This Bear Market 2008 Could Last 20 Years

Yesterday, prices went up on Wall Street… The Dow rose 413 points. There was no follow-up this morning, as investors eyed a mixed bag of 3rd quarter corporate earnings.

But, investors are in a pretty good mood, all things considered. After all, Warren Buffett is bullish on stock prices… Warren is putting his money and his mouth in the same place – equities. He says he’s sure they will do better over the next 10 years than cash.

Here at Markets and Money, we are not rich enough to argue with the Sage of the Plains. Besides, we think he’s right. Or, almost right.

Stocks will probably do better than cash over the next 10 years; but mostly because cash will probably do very badly. Our guess is that everything will do better than cash. Except bonds – which represent cash deferred into the future.

And here, for the benefit of new readers and long-time DR sufferers alike, we give our view:

When Mr. Market goes into a sulk, he takes a long time to come out of it. Real bear markets last 10…15…20 years. And judging by the meltdown in the financial sector…and the rapid losses we’ve seen over the last three weeks…we have a real bear market on our hands.

This bear market actually began in January 2000 when the tech sector crashed. But it was reversed when the feds opened a Hoover dam of liquidity, beginning in 2001-2002. Stocks floated higher…and consumers, business and Wall Street actually increased their indebtedness.

Every bubble expands until it finds its pin. The bubbles in housing, debt and the financial industry began deflating in 2006/2007. But the big popping noise was only heard in September/October of this year, when Wall Street itself imploded.

And now, the feds are out of easy options. They can’t push more credit on the poor consumer; because the credit pipes burst along with the bubble in the financial sector. Besides, if they were to lend the consumer more money, what would they lend against? House prices are falling.

With no more easy credit available to them, consumers are doing what they have to do – they’re cutting back. How much? For how long?

No one knows the answers to those questions but our guess is this: more and longer than you thought.

Why so?

“The real deterioration in the economy is only just beginning,” said a London banker.

Every businessman we know is sharpening his pencil. He’s looking at his list of expenses and circling items that he thinks can be cut. Most of those items have someone’s name connected to them. Unemployment is going to rise more than expected. As it does, consumer spending is going to fall more than expected.

As to what to do about the weakening economy, says the New York Times, a consensus is forming. As might be expected, the mob wants more bread. And as might be expected, the feds are eager to give it to them.

Today’s headlines tell us that another stimulus package is being prepared in Congress. The pols are getting out the lights, the shiny balls, and the garlands – they’re going to Christmas tree this one even better than the last. Earmarks, nosemarks, cheekmarks – this new bill will have the marks of every greedy S.O.B. in Washington on it. Your town need a bridge? Better get the request in soon, so your Congressman can hang it on the tree. How about a new ‘community center?’ Got any indigenous people around…any victim group…any bunch of layabouts or n’er do wells who need handout? Cripples? Half-wits? Republicans? Kiwanis? Butchers? Car dealers! Yes, give the poor car dealers a break. They’re not even selling Japanese cars, according to the news.

Yes, dear reader, the fix is in. Ben Bernanke said he backs another stimulus bill. And this new measure should stimulate just about everyone; it’s sure to include more ‘rebate’ checks…infrastructure spending…and giveaways to anyone with a decent lobbyist.

But where does the government get more bread? More below…

*** And the financial crisis is not just contained to the United States.

“China is slowing down,” explains Chris Mayer, “There are a lot of ways to tell this, but one of the best ways is to look at the China operations of international companies. For example, Best Buy reports its China same-store sales fell 7%. Kingfisher, which is a do-it-yourself chain, reported sales fell 19%. Yum! Brands, which runs KFC restaurants in China, said sales were up 5% – which is not so bad, but they were up 11% in the same period in 2007.

“So as China slows, that will have a big impact on commodity markets. And it may also be a bellwether for the rest of the emerging markets. Anyway, it’s another development we’ll watch closely when our businesses report. We have several companies whose international operations were a big part of the appeal and were growing much faster than the rest of the company.

“I still believe overseas markets will grow faster than the more mature Western markets and that we’ll be glad we have exposure to these markets over the long haul. As I say, we’ll have a better idea of a lot of these things soon.”

*** Where do the feds get more bread? Their granaries are empty. And they’re already borrowing at the highest level in history.

“Where is the Treasury getting $700 billion?” asks Jane Bryant Quinn.

“It will borrow worldwide, by selling Treasury securities. Right now, there’s a strong demand for them, so it’s selling into a welcoming market.

“It is remarkable how much capital the U.S. has been able to attract to finance its borrowing needs,” says Brian Sack, Washington-based senior economist at Macroeconomic Advisers. That might change, he says, “but there are no clear signs yet.”

When the clear signs appear, it will probably be too late. That’s just the way things work. Crises build…and build…like pressure in a volcano. Unless you’re paying close attention, the whole mountain explodes before you know what is happening. Then, it’s amazing how fast things happen. And it’s astonishing how often you say to yourself…’I knew that was going to happen” and wonder why you didn’t do the obvious thing to protect yourself.

As political columnist David Yespsen said in I.O.U.S.A., “I think it’s going to take a crisis before America responds to [the financial crisis]. This is America, we don’t do anything until something reaches a crisis; whether it’s military re-armament before World War Two or whether it’s this question now. We’re not going to be willing to take this pain until it gets to be a real problem.”

And it has become a real problem. Eventually, the feds will find it harder to raise money. Lenders will not be so kind. Investors will be not so dumb. And the full faith and credit of the United States of America will not be such a sure thing.

A dear reader poses a good question:

“Can you give your readers an idea what portion of a $3 trillion annual budget must be earmarked (bad word?) to service the debt annually on a $9 trillion national debt? Also, if every thing remained static, how long it would take to pay down the debt?”

As to the first question, the writer is behind the times. The official national debt is now over $10 trillion. And for ease of calculation, let’s say it bears an interest coupon of 4%. That would put the annual interest charge at $400 billion…or 13% of a $3 trillion budget.

But remember, the U.S. government does not take in enough in tax receipts to pay current costs. With a falling tax take and rising social costs – not to mention rising bailout bills – the deficit is expected to come in above $1 trillion. Or, to look at it differently, the entire interest payment has to be borrowed too – in fact, more than 2 times the interest charge.

So, in 2010, the interest charge would be another $1 trillion x 4%, or $40 billion more. Imagine that the deficits go to $2 trillion…or beyond. Or that a $1 trillion deficit persists for a few years. It wouldn’t be too hard to imagine a national debt greater than the GDP in just a couple of years.

But it’s not just the deficit that matters…it’s also how much the feds have to pay to borrow the money…and how much new money, “out of thin air,” they create. We will pass over the monetary theory and go right to the point. We recently saw a chart of “money aggregates.” The chart roughly measures the supply of “money.” After being nearly flat for the last few years, it has suddenly begun to shoot up. The feds are not just innocently borrowing, in other words; they’re inflating too. As expected.

*** If we’re right about inflation, you might want to buy some gold at today’s low prices.

Of course, we asked our old friend Issy Bacher, from South Africa, what he thought of the pullback in gold prices. In short, he thinks gold could pull back even more:

“Cycle analysis of the gold price doesn’t look encouraging at present. I gave an interview on CNBC some time back when I gave a forecast of $ 750. Gold was around $ 950 at the time.

“It got to $ 750 on 12/9/2007 Cycles again suggest that it could test support round the 750 dollar level. As the cycles are dynamic, we re-examine the cycles if it gets to that level. The strong support for gold is around $650.”

We don’t know where the price of gold is going. But we know what we’ll be doing if it goes to $650; we will be buying more.

Until tomorrow,

Bill Bonner
Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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5 Comments on "This Bear Market 2008 Could Last 20 Years"

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Bruce Brymer

Hi – It seems obvious to me that the credit for the USA will dry up when countries like China have to redirect outgoings domestically to re-invigorate internal demand. Could be a problem if they have to call in any $US.


Just as a general observation, would you clarify the use of billion, trillion and the number of zeros used when reporting financial news in Australia.

Inflation is a good thing. The US could use it to shrink their debt. Of course this means everything goes up in price but so long as the banks give credit to buy it, it matters not. I also think the rest of the world will run around madly with bits of wire and stickytape and blu tack and hammers and nails and long pieces of wood to prop up a sagging US. Why’s that? Well as the saying goes (adjusted for inflation) Owe the bank a billion and you’re in trouble. But owe the bank a trillion (or 10)… Read more »

Possibly you are American. I think the US will be suprised at how little the world is willing to put up with additional and aggregious bumbling. The fin de sicle presidency of GW Bush has exhausted the last ounce of patience, and I think what will happen is that people will shift out of exposure to US debt. You think you have a current accounts problem now, try paying for oil (and gold) in Euros. The value of loans taken out with little green pieces of paper is looking pretty shakey.

ralph hill

inflation is the hidden tax. it may ‘shrink’ gov’t debt over time in one of those sneaky sweep it under the rug affairs. but eventually you have more dirt than rug.

but the more severe inflation gets, saving doesn’t pay. without saving there is no capital formation and investment.

after they run out of bandaids, it’s all over.

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