Financial Services Industry Seems to Have Peaked Out

Writing to you from the Land of the Dead…

We step back in order to have a look at the Big Picture.

Hmmm…still, not very clear. So, we step back again…and again. Soon, we are so far away that we can’t see a thing!

Still, looking through the binoculars, this is what we think we see.

First, the U.S. economy is in decline. The latest figures show it growing more slowly than the population – which means, the average citizen is getting poorer.

Of course, dear readers know the figures are not very helpful anyway. In a consumer economy, GDP growth rates tend to measure the rate at which people consume wealth rather than the rate at which they create it.

But let us put that quibble aside, at least for this morning.

The weekend news brought more evidence that the U.S. economy has peaked out. Recent graduates are having a hard time finding work, says the Washington Post. Joblessness is supposed to rise to 6% next year, adds the Financial Times.

Even ‘the rich are beginning to feel the pain,’ opines a piece from the Associated Press.

And millions of Americans are facing “retirement poverty,” continued the salmon-colored paper. Why? They haven’t saved enough…and their houses – on which they had counted to finance their golden years – suddenly seem to be made of base metal.

Fannie Mae faces a “glut of unsold homes,” reports the Chicago Tribune. (What the paper means is that it faces a glut of houses, not homes. A home is what people make of a house. But if it is unsold, it is a house, not a home. And many of the houses built in America in the last 10 years will probably never be homes. They are too expensive. Too far out. And too many.)

“Ghost towns across America,” is how the Wall Street Journal describes them.

Another small bank failed in Florida, while in Detroit, the auto industry is a wreck. Vehicle sales are down 13.2%, for obvious reasons…and the automakers are running low on cash, says the New York Times.

Between 1950 and 2000, the USA transformed itself from a country that made things to a country that financed things. Mothers stopped wanting their babies to grow up and become captains of industry; instead, they wanted them to go to Wall Street. That’s where the money was – in finance, not in manufacture. Gradually, the engineers and machinists who used to run the automakers were replaced by financiers. And gradually, the business model changed, from making money by selling cars to making money by financing cars. And if you’re going to finance cars, why not finance some houses too?

But now the financial services industry seems to have peaked out. And what’s left of the automakers? We don’t know…but we’re going to find out soon – as they get hauled to the junkyards, stripped, dismantled and sold for scrap.

“Only luck can save America’s troubled economy,” concludes the FT.

From a distance, we can see the United States – and England – sinking. But it looked for a long time as though the rise of other economies – China, India, Russia, Brazil…just to name a few – might be enough to balance it out. This was the theory of ‘decoupling,’ the idea that the U.S. could sneeze all it wanted; the rest of the world would still remain in rude good health.

Here at Markets and Money, we were always skeptical of the ‘decoupling’ concept. Coupling has been going on for a long time; it didn’t seem likely to us that it should suddenly go out of style.

On the other hand, never before in the history of the world has so much economic growth been going on. And most of it is going on outside the United States…and Europe.

“It’s amazing…I just can’t believe it,” said a young man we met over the weekend. “I work in aluminum. I’m a buyer for a big French company that makes products out of aluminum. So, I travel regularly to China…to Beijing and Shanghai, mostly. I go at least every six months. And when I go I stay in the same hotels. And I get there and I look out the window, and every time there is another big skyscraper right next door. ‘Where did that come from?’ I wonder. Because they hadn’t even begun to work on it when I was there the last time. But those people work day and night. And the city of Shanghai is growing by about 30,000 new people every week…something like that. It’s unbelievable…

“And then when I get back to France…it is like going into a museum…where nothing ever changes. In some ways, it is a comfort, because life here is nice…predictable…and comfortable. But it is like the land of the dead.”

And now, the big news: manufacturing contracted in China for the first time since ’05. Decoupling? Maybe…but China is slowing down too. And if America, Britain, Europe and Asia are all slowing down, what does it mean for oil and commodities? It means they must go down!

Yes, that is the third big thing we see…as we look through our binoculars. After hitting a high of $147, oil is slipping and sliding. It ended last week at $125 – a loss of 15% from its high.

The industrial commodities are all falling – copper, aluminum, steel. Gold at $917 an ounce also seems to have lost its way. And many people think we’ve seen the last of the bull market in the whole commodity/oil/gold complex. It may be another 20 years, some believe, before we have another big run-up in the commodity sector. So far, no major magazine has announced the “Death of Commodities,” but surely some are thinking about.

But we’re even more skeptical about the ‘death of commodities’ than we are of ‘decoupling.’ Because, commodities cycles tend to be much longer than other cycles…and prices do not react only to the economic cycles; they also react to the monetary cycles. Copper, oil, lead, wheat – all represent more or less finite resources. And all require real resources – time, money, equipment, investment, and know-how – to bring forth. You can’t blame the people who produce them for wanting more than worthless pieces of paper in exchange for them. Typically, the more pieces of paper there are in circulation – pretending to be ‘money’ – the more pieces of paper producers want in exchange for their oil, gold, silver, lead, etc. And typically, they look ahead to try to figure out what those pieces of paper will be worth in the future before they agree to trade valuable resources for them.

Yes, dear reader, that is what we see through our binoculars too. A world in motion. Nothing stands still. Instead, no matter where we look – at houses, oil, stocks, you name it – it bobs on a frothy sea of ‘money.’ And while we have to look to see if the United States and China are declining…or if the financial boom has topped out…or the commodity cycle has peaked…we also have to keep our eye on tides of money too. About which…more to come this week…

Bill Bonner
for 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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2 Comments on "Financial Services Industry Seems to Have Peaked Out"

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Smack MacDougal

Bill writes, “First, the U.S. economy is … growing more slowly than the population – which means, the average citizen is getting poorer.”

Bill meant to write, “… a U.S. citizen, on average, is getting poorer.”

Perhaps, the decline of English became the first cause that kicked off the decline of American culture and eventually, the U.S. political system and its economy.

Hans Blix

Once America goes broke, and we buy them up for $50, I would like to force them to adopt the metric system.

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