Bill Bonner (The Daily Reckoning):

The Los Angeles Times tells us that mortgage defaults in the prime category rose in the 3rd quarter. If you are wondering what might happen to housing prices in the US…should the depression continue…you might want to keep an eye on the default rate.

Housing prices are down about 30% nationwide. In some areas, they are down much more. But they had been going up for so long…this downswing still seems like an aberration. Hope has momentum…especially in the housing market. Housing prices rose along with inflation for 100 years. Then, they rose much faster than inflation over the last 10 years, ending in 2007. This leaves people with the impression – false – that housing always goes up over the long run. As we have pointed out many times in these Daily Reckonings, housing prices in the nicest neighborhood of Baltimore, where we have our offices, hit their highs, in real terms, in the 1920s. They’ve been going down ever since. Even after the big run up to 2007, they were still below their ’20s peaks. That’s a bear market in real estate prices that has lasted, so far, 80 years.

We don’ t have reliable numbers – in fact, we don’t even have unreliable numbers – but our guess is that property prices in central Rome topped out during the reign of Trajan…or maybe even Augustus. They must have gone down for the next 1700 years, because as late as the 1800s, the most precious real estate of the Roman Empire…around the forum…was being used as a goat pasture. That’s still better than say Troy or Ctesiphon – cities that were abandoned and forgotten completely.

Real estate doesn’t go up over the long run. Sometimes it goes down…often for a very, very long time. . .

Click here for the rest of Mr. Bonner’s commentary at The Daily Reckoning.

Bill Bonner (The Daily Reckoning):

We reported that the US government would need to roll over $2.5 trillion worth of debt next year. We probably erred. The number was right, but it was meant to be over the next two years. During the next two years also, worldwide, banks need to roll over $7 trillion. Whether it is over one year or two years, we’re talking big money.

Most people who bother to think about it are coming to the conclusion that this is very inflationary…and very bullish for gold. They think the Fed will need to “monetize the debt” directly, or indirectly. One way or another, they say, the central bank will have to increase the volume of money so that the government can finance its deficits.

Paul Krugman, Nobel Prize winner in economics, suggested that the Fed add another $2 trillion to the nation’s monetary base, partly to accommodate federal borrowing…and, he believes, to stimulate employment.

This idea is widespread. Richard Koo, one of the few economists to understand the Japanese depression and what awaits the US, thinks along similar lines. The US economy is going into a depression, like Japan; the government must spend huge amounts of money in order to keep GDP from falling.

Japan’s top man shocked the nation last week when he announced the largest budget deficit ever. The government will spend about $1 trillion – a new record. And it will collect less than half that much in taxes. Meaning, most of what the Japanese government spends is borrowed – something the Japanese haven’t done since the days when Americans were dropping bombs on them.

The Japanese government is doing what it should do, says Koo. It is replacing missing private spending with public spending. So doing, it has avoided a drop in GDP and employment. Throughout its 20 year slump, Japan’s GDP has never fallen below the peak set in 1989. Nor has unemployment ever risen above 6%. Bravo!

Bravo?

Click here for the rest of Mr. Bonner’s commentary at The Daily Reckoning.

Bill Bonner (The Daily Reckoning, UK):

The financial world is slowing down. Analysts… economists… and blabbermouths are getting ready for the holidays. The news flow is quieting. The noise is abating.

So, let’s talk about gold. But first… a note about the little train that couldn’t.

The Eurostar connects London and Paris. Last Friday, several trains entered the tunnel and stopped. According to the press reports, the weather was unusually cold in France and unusually warm in the tunnel. This caused some sort of malfunction, stranding 2,000 travellers under the dark water and thousands more on both sides of the channel.

It was a blow to France’s pride; the French consider their train technology to be the best in the world. Yesterday, President Sarkozy called the head of the Eurostar and chewed him up… and this morning, the trains were meant to be running again.

We rose at 5am to rush to the Gare du Nord, so we could get the 6:43 to London.

“You’re going to take the Eurostar,” said the taxi driver with a laugh. “Well… good luck…”

When we got there, it was obvious something was wrong. Passengers weren’t lining up in an orderly fashion. Instead, hundreds of travellers who had been waiting three days for a train formed a miserable, complaining mob.

We were just trying to figure out what was going on when a phalanx of police came down the steps, followed by another group of Eurostar staff members. They wandered around… formed the passengers into lines… answered questions and then, nothing happened. We waited…

And waited…

“This is intolerable,” one French passenger yelled at a young woman in uniform.

“You people have no respect for your customers. We’ve been waiting days to get back to our families… and you treat us like cattle. It wasn’t our fault the trains didn’t run as they were supposed to. It was your fault. And you should have done a better job of dealing with the trouble you caused.”

A murmur of approval went up from the crowd. The clerk walked away. We waited. Finally, after half an hour, your editor gave up. His business in London could wait. We walked over to our office, only about 20 minutes away, on foot.

Now… back to gold…

The price fell $15 yesterday to just under $1,100. We expected a correction in the gold market. But we thought it would come along with a correction in the stock market. Stocks rose 85 points on the Dow yesterday.

We take this as a warning: something is going on that we don’t understand. That said, there’s a lot going on that we don’t understand.

But the broad patterns generally make sense. Boom was followed by bust. As dear readers know, the force of a correction is equal and opposite to the deception that preceded it.

The deception of the Bubble Era being exceptional, the correction would be exceptional too – even under the best of circumstances.

But these are not the best of circumstances. Because several other things are happening… things that need to be reckoned with too.

• The US is losing its privileged place in the world. Americans now compete with many other people in many other places for the world’s resources – including its savings.

• The international monetary system, an experimental system built of paper dollars, may be falling apart.

• The days of cheap and bountiful energy are over.

• Governments are going broke. State governments. National governments. In Europe. In the Middle East. And in America.

• The engine of economic growth – Americans’ willingness to go into debt in order to consume more and more of the world’s output – has gone into reverse.

• And, governments are meddling on an unprecedented scale… delaying and avoiding necessary adjustments, possibly turning an ordinary depression into a Great Depression… or even a Much Greater Depression.

These are not small challenges. Any one of them would be a worthy crisis on its own. Put them together and you have the makings of a catastrophe.

What will happen? Don’t know. Wish we did.

A series of mini-disasters? Or one big planet-wide blow-up?

Or, are the authorities so smart that they can engineer trouble-free solutions to these challenges?

Click here for the rest of Mr. Bonner’s commentary at The Daily Reckoning, UK Edition.

Bill Bonner (The Daily Reckoning, UK):

Leading economists have a one-stop solution for just about everything: stimulate consumer spending.

When the price of oil hit $150 a barrel, the first major alarm sounded. Something was wrong. Now we have a clearer idea of what it was.

To make a long story short, leading economists have a one-stop solution for just about everything: stimulate consumer spending. But $150 oil warned us: continue down that road and you will run out of gas. There isn’t enough oil in the world to allow US-style consumption for everyone.

Two weeks ago, Dubai gave us another wake-up call. Thought to be risk- free, since it was implicitly backed by all the oil in the Middle East, Dubai World nevertheless stopped paying its debts. And last week yet another bell banged our eyes open. Greece announced first that it would not try to reduce its deficits… then, that it would. Hearing the news, the financial world rolled over and went back to sleep. But The Wall Street Journal offered a hint of trouble to come: “Markets force Greek promise to slash deficit,” said its page one headline.

If markets could force the Greeks to trim their deficit – about 13% of GDP… not far from the US level – could they not force Britain and America too? Coming right to the point, the fixers face not just one crisis, but many. They have a growth model that no longer works. They have aging populations and social welfare obligations that can’t be met. They have limits on available resources, including the most basic ones – land, water, and energy. They have a money system headed for a crack-up, and an economic theory that was only effective when it wasn’t necessary. Now that it is needed, the Keynesian fix is useless. If a recovery depends on borrowed money, what do you do when lenders won’t give you any?

But let us backtrack to a smaller insight. Then we will stretch for a bigger one. Americans are supposed to be insatiable shoppers. For at least three decades, the world counted on it. It was the growth model for almost all the Asian manufacturing economies… and for resource producers everywhere. But as we approach the biggest shopping season of the year, a survey of consumers signals an earthquake. Americans plan to spend an average of 15% less during this holiday season than the year before. Only 35% say they will take advantage of post-Christmas sales, traditionally when the stores unload unwanted inventory. They seem to be satiable after all.

Push come to shove, Americans react like everyone else. Now, they are being shoved into a new world, very different from the one they have come to know. In 1973, the American working stiff went into a decline. His weekly earnings, in real terms, went down for the next 36 years. The typical worker earned the equivalent of $325 a week in 1973… adjusted to constant 1982 dollars. By US official accounting he was down to $275 a week in 2009. Unofficial estimates put the loss as high as two-thirds of his purchasing power.

Yet, his spending increased anyway. How? He squeezed the rest of the world. The US trade gap began to go seriously negative in 1992. By 2006-2007, foreigners were shipping to America nearly $900 billion more per year in goods and services than they received in exchange. This gave the typical American a standard of living few people could afford; too bad, he wasn’t one of them.

Now he’s up against billions of Patels and Hus. They work for less. They save more. They want more stuff too. And they’re suspicious of the dollar.

Their economies are growing faster…

Click here for the rest of Mr. Bonner’s commentary at The Daily Reckoning, UK Edition.

Bill Bonner (The Daily Reckoning, UK):

Gold rose $15 yesterday. What to make of it?

Perhaps it was because Ben Bernanke’s extended his “extended period” pledge?

He said, in effect, if this economy doesn’t come out of its slump, it won’t be his fault. He’ll keep monetary policy as loose as possible for as long as possible. Not that we had any doubt about it. He has a theory. It’s a bad theory, but it’s all he has. And it tells him that you fight a depression with loose money.

So, what do you expect? Interest rates will remain artificially low as long as Bernanke can get away with it… or until the depression ends… whichever comes sooner.

That said, he hardly has to lift a finger. Judging from the last auction of short-term Treasury debt, lenders can’t think of anything better to do with their money than to give it to the government – in return for nothing. The last auction produced a yield of zero on one-month loans.

We went to visit a pair of clever Swiss bankers yesterday. These fellows manage money for clients all over the world. What do they think? They were focused on stocks:

“This year, the people who made the most money were those who were most heavily invested in equities. And if the patterns of the past hold up, 2010 will be a good year for equities too.

“Whenever the ten-year performance goes close to zero, the next few years tend to be very good for stock market investors.

“In fact, there has never been an exception, going all the way back to 1881. Last year was one of the worst years in stock market history. This has been one of the best. And next year should be one of the best too.”

He handed us a chart to illustrate his point. It shows the 10-year performance of the stock market.

We see that very rarely are stock market returns negative over a 10-year period. In fact, there are only two worth mentioning. One was in the ‘30s, when in August ‘39 stocks had returned MINUS 4.68% for the previous ten years.

The other major losing period came in February of this year, when investors had gotten an average annual return of -3.43% since 1999.

The message seems simple enough. When the market turns down sharply… expect a sharp turn-up to follow. But studying the chart more carefully, we see two things.

Click here for the rest of Mr. Bonner’s commentary on The Daily Reckoning, UK Edition.

Bill Bonner (The Daily Reckoning, UK):

Are we in a depression yet? The number of Americans living on food stamps has risen to 37 million. The ‘30s had soup lines. The ‘00s have food stamps.

And what else was big in the ‘30s? Escapist movies. Here’s a headline for you:

“Box office takings set to smash records,” says the Financial Times. What kind of movies? End of the world catastrophes… vampires… strange non-humans doing strange things.

For example, there are ads for Avatar all over Europe. The film seems to concern Spock-like creatures who use bows and arrows. Pure escapism, in other words.

Stocks went down a bit in America yesterday. The commentariat blamed it on higher producer prices, thought to be harbingers of consumer price inflation.

Of course, consumer price inflation is what everyone is counting on.

The debts of the past need to be reckoned with. Borrowers are doing the best they can. They pay when they’ve got the money. They default when they don’t. Since ’07, mortgage debt is down about 2% –to about $10 trillion. Most of that decline comes as a result of defaults and repossessions.

Let’s see, 2% over two years ain’t very much. At that rate, it will take half a century to bring mortgage debt down to the comfortable levels of the ‘80s.

What’s more, it will be hard to do at all. Incomes are stagnant… or actually falling. As people cut back on their spending in order to pay down debt, it reduces income to employers, as a consequence of which the economy is weaker… with fewer jobs and less income to the folks who are trying to pay off debt.

What a drag! People ran up huge debts believing that they would never actually have to pay them. They figured they would refinance, and pocket the built-up ‘equity’.

But, according to a report in this week’s press, though mortgage rates are at a multi-generational low, finding a banker willing to lend is as hard as finding a liquor store that makes home delivery on Sunday.

That’s largely because the equity most homeowners have is negative. Houses are down about 30% since ’07. Any buyer who bought or refinanced a house in the last four or five years is likely to be under water.

Even in normal circumstances paying off debt is a long, hard process. Mortgage debt is long-term. Paying it off is long-term too. Many people see years of painful scrimping and saving ahead of them.

What they would all appreciate is a little help from inflation. Inflation lightens the load. It increases nominal incomes while holding mortgage payments steady. It increases nominal ‘equity’ too.

House prices tracked inflation for a hundred years. It was only in the last ten years or so . . .

Click here for the rest of Mr. Bonner’s commentary on The Daily Reckoning, UK Edition.

Bill Bonner (The Daily Reckoning, UK):

The Financial Times calls it a “war on greed”. But it’s a bogus war
It’s open season on bankers. But the hunters are shooting blanks!

First, Britain said it would impose a 50% super-tax on their bonuses. Then, Sarkozy said he would do the same thing. Angela Merkel merely said that she found the idea ‘charming’.

As for the US, the argument goes on. Goldman has tried to head it off with various gestures.

Goldman’s top man said the firm wasn’t just trying to make money; it was doing “God’s work”. No kidding. We couldn’t make this stuff up.

How Mr. Blankfein knows what God wants him to do, we can’t tell you. But it was certainly a bold public relations move to suggest it.

More recently, top executives agreed not to take cash bonuses.

The Financial Times calls it a “war on greed”. But it’s a bogus war. What is really going on is that both sides are conspiring to share money that doesn’t belong to them.

The Wall Street Journal, for example, revealed more of the real dealings between AIG and Goldman.

AIG had guaranteed billions worth of Goldman’s dodgy mortgage deals. If AIG went down, Goldman would lose a lot of money. So, when the feds stepped in to “save western civilization as we know it”, they were really saving Goldman.

Western civilisation would have been better off if they had all taken their losses and gone to wherever willing investors and lenders sent them. Instead, the feds put up the taxpayers’ money… and the bankers got their bonuses.

The show must go on. And now, as the government pretends to punish the bankers, the bankers pretend to suffer.

In the first place, a 50% tax is not that extraordinary. The top marginal rate is nearly 50% in many places already – including the US. Add the local tax to the federal levy and you barely have half left.

In the second place, if the bankers don’t take big cash bonuses they’ll take their compensation in some other manner.

According to the Financial Times, rough handling by English tax collectors is causing many bankers to leave the country. But there’s more to it than just the taxes. Bankers are leaving the UK because the opportunities for them are better elsewhere.

Here we come to one of the world’s big trends – one that will have profound consequences for the entire world.

There may be a depression in the US and Britain… but it hasn’t slowed the movement of money and power from the mature, developed economies – notably the aforementioned Britain and America – in the direction of the emerging markets.

The emerging markets are growing faster; everybody knows that.

According to a Goldman study, nearly half the world’s economic growth is now occurring in just four countries. And neither the US nor Britain is on the list. Nor is any other developed country.

The four are the BRICs… Brazil, Russia, India and China. They were given a big boost by the Fed… which has kept the price of credit in the US artificially low for almost an entire generation. This increased consumer demand in the US for foreign products, indirectly transferring a substantial part of the US GDP to the emerging market exporters.

This year, nearly twice as many IPOs were completed in Hong Kong as in either New York or London. Why? Because there is more new economic activity in Asia than in the mature Anglo-Saxon markets. And because there is more money available in those emerging markets than there is in the West.

This trend could come to an end at any time. But it is unlikely.

Click here for the rest of Mr. Bonner’s commentary at The DailyReckoning, UK Edition.

Bill Bonner (The Daily Reckoning, UK):

We are high over the African veld… at least, we think it is called veld. That’s ‘field’ to you and us. And we’re so high above it we can’t see it anyway.

After a few days in Johannesburg, we’re on our way to Dakar. Why would Bill want to go to Dakar? We asked the same question. But Dakar is just a stopover on the way to Washington.

Meanwhile, there are things to be reckoned with.

When we left the ground, it appeared that we were finally getting the shakeout in gold that we’ve expected… and maybe the beginnings of a shakeout in stocks too.

(Whoa… we just landed in Dakar… got an internet signal. Seems gold is down another $22. The Dow, however, rose 51 points yesterday.)

On Friday, the London gold market saw the highest volume traded in history.

London gold expert, Dominic Frisby, sent this commentary:

“After peaking last Wednesday at about $1,220 an ounce, the price has fallen almost $100 in just four trading days. Friday’s capitulation – some $60 – was particularly ugly. It shows just how much speculative, hot money there is in the sector.

“So what now?

“In the week to last Wednesday 7 December, almost $300m of call options (options betting the market will rise) were traded in the largest gold exchange-traded fund (ETF), GLD.

“That is more than the entire call volume of the second and third quarters of this year – in just five trading days. On Wednesday alone, trading volume in GLD calls amounted to almost 50% of what the market traded in the entire second quarter.

“That is a sign of extreme speculative excess. It is not the time for short-term investors to buy. At such extremes, you have to ask: where are the next buyers going to come from?

“As we head into year end, there are a lot of fund managers who will want to lock in their profits for the year.

“I’m afraid that means they will sell their gold – and anything else they own that has done well – at the slightest hint of a turn in the markets, because they will want to secure their gains (and their bonuses) on what will have been an excellent year. That’s what we saw on Friday and why the market fell so hard, so fast.

“In the short term, this does not bode well for any market – except one. “It may be that we are finally seeing the end of the ‘Great Reflation Trade’, this astonishing rally out of the crash.”

Click here for the rest of Mr. Bonner’s article at The Daily Reckoning, UK Edition.

Bill Bonner (The Daily Reckoning):

The Dow stayed in the same place yesterday. The correction in the gold market continued, with a $5 loss in the gold price.

The employment news on Friday was better than a poke in the eye with a stick. But how much better? Better enough to justify higher prices on Wall Street? Better enough to sell your gold because you believe that it will be clear sailing from here on out?

Uh…we wouldn’t advise it.

Maybe Main Street has been misled – again – by Wall Street and the feds. Spread around enough hot money and it begins to look like there’s a real recovery going on. Employers – as well as consumers – are duped. Business owners, for example, are likely to think that the recession is over and halt the layoffs.

More likely, Friday’s announcement that unemployment has bottomed out is bogus. A single swallow doesn’t make a spring. Nor does a single month’s worth of jobless numbers tell us much about the underlying trend.

Jobless rates…like other financial numbers…bounce around. One month is insignificant. We’ll have to wait to see what happens next, just like everyone else. But there are probably a million or so more job cuts to come before the bottom is finally reached.

Don’t blame businessmen for being confused. The press reports make it sound like it’s back to business-as-usual. And for the banking industry, it DOES seem as though nothing has changed. They’re lending to cockeyed private equity deals…aiding and abetting speculators in the carry trade…and handing out billions in bonuses. Just like old times.

They’re enjoying the bliss of the spotless mind…that is, the mind that has no memory…no regrets…and no sense.

But something has changed. It’s not the same world that it used to be. We don’t know much, here at The Daily Reckoning mobile headquarters in Johannesburg. But we know this: there is NO WAY that today’s economy is going back to what it was pre-2007. Business as usual? Not at all.

Click here for the rest of Mr. Bonner’s article at The Daily Reckoning.

Bill Bonner (The Daily Reckoning, UK):

Two bits of hot news on Friday – the employment report… and the action in the gold market.

According to the US government, there were fewer people out of work in the month of November than there were in October. At least, that is the way the authorities tell it.

The official jobless rate fell from its 26-year high of 10.2% to a 26-year high of 10%. Good news, if you believe it’s the beginning of a trend.

The other big news is that gold fell $48. We’ll come back to that in a moment…

Elsewhere in the news, we find that bankers are lightening up – at least in their loans to speculators. Tony Jackson in the Financial Times says they’re at it again:

“ US bankers are resuming their carefree habits as in the days of the credit boom. In lending to private equity, it seems they are once more issuing so-called covenant-light and payment-in-kind loans, whereby borrowers are freed from irksome conditions and can pay their annual interest by simply borrowing more.

“All this at a time when companies acquired by private equity last time round are sliding into default in record numbers.”

Oh to be young again… sans souci, sans scruple… without a worry or a regret… oh to be a banker!

We’re happy for them. Really. The bankers, that is…

Well, we would be happier if they were really doing something to put the economy on the road to recovery. But what do you expect? So far, the ‘recovery’ is as phony as the boom that preceded it.

A real recovery requires real savings, real investment, real jobs, and real increases in earnings (readers will recognise those as the same requirements for a durable boom in the stock market). As far as we can tell, they do not exist.

But who cares? For most investors a phony recovery is as good as a real one.

And if the economy is recovering in any shape or form, maybe investors don’t need so much of that catastrophe insurance – gold – after all. The price of gold fell $48 on Friday.

Click here for the rest of Mr. Bonner’s article, available at The Daily Reckoning, UK Edition.