club originally founded for actors and writers, it was
the club in which Dickens and Thackeray had a legendary feud. More recently,
Prince Charles dined in a private room with intimate friends. And now your
editor goes there for lunch from time to time.
It is a grand old building…with ornate trimmings…hung with paintings of great
actors and theatre scenes. The place seems perfect for a conversation about
monetary policy. It is as old as the South Sea Bubble…and a monument to
an industry of make-believe.
William made an interesting point.
“The Obama team doesn’t seem to know what it is doing on economic matters,
does it? They had a good man on the team – Paul Volker. He was the only one
who really knew what he was doing. And they seem to have edged him out.
“This is a very bad sign. It was Volker who saved the day the last time the US
dollar seemed to be headed for the scrap heap. This time, it looks as though
they have no intention of saving it.”
The dollar hardly looks like it needs saving now. It rose slightly yesterday.
Generally, throughout the crisis of the last six months, the dollar has been
favored as a safe haven.Yesterday too, prices of gold and commodities fell –
in dollars. The greenback rose against cotton, coffee, silver – just about everything.
Why is the dollar so (seemingly) strong right now? Master FX Options’ Bill
Jenkins believes it is because the United States isn’t facing the same sort of
’social upheaval’ that the Eurozone has.
“Across the Eurozone riots and outbreaks of violence have been touched off by
escalating economic problems and disagreements between members and
neighbors. People involved in civil unrest are a multifold problem. First,
they have too much time on their hands because they are not working. Jobless
citizens, especially in a heavily socialist culture, are a continual drag on the
system. Second, it costs money to keep repressing social upheaval — presenting
another drag on the system. Additionally, the passions and fears of men being
what they are, such activities tend to draw in more normally productive folks
as the snowball gains speed and volume.
“Here in the United States, we are not facing such difficulties (yet). This means
a more reasonable system of work and distribution of goods and labor. All in
all, this is good for a culture, the body politic and the economy. As a result, it
also breeds greater confidence in the currency. And when all is said and
done, investment money will go where there is a reasonable likelihood of
return, even if the return may be lower.
“This is what has been good up to this point in the recession/depression for the
US dollar. And if this continues to unfold over the next year or two in similar
fashion, this would still produce US dollar strength compared to the euro
simply by the ‘fear factor.’
“Additionally, as I have tried to show, the situation in Europe is actually more
severe than in the United States. I believe in the end that will make them copy,
at least percentage wise, the same devaluing practices that have happened here.
Should that occur, it would once again be advantage-USD.
“However, when I look at the dollar, I wonder if what we have done may
be past the point of no return, the point of repair or recovery. The next
generation may well find that the US dollar has gone the way of all fiat
currencies before her. What will replace it? I can’t say. But in the present
environment, more shocks to the system will ultimately favor the dollar… at
least for the time being, because it is supported by stability. And in unstable
times — stability draws the highest premium.”
For more from Bill Jenkins, see his latest report here.
Though the dollar doesn’t look like it needs saving right now, there are two
things going on…two things that appear contradictory…and which lead
investors to make big mistakes. On the one hand, the world economy is
contracting – which is naturally deflationary. Demand goes down…prices go
down…the currency in which prices are quoted goes up. On the other hand,
the people who control the currency are doing all they can to cause it to go
down. The Congressional Budget Office tells us that the US national debt is
rising by about $1 trillion per year. It will hit $12 trillion this fall. By next fall,
it will be at $13. The interest alone this year is $565 billion – about 4% of the
nation’s total output.
The last time the United States overspent on anything approaching this scale
was during the ‘guns and butter’ years – the 1960s. Lyndon Johnson wanted
a war in Vietnam and a Great Society at home. He got both. He also got
inflation. Inflation rates hit double digits in the late ’70s. The dollar seemed to
be going the way of all paper money – to nothing.
But “Tall Paul” Volker was called to the Fed. He said he was going to snuff
inflation…and he meant it. Against widespread criticism – his effigy was burnt
on the steps of the Capitol – he took the yield on 10-year T-notes all the way to
15%. The economy entered its worst recession since the Great Depression.
Politicians howled. The press roared. Everyone seemed to want Paul Volker’s
head. But Reagan backed him up. And he beat inflation and saved the
dollar.
But that was then. This is now. Now, the country is far deeper in debt…with a
much weaker economy…and much stronger rivals. Not even Paul Volker could
play Paul Volker’s role this time.
Until tomorrow,
Bill Bonner
The Daily Reckoning
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Tags: Bill Bonner, Daily Reckoning, Downturn, Financial Times, International Monetary Fund, London England, New York Times, Recession
