Second Prize in a Beauty Pageant

Goodbye QE boom… we hardly knew ye.

And good riddance! You were never reliable. Never real. Never worth a damn.

US stocks fell a little more. Most foreign markets headed down too – scarcely a week after the biggest money-printing announcements in history…

Europe’s doing it. Japan’s doing it. America’s doing it. Even Brazil is doing it… sort of. Brazil recently announced ‘stimulus’ measures to help boost growth.

But debt-financed stimulus doesn’t work… not in this economy. This is an economy with too much debt already.

And that’s why the stock market has had a rendezvous with disaster… ever since the crisis began in ’07-’08. This is a Great Correction. And in a real correction, stocks should sell off until they’re cheap.

Why? Because that’s what happens in a correction. Prices correct. They go down to levels that are so low the mistakes and bad investments are wiped out. At the bottom, the survivors are bargains again.

In the ’30s, for example, US stocks fell below ten times earnings. And again in the early ’80s, the Dow traded as low as five times earnings.

And in Japan, stocks lost about 75% of their value… and stayed down. They’re still down 22 years after the crisis began.

So why haven’t US stocks kept their appointment with doom and gloom? Two reasons.

First, because the feds flooded the roads and tunnels leading out of Wall Street. There was so much cash and credit, stocks couldn’t get where they were supposed to go.

Second, because the companies used the crisis to cut overheads, staff, and expenses leaving them with the highest earnings in years.

We’re down in Brazil today… where the economy really has been growing. Economists say Brazil’s growth is slowing, but over the last five years this economy has produced two new jobs for every job the US lost.

São Paulo is like downtown LA… but many times larger… busier… more chaotic… faster-moving… and growing. There are skyscrapers in every direction we look, hundreds of them. There aren’t many construction cranes, but there are plenty of new buildings. And helicopters, you see them overhead all the time.

On the TV is a beauty contest. But this is not the country fair queen they’re looking for. Instead, the contestants all wear string bikinis… and the focus is on one part of the anatomy only. It’s called the “bum bum beauty contest” where the judges actually use a ruler to measure the girls’ charms.

We went over to the gleaming new headquarters of Facebook today… Facebook has 50 million users in Brazil, one fourth of the population. And last year, computers passed TV sets as the number one Christmas gift.

‘The story here is a middle-class success story,’ our contact explained. ‘There are millions of people who are entering the middle classes. They’ve got decent jobs, good wages, rising household incomes, cars… and computers.’

Very different from the US, where the middle class is shrinking. Household earnings for middle-class families have been stagnant for nearly 20 years. Household net worth has gotten whacked too – first by the stock market… and then by housing.

The idea of the American dream was that if you got a good education and bought a house. You couldn’t miss. But ’tweren’t so. Here Robert Samuelson explains:

‘A study from economists at the Kansas City Federal Reserve reports: Fewer than 60 percent of college freshmen graduate within 6 years; student debt now totals about $1 trillion; for 25 percent of borrowers, annual repayments exceed $4,584; default rates are almost nine percent. ‘Defaulted borrowers may be sued, tax refunds may be intercepted, and/or wages may be garnished,’ the report notes.

‘The plugging of homeownership – the quintessential symbol of ‘making it’ – is another perverse pathway. True, homeownership is a laudable goal; it stabilizes neighborhoods, for example. But the promotion went overboard. Lax lending standards lured people into buying homes they could not afford, contributing to the 2007-09 financial crisis. Again, victims were the intended beneficiaries; since 2007, at least five million Americans have lost homes through foreclosure, reports CoreLogic.’

A collapsing middle class and a Great Correction are not good for the stock market. According to John Hussman, the outlook for stock prices – according to his proprietary model – has never been worse. QE money printing doesn’t really improve the economy. And real companies depend on the real economy to grow.

Don’t expect to make any money on your stocks over the next ten years, he says.

And this week, Jeremy Grantham told the world that today’s high earnings are “freakish”. Abnormal, in other words. And what we know about abnormally high earnings is that they soon revert to normal… and then abnormally low.

The combination of a funky, correcting economy, shrinking middle class and mean-reverting earnings is likely to hit the stock market like an iceberg hit the Titanic.

Our advice: stay close to the lifeboats.


Bill Bonner
for Markets and Money

From the Archives…

The Sharks Amongst the School
21-09-2012 – Greg Canavan

Bernankonomics 101
20-09-2012 – Greg Canavan

There’s Going To Be a Fight
19-09-2012 – Dan Denning

The World’s #1 Money Printer
18-09-2012 – Bill Bonner

The Video That Started All the Controversy
17-09-2012 – Dan Denning

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail Markets and Money.

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