It is always worrisome when people in positions of responsibility agree with us. It troubles us, for example, that so many people think they see a recession coming. Maybe we won’t have one after all.
Or… maybe we won’t have the recession they all expect.
The experts are all said to be gloomy. But what kind of gloom is it when stocks in a communist country trade at 37 times trailing earnings? When Picassos and dead animals still sell as if they were works of great art? And when the yield on a 10-year T-note is still below the going rate of consumer price inflation? We know Treasury debt is supposed to be the safest investment in the world – but most of the holders are not U.S. taxpayers. They’re foreigners, for whom a U.S. Treasury obligation is a wild (and to us, reckless) speculation on the dollar.
Are investors really risk averse – with the Dow selling near an all-time high and selling at 18 times earnings? Are they really running scared with house prices down scarcely 10% after a 70% run-up? Are they desperately worried when the price of gold is still only about 40% – in real terms – of its previous high set 26 years ago?
To return to the housing news, the SF Gate reports that it takes an annual income of $196,000 to be able to afford, comfortably, the average house in San Francisco. In Marin County, you need to earn $218,000. How many people actually earn that kind of money?
The story is the same throughout much of the nation. Housing prices in California are down 15% to 20%… but the average house is “still unaffordable” for the average house buyer.
And when Bernanke delivered the bad news to Congress yesterday, the news he gave out was not as bad as you might expect. He said the economy would be softer than expected, but that it would recover before the end of the year. That is the message that practically all the experts are peddling: look for a slump in the first part of the year, recovery later on.
Yesterday, we noted that homeowners typically believe that the downturn in housing prices may last one or two years. They still believe that “house prices always go up in the long run.” Stock buyers seem to think the same thing. Many are talking about a bottom already. Some think the bottom has already come and gone – in January. They believe we’re now in a new phase of what is, for them, an eternal bull market.
Mr. Market always has a trick up his sleeve. What if his big surprise is that this downturn doesn’t go away after six months? What if house prices grind downward for five years… or more? What if we have begun a major bear market on Wall Street, with the Dow falling, in real terms, for the next 15 years? And what if Warren Buffett is wrong? What if America has topped out? What if, after 232 years of coming up in the world… it will go down for the next 232? What if it is now smart to short the United States – its currency, its stocks, its labor and even its military?
The U.S. enjoyed an extraordinary run of good luck. It had rich farmland… with huge oil deposits under it. It had energetic labor and low taxes. It had innovators, risk takers… and a government that left them alone. It had thrifty, hard-working people who asked for nothing but the chance to work. This combination of hard work and good luck put America on top of the world. But that’s the trouble with being on top of the world; there’s no where to go but down. Now, the U.S. is a net importer of food… and fuel. Its government seeks to control not only the lives of its citizens, but the fates of other peoples half way around the globe. Its citizens work harder than ever… but they are now competing with people who work even harder than they do… people who are willing to work for one tenth the compensation and then save half of what they earn. These same U.S. citizens are bending under the heaviest burden of private and public debt the world has ever seen, while their government encourages them to spend more.
Here’s a surprise for you, dear reader. What if this great economy didn’t “emerge even stronger”… but instead was crippled, and never recovered?
Markets and Money