What’s the Economy Telling Us?

A quick look at the numbers:

Yesterday, the Dow fell more than 200 points. Oil, up $1.69, hit a new record. The dollar rose to $1.53 per euro. And gold lost ground…dropping down to $871.

Up, down…up, down…what’s going on? Is the economy recovering? Is the stock market giving us the “all clear?” Is the smart money buying the United States of America again?

No. No. And no. At least, not in our humble, timid, looking-over-our-shoulder and keeping-our-fingers-crossed opinion.

Yes, dear reader, here at Markets and Money headquarters we are sometimes right…sometimes wrong…and always in doubt. What are we in doubt about today? Practically everything. Still, that doesn’t stop us from having opinions.

But let’s begin by looking at Consumeris Americanus, a species that has been having its share of trouble lately. Its habitat is threatened by falling house prices…its food supply has become more expensive. What’s the outlook?

First, this report from Bloomberg:

“U.S. consumer borrowing jumped more than double the amount economists forecast in March, indicating a slowing economy is forcing Americans to accumulate credit-card and other forms of debt.

“Consumer credit increased by $15.3 billion for the month to $2.56 trillion, the biggest monthly rise since November, the Federal Reserve said today in Washington. In February, credit rose by $6.5 billion, previously reported as an increase of $5.2 billion. The Fed’s report doesn’t cover borrowing secured by real estate, such as home-equity loans.

“Consumers are turning to credit cards after banks tightened standards for home-equity loans and other borrowing. The March figures brought U.S. consumer borrowing in the first quarter to $34 billion, the most since the first three months of 2001, when the economy entered its last official recession.

“‘Consumers are strapped as incomes are not keeping up with inflation and this is leading them to rely increasingly on credit to see them through the worst housing downturn since the Great Depression,’ said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi in New York. ‘The days of extracting cash from one’s home to spend on goods and services are long gone.'”

But wait? The feds clearly want to protect this endangered species. These dinosaurs vote! So, they’re sending out ‘rebate’ checks…they’re cutting rates…they’re spoon feeding the banks so they’ll be able to help the consumer out with more credit on easier terms.

Richard Benson comments:

“For the average American, this rebate check represents only one car, credit card, or partial mortgage payment. When you consider it cost well over $60 now to fill up the gas tank for a mid-sized car, and a lot more to go out to eat, it won’t go very far.

“On the household front, millions of homeowners haven’t even finished paying their heating bills from last winter, and over six million Americans asked for energy assistance funds so their power wouldn’t be shut off. (In California alone, 1.7 million households are behind on their utility payments.)

“Signs of the stretched consumer include the following stunning facts:
• Home equity loans have a seven percent delinquency;
• Subprime mortgages, past due over 60 days, are pushing 14 percent;
• Over one million homes are in foreclosure and three million more are empty, and up for sale;
• Ten million homes have mortgage balances greater than their value. (No wonder some homeowners are walking away from them);
• In the auto market, 25 percent of all car loans are higher than the car is worth. (The average balance these cars are underwater for is $4,300!)
“Jobs are also falling off a cliff. If it hadn’t been for the Birth Death computer model at the BLS creating service jobs out of thin air, the payroll data would have shown over 280,000 people actually lost their jobs in April. Currently, 2.7 million workers have exhausted their unemployment benefits, and with no job prospects or income, hello collector!”

Meanwhile, the rising price of food has forced a record 28 million Americans onto food stamps. Trouble is, says the bleeding heart press, the giveaways don’t go as far as they used to. Many are “still hungry,” according to a CNN report.

It’s true that we haven’t lived in the United States for more than 10 years. But we used to live right in the heart of the Baltimore ghetto. There, almost everyone got food stamps and other taxpayer-financed freebies. What we recall is that people tended to be overfed…not hungry.

But, back to our doubts and opinions…

Consumeris Americanus isn’t looking his best. But so what? The newspapers tell us that the ‘worst is behind us.’ The credit crunch is over, says Buffett. The housing crisis is over, says the Wall Street Journal. And just look at the stock market…

The stock market is said to look ahead. It is thought to see through the headlines…through the noise and opinions…and through the theories…to tell us what is really going on.

Look, say the bulls, the stock market is doing well; there’s nothing to worry about. The chartists say the next move is up. The Dow Theory folks say we’re still in a bull market. The dreamers are hoping for Dow 15,000.

Of course, they’re right about one thing; there’s nothing to worry about. We’re just talking about money. But anyone who thinks the stock market really predicts future money trends hasn’t been paying close attention. In early January 1990, the key Japanese stock index was over 39,000. It had risen like a rocket for the preceding five years. Surely, it saw more growth and prosperity ahead, right?

But that very same month, Japan, Inc. ran into a serious problem. The stock market crashed…and the economy went into a long slump – from which it still hasn’t recovered.

In the United States 10 years later, again the stock market had registered steady, impressive gains over the preceding five years. The NASDAQ was going almost straight up. Surely, stock prices signaled more growth and prosperity ahead, right?

Nope. The NASDAQ crashed…the Dow sank…and in real terms, after a decade, even in the Dow stockholders are still down 20% to 30%.

No, dear readers, the stock market is often blind, deaf and dumb. It can’t see ahead. It can’t hear the warning whispers. And it can’t put 2 and 2 together.

*** “What beautiful weather…” we said to a colleague yesterday. “It looks like the beginning of summer in London, doesn’t it.”

“The beginning? You better enjoy it. This might be the end of summer too.”

London is not known for its great weather. Sometimes, a few lovely weeks in May or June may be all the summer Londoners get.

*** “You may be able to print your way out of a recession,” said another colleague this morning, “but you can’t mint your way out.”


“In the U.S.,” he explained, “because of price increases in the metals markets, it now costs more than 5 cents to make a new nickel. And here in England, if you melt down two pennies, you get 3 pennies worth of copper.”

*** Food riots have broken out in several countries…including several oil producers. The oil exporters find they need to spend more and more of their loot feeding their own growing populations. Several have tried to invest in more local food production, but have been stopped by a lack of water.

*** Here’s something interesting. Our Buenos Aires correspondent, Horacio Pozzo, tells us that U.S. company, Amyris, has gotten together with a Brazilian company, Crystalsev, to produce a sugar-caned based bio-diesel fuel which is “equal or better than diesel from petroleum.” Several large companies from Europe and America are moving to Brazil to take part in the development of bio-diesel fuels. And Fiat Powertrain Technologies says it will launch a motor designed to run on ethanol – also in Brazil, in 2010.

*** Finally, more than a million Americans are being fed and housed, courtesy of state, local and federal governments. They’re the lucky ones…paying no mortgages…losing no jobs; they don’t even have to buy bread. Still, life in U.S. prisons is probably no picnic.

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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