Investor Gains in This Century Have Been Corrected

We walked along the Seine last night, on the left bank, making our way to a romantic restaurant rendezvous. It was a lovely night. Paris is the world’s most beautiful city…and along the river, near the Pont Neuf and Notre Dame, we watched the lights on the water…and the outlines of the buildings on the Isle de la Cite…and the Rive Droite. A gentle mist fell on the scene like an impressionist’s brush.

But as pretty as it was…and as much as we looked forward to our dinner…we walked along with our head down. It’s the end of the world as we know it…and we don’t feel so good.

Why? Because this correction is beginning to hurt.

On Monday, we put out the word that the Morgan Stanley index showed a worldwide loss of equity value of some $30 trillion. By Wednesday, we got an update: another $2 trillion had been lost. And yesterday, once again, the Dow went down hard – another 445 points were lost. This brings the index down to 7,552…another day like that and it will have wiped out all the gains of the last six years. The low for 2002 was 7,286. It looks like we’ll get there soon.

That will mean that Mr. Market will have corrected the entire 21st century rally. You’ll remember, we thought the bear market began in January 2000. Stocks fell. Then, in October 2002 began a uptrend that most people took for a new bull market. We figured it was just a bear market rally – a trap for unwary investors. But it lasted so long and took stock prices so high that even we had trouble sticking to our story.

Now we see we were right. Almost all the gains made by investors in this century have now been corrected.

Dan Denning sends us over this chart:


Goldilocks and the 4 Bears

But what next? Will Mr. Market stop there? It doesn’t look like it. We’ve never seen him so angry…and never seen him so determined to do damage. It looks to us as though he wants to correct a lot more than just the bear market rally…

….maybe he’s going to correct the entire bull market run that began in 1982. If so, you can expect the Dow to sink down to about 3,000 (adjusting the ’82 level to inflation).

…maybe he’s going to spank the baby boomers. They didn’t save. They were reckless and spendthrift. They’ve lived such charmed lives; they were born just after the last Great Calamity – the period of 1914-1945. But now it looks like they are in for a correction…correcting their foolish habits and silly ideas. In other words, it looks like the boomers are going to sweat – for the first time in their lives.

…maybe he’s going to correct the entire post-’71 funny money system, taking the dollar down a peg so it’s no longer the world’s only reserve currency.

…or maybe he’s going to correct something even bigger. A “correction” is an episode – inevitable, but rare – in which mistakes are identified and put right. But there’s another way of looking at it…it’s a period when things regress to the mean…when they go back to normal…when they return to where they ‘ought’ to be.

Well, it’s not ‘normal’ for the price of oil, for example, to shoot up from barely $30 to nearly $150 in the space of a couple years. Now, we’re seeing the oil price come down to more normal levels. Yesterday, oil dropped below $50. This morning, in Asian trading, it is below $49. It is regressing to the mean. It might even “overshoot” to get there.

It may not be ‘normal’ either for a man in Detroit to earn $35 an hour while a man in Shanghai earns only $1.50. Both men’s work should be worth about the same thing. And for most of human history, there was probably little difference. In the 18th century, for example, economists believe that a fellow had about the same standard of living, whether he lived in Delhi, Detroit or Dongguan. Then began an anomaly. Detroit took off. Thereafter, people in Europe…or of European descent…earned far more than the ‘wogs.’

Naturally, the Europeans developed a certain sense of superiority.

“What separates civilized men from barbarians?” the French have been known to jest. “The Mediterranean!”

*** Now, it’s the Europeans and Americans who are on the wrong side of the Mediterranean. They have a big disadvantage: their costs are too high. Just look at Detroit. Its labor is too expensive. It has too many legacy costs. It operates with too much overhead…too many lawyers and bureaucrats…too much staff…too many expenses and impediments that its competitors in China don’t have.

And so now, the Chinese are proposing to buy GM! Can you believe it? What was good for GM was supposed to be good for America – at least, it was in GM’s heyday. But now they’re talking about selling the whole U.S. auto industry to communists. Here at Markets and Money we’re having a serious case of irony overload… We read the headline news…and we just don’t know what to make of it.

But yesterday evening…walking along the quai…we had a thought. What if Mr. Market intends to correct the entire European advantage? What if he intends to correct the entire Industrial Revolution…bringing the developed world’s GDP/person more into line with those in China and India? Maybe he intends to unhinge the sky again? Maybe we will see all five stages of collapse – financial, economic, political, social and cultural…and maybe some hurricanes and a major epidemic too!

But we’re not going to worry about it. That is all in the future…perhaps the distant future. Let’s get back to what is happening right now.

The feds are now in full inflation mode. They’re cranking out as much cash as they can. But as much as they create new money – Mr. Market destroys it faster.

And what will happen today? Who knows…? But yesterday probably took another $1 trillion out of the financial world’s stuffing…

A Reuters report tells us that it will take a lot more than Paulson has left to fix what it wrong with Wall Street. Financial institutions need between $1 trillion and $1.2 trillion to repair their balance sheets, says an analyst.

Remember, it’s a “balance sheet recession,” not a standard business cycle recession. Companies, governments, consumers, investors – we’re all desperate for cash to rebuild our balance sheets. We need to pay down debt and build up savings.

And given the size of the holes we have to fill, you can expect some big loads of sand, rocks and gravel coming from the world’s central banks. In fact, one report we got this week tells us that the size of the campaign – in dollar terms – is already over $4 trillion…or more than the cost of WWII.

*** Joblessness is near a 26-year high, says a Bloomberg report. Lost your job on Wall Street? Need retraining for a new career? Learn to say, “Would you like fries with that?”

Yes, it’s the “New Frugality,” says the Associated Press:

“It is a whole reassessment of values,” said Candace Corlett, president of the consulting firm WSL Strategic Retail. “We’ve just been shopping until we drop and consuming and buying it all, and replenishing before things wear out. People are learning again to say ‘No, not today.'”

“The trend is evident in where cash registers are ringing, and where they are not.”

*** A federal judge has just ordered the Pentagon to release two of its Guantanamo prisoners. The conservative judge was supposed to be friendly to the Bush administration, but even he could find no justification for holding the two men.

Which sounds to us like another charge that will eventually be brought against Dubyah and his Hole in the Head gang – unlawful imprisonment.

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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