Not much action in the markets yesterday. The Dow barely budged, but still ended the day in positive territory – the 7th day in a row of gains. Gold fell $6.
Why? Because they are trapped. After 12 years without a real gain, they can’t afford to miss a major rally. So, they’re inclined to take chances. But is this rally worth betting on?
Nope. Not in our view.
Stocks have gone nowhere in 12 years. But it’s not ‘nowhere’ that they need to go. They need to go down. They need to complete their historic rendezvous with the bottom.
Currently, the S&P trades at about 17 times earnings. You buy a share for a dollar. You get a company earning about 5 cents a year per share. But at a real bottom, a dollar’s worth of stock ought to buy you 20 cents worth of earnings. At one point in the ’30s, there were major companies selling at barely 3 times earnings…that is, a dollar’s worth of stock earned 33 cents.
We have a long way to go. And it’s not going to be much fun for those who are holding shares and hoping they will go up. Most likely the bottom won’t come for a few years. And when it comes, people will be shocked, broke and disappointed.
Most likely, too, US incomes are going down. Much of the economic gains made over the last 20 years were phony. They were based on buying things with money that hadn’t been earned yet. There were not many people who could afford Americans’ standard of living in 2007…not even the Americans themselves.
And of course, businesses and investors made their projections for future earnings based on the same delusions. They built houses counting on rising incomes. They built malls counting on rising spending. They made their own retirement plans based on bubble-era estimates.
“Poor Johnny,” a friend reported the news on another friend. “He’s broke. You know, Johnny… He’s a developer in Florida. But what is it with those guys? They never take their money off the table. He had made a fortune. But he just kept leveraging up. You know, he’d use his apartment buildings as collateral to buy more apartment buildings. And towards the end he was buying some pretty expensive property near Miami, secured by his other property, which was valued according to some very optimistic appraisals.
“I told him he should retire. He was 62. He was on top of the world. What more did he want? Why take chances?
“Then, when the bottom fell out, the whole thing collapsed. The last thing I heard, he was looking for a job.”
We’ve already seen the peak. What’s ahead is the valley. For the next few years – maybe 5…maybe 15 – we can expect falling standards of living in the US…along with falling stock and real estate prices. Yesterday’s news, for example, told us that 1 million people are expected to lose their homes to foreclosure this year.
If you wanted more proof that the economy is not recovering, here you are:
“Retail sales fall for second month,” says Bloomberg.
Households are getting rid of debt. They’re sprucing up their balance sheets by increasing their savings rates. More savings, less debt. We have no quarrel with this process. It’s the market’s way of correcting mistakes and putting things back in order.
But it’s not without its little aches and pains. You’d expect retail sales to go down, for example.
If this were a recovery, on the other hand, you’d expect sales to be going up…to be recovering, that is. If the economy were retracing its bubble path, sales would go up and up. Instead, they’re going down and down – which is why it’s not a recovery. It’s a Great Contraction.
How long will it last?
Until it is over.
And more thoughts…
“The whole thing is a sham,” we said to Elizabeth yesterday. It was a holiday in France. So we walked up the street to the only café that was open and sat down at a sidewalk table.
“The entire economics profession turned into a bunch of scalawags almost a hundred years ago,” we continued. “They created a phony image of an economy. It was a bit like taking a jungle and turning it into a zoo. Once they had the animals in cages, they could make them do what they wanted. They could pretend that they controlled the economy. They were really just zookeepers.”
“What do you mean by that?” Elizabeth asked. “A jungle is a natural thing. But so is an economist. They were just doing what came naturally to them. So, what they produce…what they create…is still a product of ‘nature,’ no?”
“Well, yes, that’s what makes it hard to understand. Everything is in some sense ‘natural,’ since everything is the product of natural forces. But some things are more natural than others. And some actions – although natural – produce outcomes that are undesirable. You can round up people and put them in concentration camps…and you can say that this is a ‘natural’ thing for people to do…since they demonstrably do it from time to time. But it’s not very nice for the people who get rounded up.
“Likewise, it’s not very nice when the economists put you in a cage.
“The people doing the rounding up say they are making a better world. In yesterday’s paper, for example, Paul Krugman says the Fed should set higher inflation targets in order to keep people from saving money. He doesn’t seem a bit concerned that higher inflation rates will steal peoples’ savings. He says the threat of higher inflation will force them to borrow, invest and spend. At least, that’s the idea. But you can only have an idea like that if you’ve already become a zookeeper.
“You say… ‘I’m a great economist. I can make the animals eat ice cream. How? I’ll take away their meat.’ So you take away the meat. The animals begin eating ice cream. And then you say, ‘See, I told you I was a great economist.’
“But the animals don’t really want to eat ice cream. And it’s probably not good for them. They get sick and their teeth rot.
“And now – in the real economy – people don’t want to eat ice cream. I mean, they don’t want to borrow and spend. They want to save. But Krugman wants the feds to force them to borrow and spend – just like they were animals in a cage – by threatening to debase their savings. Maybe the feds can do that. And then Krugman will think he’s a genius. The effects on the phony, zoo-economy might appear to be good. People might try to get rid of their money. They might spend and invest. The GDP figures might move upward.
“But that doesn’t mean people would be better off. They’d be worse off…”
*** “China can teach Argentina a lesson…” says a news report. China is about to invest $10 billion in Argentina’s railroads. Obviously, if Argentina wanted railroads it could finance them itself. If it had any money, which it doesn’t. So, the Chinese have come to the rescue. Argentina is a good source of raw materials and food. The railroads will make it easier for Argentina to bring its produce to market, and make it easier for the Chinese to haul it away.
According to the report on Breakingviews, Argentina will learn the value of long-term investment in its infrastructure.
But the gauchos weren’t born yesterday. They know how to play investors. They bring them to Buenos Aires. They are fed fat Argentine beef. They are watered with rich malbec wine. They watch a tango show and a polo match. After a few days they are ready to open their checkbooks.
Then, the Argentines take the money…and later default on their obligations. China is probably going to learn a lesson, too.
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