Stock Market Continues Its Recovery

Other Americans may take the day off. But not us…not here at the headquarters of Markets and Money. We’ve got some reckoning to do.

But let us take a moment to bow our heads and offer this Prayer of Thanksgiving…

Thank you, good Lord, for everything.
We are still alive. We are still solvent.
Help us stay that way. If not both, at least the former.
Lead us not into temptation. Keep us in gold and cash until this is over.
And thank you for bringing the man called Obama to the White House…he might not be any better, but he could hardly be worse; or could he?

Okay, we’ve said our prayers…now, down to business…

Yesterday, the stock market continued its recovery. The Dow was up 247 points. Oil sank to $54. Gold lost $7.40 to come to rest at $811.

We have been waiting for a major rally. Perhaps it is here. But watch out. It is probably temptation coming…

Wait…this is national holiday in America. This is probably a good day to tell you:

What We Believe

Yes, dear reader, we may be cynics, scoffers and doubters here at Markets and Money, but we’re not nihilists. We have our beliefs. And feelings too. Really.

Here is what we think:

Financial markets are part of public life. As a consequence they follow the rules of all public spectacles. That is, they are one part rational and sensible…one part incomprehensible…and one part pure humbug. You never know exactly which part it is you’re looking at.

But the markets are also moral, not mechanical. That is, they follow moral rules, such as – Thou Shalt Buy Low and Sell High…Thou Shalt Save Thy Money…Thou Shalt Not Speculate Unless Thou Knowest Exactly What Thou Art Doing.

Break those commandments…and you’re on the road to money Hell. No point in tinkering with the machine. You can’t ‘fix’ it. That’s just the way it works. Financial sins are punished, one way or another.

But moral lessons – as opposed to mechanical knowledge – are cyclical, rather than cumulative. One generation learns. The next forgets. That’s why the biggest market trends tend to follow great, long cycles – approximately generational in length. In 1929, for example, stocks hit a generational high. They didn’t recover until 1954 – 25 years later. They reached a peak in 1966…and then declined until 1982. They didn’t reach another major peak until 2000 – 34 years later.

We all know what has happened since. The market tried to correct in 2001-2002, but the feds wouldn’t let it. They inflated the biggest bubble of credit and speculation in history…

…that bubble has just burst.

What now? Well, we can expect a long period of regret, reorganizing and repentance. It takes time to undo mistakes. It takes time to learn. It takes time to correct the errors of a 25-year bull market.

If the real top of the bull market cycle came in 2000, we will probably see the next peak around 2025. Meanwhile, there is a dark valley to cross.

But wait…there’s more.

Because while the private economy is reluctantly owning up to its mistakes…going into rehab…making amends…rebuilding balance sheets….and promising never to do such stupid things again…

…our leaders are doing all they can to stop the learning process.

“Here’s $800 billion,” was yesterday’s temptation. “Go out and have a good time.”

“Rescue, Part 2” is how the International Herald Tribune describes it. The plan itself has two features. In the first, the feds will spend $200 billion to buy up loans made to consumers and small business. In the second, another $600 billion will be offered to the mortgage industry.

Our colleagues at describe the program:

“It’s an $800 billion slush fund aimed at loosening credit for homebuyers, consumers and small businesses.

“And it may get bigger…

“Treasury Secretary Hank Paulson has left the door open for more funds. He says, “The facility may be expanded over time and eligible asset classes may be expanded later.”

“Why doesn’t this come as a surprise?

“So there is still no telling how much more money the government will throw at this crisis. But our back-of-the-envelope calculations puts the running total at over $8 trillion.”

The Washington Post sums it up beautifully. “A year ago, the central bank had assets of $868 billion, of which about 90 percent was in Treasuries. Last week, it had assets of $2.2 trillion on its books, of which 22 percent was in Treasuries.”

How this will end, we don’t really know.

But we know this: You can’t pump $8 trillion in funny money into the economy and not expect consequences.”

Meanwhile, the Europeans don’t want to be left behind:

“The European Commission urged EU governments Wednesday to jointly combat the economic slowdown with euro200 billion (US$256.22 billion) in spending and tax cuts to boost growth and consumer and business confidence.

“If fully enacted, its two-year “European Economic Recovery Plan” would see the 27 EU governments spend 1.5 percent of the bloc’s gross domestic product to halt the slowdown that has already pushed some European nations into recession.”

But let’s not get distracted by the details. The markets are teaching people a lesson. The feds don’t like it. They want people to believe that the economy is a mechanical system…that they just need to find the right screws to turn…and the right levers to pull.

Since the “machine” is visibly slowing down, these simpletons think they can get it going again. Just add more fuel!

Of course, as we saw in 2001-2007, the feds can certainly have a big effect on the economy. Their “economy as a machine” theory often seems to work. In fact, practically everyone believes it will work. They just argue about which screw to turn…and who should do the screwing.

The Keynesians say you turn the screw marked “fiscal policy.” When private spending slumps, just replace it with government spending. Pretty simple, no? But when the feds turned that screw – arguably, too far – in the ’60s and ’70s, it didn’t seem to work. Instead, they got stagflation.

So, Milton Friedman pointed to the lever marked “monetary policy.” Give that a pull, he said. It will make sure that the economy always has just the right amount of credit at just the right price. So, Maggie Thatcher and Ronald Reagan both pulled on the monetary policy lever. And Alan Greenspan swore by it. He yanked it so hard in the recession of 2001-2002, the handle practically broke off. Milton Friedman was still alive at the time and actually approved of Greenspan’s handiwork, saying that he had ‘spared the economy a worse recession,’ or words to that effect.

Now the machine has broken down again. It has thrown itself into reverse; the 3rd quarter showed an absolute decline in US output – and it’s speeding up in the wrong direction! And now the terrified feds are ‘pulling out all the stops.’ Which means they using both Keynes and Friedman, and every other tool they can get their hands on.

But the real problem is this: the “economy as a machine” theory is much too simple. No theory, said the philosopher Godel, is ever complete. In science, each one is a stepping stone, towards a fuller and more complete theory. Even theories that take you in the wrong direction are useful – at least in science. They are eliminated…and discarded, so science can take a new direction.

In economics, no theory is ever discarded. Instead, they are merely recycled as market conditions change. “Markets make opinions,” say the oldtimers. In a boom, it is the free market theories everyone wants. “Leave the market alone…it will take care of itself,” they say. But in a bust, the cry goes up: “Help!”

For the moment, Mr. Market’s correction still dominates the economy. One way or another, it will continue for many years. But the Feds are turning the screws and pulling on the levers. Keynes is in fashion…for the present. But Friedman is still around too. Between the lot of them, they ought to be able to do some spectacular damage

But there is plenty of room for surprises…and more mischief from the feds. At some point, we presume the feds will succumb to the lure of the printing press. By some accounts, they already have. Then, we’ll really see some excitement.

So, enjoy your Thanksgiving turkey…and stay tuned.

*** Frugalista. It’s the latest thing, dear reader. Just as we predicted, being thrifty has become fashionable again…so fashionable they even have a word for it: frugalista. It means someone who doesn’t like to spend money but it nevertheless very stylish.

Spending money is soooo 2007…appearing rich is soooo passé…..having a big car, a big house, a big bank account is soooo, like, yesterday.

Chic poverty. Coming soon, to neighborhoods near you.

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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4 Comments on "Stock Market Continues Its Recovery"

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confused in australia
confused in australia
Ok… I completely agree with your logic and can see that you have been correct at the daily reckoning about this crisis. what i want to know however is how central bankers and legions of MBAs can be blind to what seems so simple. surely they have economic advisers who can appreciate the same macro economic results that you can. surely some of these individuals are on a circulation list and have a comment they would like to make… ? i can’t believe that paulson and co are at the helm of an evil empire with intentions of committing everyone… Read more »
Philip Coggan

“If the real top of the bull market cycle came in 2000, we will probably see the next peak around 2025”. Yes, but the location of the middle of the valley between them is far more interesting. Promise you’ll tell us when we get there.

Mistake in argument. The Dow Jones took roughly 25 years to close above the 1929 high. But it was roughly another 12 years before a valuation peak comparable to 1929 was attained. So in Bill Bonner’s argument the next high should have been 2037, using his historical precedent. Using the valuation peaks of 1901, 1929, 1966 and 2000 the average peak to peak is 33 years – peak in 2033? From valuation peak in 1901 to valuation trough in 1920, the duration was 19 years, using trailing ten year earnings. From valuation peak 1966 to valuation trough in 1982, it… Read more »
Rick Ackerman’s daily post Best & Brightest See Rally Ahead For edition of December 01, 2008 Some of the most astute bears we know have turned bullish in recent weeks, none moreso than Porter Stansberry. Porter was a good six months ahead of the crowd when he read Fannie and Freddie their last rites early in 2008. Although we can’t recall the last time he waxed enthusiastic about stocks, he is doing so now: “The investments you make right now will become the best investment of your entire life,” he asserts in his latest advisory. He sees this as one… Read more »
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