Inflation Protection at 1%

“We’ve seen the bottom for this part of the cycle,” said our old friend Issy Bacher. He took out a chart.

“See this…” He pointed to a series of undulations.

“Here’s the bottom…at 7,400 on the Dow. I don’t have a crystal ball. But the charts are showing that this is the bottom for this cycle. I don’t know how far this rally will run, but it could be very impressive and could last for quite a while.”

Yesterday, the Dow rose again – up 172 points. Oil remained unchanged at $46 a barrel. The dollar went nowhere…at $1.27 per euro. And bond yields are still exceptionally, remarkably, and probably insanely, low. The U.S. 10-year T-Note yields 2.67%. Even at the lowest yields in history, people buy more of them.

And if you’re worried about inflation, you can buy the inflation-adjusted bonds – the TIPS – at an exceptionally low premium. When we looked a week or so ago, the cost of protecting yourself against inflation over the next 10 years was less than 1% per year (the nominal yield you give up in order to get the TIPS rather than a regular 10-year notes). In other words, investors expect inflation to remain below 1% for the next 10 years. How likely is that? We don’t know… But inflation protection at 1% sounds like a bargain to us…

But back to our subject…finally, we have an Obama Bounce.

How much? For how long?

We don’t know that either. But we are hoping it will retrace about half of the losses from the high. That will put the Dow back over 10,000… The big rally following the ’29 crash lasted from November to April ’30. It recovered 60% of the losses. Then, the bottom fell out again.

Yes, the worst is still ahead. We are only at the beginning of this correction. Stocks and commodities are the cutting edge. And it’s fun to watch Wall Street stumble. But now, we get to watch the economy bleed. The scene will turn grim.

A report from yesterday’s news tells us that the private sector hacked off 250,000 jobs in November. At that rate, 3 million jobs would be lost in a year. When people lose their jobs, life gets hard. They turn to savings. But what savings? Few people saved in the Bubble Epoque. Saving for a rainy day just didn’t seem necessary – it never rained. Why bother? Besides, in an emergency there was always a job available at McDonalds…and credit cards.

But now the monsoons have come. The drains back up…and even Mickey D is taking down his ‘Help Wanted’ sign. And credit cards? Who can afford more credit card debt?

“Nobody really likes firing people, but you have to do it,” explained a colleague. “It’s a little like tossing people out of a crowded lifeboat. If you do, they drown. If you don’t, we all drown.

“But firing people now is particularly bad. Because you know there isn’t much chance that they’ll be rehired anywhere else. Most businesses are firing people as fast as they can. I don’t know any that are hiring. So, you have to figure that when you fire someone he’s going to be out of work for the duration of the recession…and how long could that be? A year? Two years?”

It might be 10 years, for all we know. These balance sheet recessions take time. Remember, people are getting fired for a very good reason: businesses need to correct their balance sheets…and redress their business models. They have to reduce expenses, because their incomes are falling. Shoppers may still be trampling people to get at half-priced CDs…and toaster ovens at 33% off…but, overall, they’re spending less money. That means lower sales…and fewer jobs.

This is just how balance sheet recessions work.

*** Stocks may have ended on a modest high note yesterday, but at the open today, the Dow, S&P and NASDAQ were all down on a flurry of negative data.

First, just ahead of tomorrow’s “Jobs Jamboree”, AT&T, DuPont and a slew of other major U.S. companies announced 20,000 job cuts. You know the markets didn’t like that piece of news…

Next, weak retail sales yanked the stock indices back down, as retailers that would usually be having a good run of it this time of the year, such as Target and Abercrombie & Fitch, reported a significant fall in sales.

And finally, the Big Three are at it again. The CEOs of Chrysler, GM and Ford are back on the Hill, hands outstretched, looking for an even bigger handout.

Two weeks ago, you’ll recall, the U.S. automakers were arguing for a mere $25 billion in federal loans…but now, they want $34 billion. They are warning Congress that they could possibly run out of the money they need to run their business before the end of the year if they don’t get this bailout.

“What a coincidence,” quips Addison. “The automakers showed up with their tin cans the same day monthly auto sales data was published. Sales were, umn, slow, across the board.

“Chrysler led the way this time, as November sales fell 47% year over year. GM was close behind, down 41%. The rest of the world’s major automakers were right on their heels. Ford, Honda, Nissan and Toyota all fell over 31%.

“Total new car and truck sales fell to an annual rate of 10.2 million, the lowest since 1982. Last year, Americans bought over 16 million vehicles.”

*** Trying to undo some of the damage they did at their last appearance before Congress, the Big Three CEOs “drove fuel efficient hybrids to Washington, rather than flying in on corporate jets, as they did two weeks ago,” reports CNN

They are going to have to try a little harder than that to erase the negative public sentiment. Continues CNN

“A CNN/Opinion Research Corp. poll of nearly 1,100 Americans conducted earlier this week found 61% oppose a bailout, while only 36% support it. Even in the Midwest, home to most of the automakers’ remaining plants, 53% of those polled opposed federal help.

“That was a stunning reversal of polls taken before the CEOs last trip to Capitol Hill. A poll Nov. 11 and 12 conducted by Peter D. Hart Research Associates found 55% supported federal assistance for automakers at that time, and only 30% who believed they should not get federal help.”

Could it be? Have the American people finally gotten sick of the constant bailouts? We’ll have to wait and see…

*** “South Africa is a special place,” began an old friend. “We’ve had the same sorts of things that you’ve had in America. People got 100% mortgages. House prices soared; they went up more than 50% in a single year. And now the bubble has popped.

“We’re largely a resource economy. Mining is very big here. So our bubble didn’t pop as soon as the bubble in the U.S. and the U.K. We kept going as long as commodity prices were going up. But that fell apart last June, and it’s been down ever since.

“And now there are some good deals in South Africa. The boom didn’t go on long enough to allow the mining companies to increase production very much, so the world is still running out of these things industrial or semi-precious metals – such as platinum and chrome. We’re going to see a huge squeeze on supplies in the years ahead. So, we have a potentially very interesting situation, in which the mining companies have sold off so much that you can get a 10% dividend from some of them…such as Impala, I believe…you get paid very well to wait for the next boom. And when it comes, it could be very big. Very big.”

*** No time to do any serious thinking this morning…we’re on our way to Mumbai. Stay tuned.

Until then,

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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3 Comments on "Inflation Protection at 1%"

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Hilary Smith
The economy made me do it…I’m sorry but AT&T, DuPont and the like are big enough and powerful enough to keep workers employed during this recession instead of firing 5,000 here, 20,000 there, and making the economy even weaker. Why don’t the huge companies in this country show some real corporate leadership and make a pact with each other to keep workers employed. Consumers would continue spending because they’d actually have money because they’d actually have jobs. After a couple of months, people would begin to trust again and spending habits would be restored. A serious show of good-will from… Read more »
Coffee Addict
Hilary. US firms simply cannot compete in the market with the dollar at its current peak. I am anticipate a massive USD nosedive but I don’t have a crystal ball to tell me exactly when. My “back of the envelope” guess is that if we about 60% though the deleveraging process the USD will remain bloated for the next 6 months at least. After that, who knows, but debtor nations are unlikely to just “take it on the nose”. Also I understand that Marc Faber is predicting a collapse on global capital expenditure around Q2 09. The bottom line is… Read more »
Greg Atkinson
I think the issue here is the myth that the U.S economy is the world’s best or most efficient. This myth has been pushed along by the U.S themselves because the Americans like to be seen as the centre of the universe. The fact is that a lot of U.S companies are sick and have been for a long time, the auto industry being a case in point. If the U.S., the biggest market in the world for automobiles cannot have a viable auto sector then it says a lot about U.S industry. I wonder how this can be when… Read more »
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