Bill Bonner (The Daily Reckoning, UK):

The ‘recession’ did more damage than they think

Claptrap! Nonsense! Balderdash!

Everywhere we look, someone is saying something ridiculous.

Which is good news to us. This Daily Reckoning was getting to be serious work…what with the world facing a total financial meltdown and all.

So, we’re pleased to be able to lighten up by, once again, telling you what an idiot Tom Friedman is. You already knew that? Well, it doesn’t hurt to repeat it…

We hadn’t seen much of the old Tom recently. His recent editorials in the New York Times were no smarter than before, but a bit subdued…as if some chemical trace of good sense had slipped into his system, perhaps from a paper cut. But now, he’s back, big as life and twice as stupid.

We’ll come back to Tom in a moment, but since this is a financial service, we should probably begin with the financial news.

The Financial Times is looking over its shoulder. The recession is over, it says; time to take stock of the damage.

“Beyond the Crisis… With most of the world’s economies officially out of recession, the FT launches a series examining the legacy of worst global economic crisis since the 1930s,” says the FT. But according to the figures below the headline, the crisis wasn’t so bad. The US economy walked backward only 3.5%. Now, it’s making progress again.

The FT editors should keep their eyes on the road. The ‘recession’ did more damage than they think. And it isn’t over… There’s more trouble ahead.

The ‘recession’ in the US has wiped out…

…ten years of stock market progress. Actually, stock prices are no higher than they were in 1998…

…ten years of employment progress. You have to go back to the ’90s to find a time when so few people were working in America…

…ten years of income gains. The typical household had less real, disposable income than it had 10 years ago.

In other words, a whole decade has been lost. Baby boomers are now ten years older, and less prepared for retirement than any previous generation in US history.

In Florida, joblessness has reached 11.2%. The jobless picture gets even grimmer when you consider the effect of long-term unemployment on the unemployed.

“It’s a killer disease,” says Thomas Cottle of Boston University. “People are going to be damaged and may not recover in their lifetimes.”

The FT elaborates: “The longer people are out of work the more their skills decline and the less appealing they become to employers.”

That puts the boomers in a bad spot. If they lose their jobs now they may never work again. Which means, they will face retirement with very little money…and a keen interest in making sure the feds keep the money flowing their way. They may not recover in their lifetimes…

Housing starts are at a 10-month low. Mortgage applications are at a 12-year low. As far as we can tell, both housing and employment figures are getting worse.

In short, the ‘recession’ is far from over, even if the feds are able to jive up the GDP figures from time to time.

Click here for the rest of Mr. Bonner’s insightful analysis at The Daily Reckoning, UK edition.

The Dow rose 155 points on Friday. And today, stocks are rising in Asia. Oil is over $74. Gold rose $13 on Friday… to close at $954. And the dollar is killing us softly… sinking to $1.43 per euro on Friday.

Stocks and oil are at their highest levels so far this year. With such profits at hand people figure they don’t need the dollar. Investors run to the safety of the greenback when financial storms approach. But now… they think it will be clear sailing.

“Worlds bankers suggest rebound may be under way,” says a headline at the New York Times.

Is the world economy really recovering? Should you buy stocks now to take advantage of this new bull market?

You already know the answer, don’t you, dear reader.

After a fall comes a bounce. And along with the bounce come a lot of silly ideas. You see how it works? “Markets make opinions,” say the old timers on Wall Street. When stocks are going up investors find reasons why they are going up. Pretty soon, they’ve convinced themselves that they’ll go up forever.

But bounces do not last forever. They aren’t giant turtles… they’re moths. After a few months of flitting around bright lights, they dry up. When exactly this summer of winged love will end, we don’t know. September or October is our guess. But we have little doubt it will come to an end soon.

Ultimately, stock prices depend on earnings. People compare the rate of return they can get from stocks to what they can get from other investments. Rising earnings signal higher rates of return, so investors pay more.

During the great credit expansion of 1945-2007, businesses could anticipate, generally, rising earnings. People were buying more and more things on credit. In a national economy, businesses pay wages and then the employees use the wages to buy products. The wages are a ‘cost’ to the business… but they are also the source of business revenue. When sales come from credit, on the other hand, businesses have the revenue but no wage cost. Profits go up.

Now, the cycle has turned. Businesses still have the wage cost. But instead of using the money to buy things, the employee uses it to repay loans for purchases made last year or the year before. Now the business has the cost but not the revenue.

As they say in the economic textbooks: bummer.

The process of de-leveraging will be slow. Maybe 5 years. Maybe 15. Maybe 25. It will up and down… with high unemployment (businesses will cut their wage costs as sales fail to recover)… low prices (at least in real terms)… low profits… and slow growth, or none at all.

Is that bad? No, not at all. It’s good. Economies need to adjust to the new realities of the post-credit bubble world. It will take time. And with the world’s financial authorities fighting it every step of the way… it could take a LONG time. As we’ve explained in these Daily Reckonings, government is a profoundly conservative, parasite-protecting enterprise. It cannot draw forth the future – it has no idea what the future will be. Instead, all it can do is to try to recover the past. That’s the idea of the ‘recovery’… to try to coddle, protect and pay-off yesterday’s success stories. From Wall Street to welfare… governments attempt to prevent correction.

And more thoughts:

*** The Obama administration announced that it expects $9 trillion in deficits over the next 10 years. One of the great mysteries of our time is: where will the money come from? As we pointed out last week, even if every dollar of US savings is applied to the task, the feds will still be short. And if they make up the difference with funny money – from their quantitative easing scam – the Chinese vigilantes are likely to get cheesed off and dump their US Treasury bonds.

The evidence shows that the Chinese…and other Asians…are already trying to lighten up on their US debt holdings. This from the New York Times:

“Figures released by the Treasury Department this week indicated that China reduced its holdings of Treasury securities by $25 billion in June, the most China had ever sold in a month.

Monthly figures can be volatile, and can be revised, so it is risky to draw conclusions from one month’s data. In May, China increased its holdings by $38 billion, according to the Treasury figures.

“Nonetheless, the decline highlighted a fact… Asia’s appetite for Treasury securities is not growing as fast as it once did. That means the United States will have to turn to other buyers, including American citizens, who are now saving as they did not do during the boom years, to finance the deficits… In the first half of 2009, China and Hong Kong acquired only 9 percent of the more than $800 billion worth of Treasuries that were sold.

“ Japan, which was replaced by China as the largest foreign holder of Treasuries last year, has been a larger buyer this year, taking up 11 percent of the new supply of Treasuries.

“Ownership of US Treasuries by China, Hong Kong, Japan, South Korea, Singapore, Taiwan and Thailand — since 1994 — rose to 25 percent, from less than 8 percent. Since then, as budget deficits in the United States grew, the share has fluctuated within a narrow range. In June, it was 24.7 percent.”

If Asians don’t finance US debts, who will? We don’t know… But the fewer bonds Asians buy… the more they are bought with funny money by the Fed. And the more the Fed buys with funny money the fewer Asians want to buy with real money.

How will this end? Badly…we keep saying. There is no way out. Either the feds cease spending more than they can raise honestly, by taxation and reasonable borrowing. Or, the system runs into chronic, mega deficits…like the chronic deficits in the private sector during the bubble years. Then, it blows up.

That is why we caution readers against the dollar and against Treasuries. Most likely, they will both go up this autumn…as investors flee to safety from the next market downturn. But the chances of them blowing up completely are too great. That’s why we stick with gold – even though we would not at all be surprised by a period of weakness in the gold market.

*** On Friday night, we went to a ‘dinner in white’ at a nearby chateau. It was a jolly affair, at an ancient chateau entirely surrounded by a moat.

We set up our table, alongside the others. We gathered for drinks. We saw old friends. And then we prepared for dinner.

Why “white?” The dinner marks the occasion of the Assumption of the Virgin. It’s held each year in this rural area of France. Everyone brings a full dinner service – table, chairs, candles, etc. etc. Then, after setting up outside, under the stars… there’s a twist. Couples switch around so that your editor ends up having dinner with a woman to whom he is not married.

Having dinner with someone else’s wife can be a delight. At least, you have nothing to argue about. But how much of a delight it is depends entirely – or perhaps mostly – on chance.

In our case, we were trebly lucky. In front of us was a charming woman who turned out to be a relative of many people we already knew. So we kept up a lively conversation about cousins, uncles, aunts… family tragedies… and upcoming marriages. On our right, was a cute woman with a bright smile and a friendly manner. On our left, was another charming woman with a shrewd, fast wit.

Time passed quickly. We crossed swords with the woman on our left – over education policies. We chatted with the woman in front of us – about family, the weather, local trends, food and whatever. We flirted with the woman on our right:

“Do you come to these dinners often,” we asked.

“About as often as you do,” came the reply, “once a year.”

“Well, the dinners suit you. You look very nice in white.”

“Thanks… but I really don’t have any choice. It’s a ‘dinner in white,’ after all. If I had a choice, I’d wear black.”

“Why… because you have a black, cruel heart? Or is it because you are in a sad mood? I hope not. And if so, perhaps I can cheer you up by telling you joke. How many Belgians does it take to change a lightbulb?”

“I’ve heard that one.”

“Then why does the guy from Belgium go to sleep with one full glass of water next to his bed and one empty glass?”

“I don’t know… why?”

“Because he never knows if he’ll be thirsty or not when he wakes up in the night.”

“Oh…”

Source: The Future Will Come

The about-face article, which appeared in today’s edition, was written by Kate Galbraith – one of the three new green correspondents the Times has been trumpeting.

The Times reports that wind and solar energy are suffering from the credit crisis and “economic downturn.” These market realities are our core argument against alternative energy for the present time and foreseeable future. You see, the green contingent engages in a dangerous group-think that says if we all hold hands and click our heels, the financial argument for green will make sense in a world of cheap oil and high unemployment.

Apparently, the “feel-good finances” that we’ve been railing against simply aren’t working.

The Times reports “Factories building parts for these industries have announced a wave of layoffs in recent weeks, and trade groups are projecting 30 to 50 percent declines this year in installation of new equipment, barring more help from the government.”

The article quotes Mayor Richard Mattern of Fargo, ND who fell under the green spell. He told Ms. Gailbraith, “I thought if there was any industry that was bulletproof, it was that industry,” he said referring to the wind-turbine factory in his home town, which recently 20% of its workforce.

We take no delight in dancing on the pink slips of the unemployed. Our gripe is with Mayor Mattern himself, who espouses the same claptrap as the Obama administration. The difference is that when the edict comes from Washington, it falls into the category subsidized energy rather than viable business model.

The wind and solar industries are apparently hopeful that President Obama’s green thumb will help them flourish, according to the Times. But as the article states, these renewable energy plans “will take time, and in the interim they [wind and solar companies] are making plans for a dry spell.”

Even tax credits don’t seem to be working. According to the Times, “Banks have invested in renewable energy, lured by the tax credits. But with banks tightly controlling their money and profits, the main task for the companies is to find new sources of investment capital. Wind and solar companies have urged Congress to adopt measures that could help revive the market. But even if a favorable stimulus bill passes, nobody is predicting a swift recovery.”

Again, we do believe that alternative energy is viable – inevitable.  Unfortunately, it’s not the place to put your money today.

The New York press tells us that Steve & Barry’s, a clothing retailer with 200 stores, has filed for Chapter 11. And Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE) got walloped again.

The two Mississippi Companies [a reference to the government-chartered company in 18th century France that dominated a huge bubble, went broke and practically bankrupted the nation] desperately need to raise money. But even though the two are backed by the U.S. government and clearly “too big to fail,” investors are being a lot more grudging with their money these days. Fannie had to pay 74 basis points over the Treasury rate to get cash, much more than in the past. Freddie’s stock dropped to $10. Fannie’s hit $15. Both traded as high as $60, if we recall correctly.

IndyMac (NYSE:IMB) is in the news too. The big mortgage lender specialized in Alt-A loans – a step up from subprime, but apparently not a very big step. The shares traded at $50 in 2006. Yesterday, they were marked down to 44 cents.

Bloomberg tells us that Wall Street debt is being “downgraded by derivative traders.” They know the stuff better than anyone, of course.

What is surprising – to us, anyway – is that they aren’t downgrading government debt. We believe the credit cycle has turned. After a quarter century of falling yields, it looks to us as though yields have formed a major, triple-bottom. Which is to say, bond prices, (remember, they go up as yields go down) have hit three successive peaks, more or less at the same altitude, in 2003, 2005 and again in 2007.

But if we’re on the downward slope, so far it’s a gentle one. We looked yesterday and found the 10-year T-note yielding all of 3.88%.

We have to pause a minute and draw breath. What are bond buyers thinking? Of safety, surely. They see this latest assault of deflation – with falling stock prices all over the world…with Wall Street collapsing…the Fed nervously holding the key rate at 2%…oil slipping, possibly topping out – and they look for a hole to jump in. What better hole than U.S. Treasuries…dug deep by the full faith and credit of the U.S. government and denominated in the almighty dollar?

Well, ahem…that there is the problem. The hole may be deeper than they think.

Conventional wisdom holds that inflation will not be a lasting threat. The experience of the last quarter century is that short bursts of rising prices are soon replaced by another longish period of stable ones. But this was the period when the Chinese and Wal-Mart (NYSE:WMT) were lowering prices on manufactured goods…when labor rates were held down by the influx of millions of people into the modern economy…and before the cycle of commodity prices turned up. This was also the period in which interest rates were falling…and almost infinite amounts of money were available to increase consumer spending and production. That period is over.

Nevertheless, millions of investors expect it to continue. They believe that a cooling world economy will bring the forces of inflation back to their barracks and that they can go on collecting 3.88% coupons without feeling like chumps.

Who knows? Maybe they’re right. Still, we think they are morons. Even if they turn out to be right, the margin of safety on U.S. Treasuries is so razor thin they’re bound to cut a vein.

The real issue for us here at The Daily Reckoning is how the world ends. The world as we know it…Boomland…the world of constantly expanding credit and rising asset prices…is finished, we think. Does it end with a bang or a whimper? Does it end with the bang of inflation? Or the whimper of dying prices?

“Both” is still our best guess.

Source: The End of the Boomland Economy

But behind this headline is the finding that spiraling gas and oil prices are of more concern to Americans than the home mortgage crisis.

Twenty-one percent of Americans say the most important problem facing the US economy is gas and oil prices, while only 14% named housing and the home mortgage crises.

The poll also shows that only 21% of Americans believe the economy is in good shape, the lowest percentage since October 1992 — and this number is down 17% since January.

“If you think pump prices are high now hold on to your wallet,” says Mike Burnick in the Offshore A-Letter.

“Since June 1st last year, crude oil surged almost 58% higher in price. Over the same period however, the price of unleaded gasoline has only advanced about 19%

“Prices at the pump usually climb as America enters its summer travel season, boosting demand for gasoline. Over the past five years, demand for unleaded has jumped on average 4% between April and July.”

“Even with oil prices at $80 a barrel, major oil firms are printing money,” says Floyd Brown at Investment U.

“They have been showing financial discipline and therefore are increasing returns to shareholders. Natural gas supplies are tightening after a return to colder winter temperatures and firms specializing in providing this clean-burning product are throwing off immense amounts of cash. Plus, the oil service stocks have paused even as oil exploration budgets are growing.”

Floyd recommends two hot oil stocks. To find out more click here.

But that’s just the way globalisation works. We have nothing against it, but neither would we mind if there were less of it. Which raises the big question: is the leveraged planet becoming even more leveraged…or less so?

Ah, dear reader…this is where inflation and deflation make common cause. They both deleverage the world…reducing the value of debt – either by defaults or by lowering the real value of the debt itself. That is the real story in the financial markets…and in the housing market: leverage is being marked down. A residential mortgage worth $200,000 two years ago may be worth only $150,000 now, for example. Bear Stearns – worth billions a few months ago – is now worth peanuts.

Inflation takes leverage down too. All those US dollars held abroad (and at home, for that matter)…all those dollar-denominated Treasury bonds…all those dollar denominated I.O.Us – they all lose value as inflation increases. Just take those two trillion odd dollars outside America. Every one of them is a claim against US assets – land, houses, tractors, food, stocks, buildings, you name it. And as inflation takes prices upwards, each of those dollars falls to the ground…it will buy less of what the US has to offer.

We have been talking about the battle raging between inflation and deflation. But this is one way to win, no matter which side comes out ahead. Want a sure bet? Bet on deleveraging. How do you do that? There are many ways. Sell the industry that provides leverage, for example – the financial sector. Sell Wall Street on rallies, in other words.

Yesterday was a good day to sell. After having gone up more in a single day than the entire value of the Dow in ’29, it was time to take profits. And that’s what investors did. The Dow sold off a little.

Gold, meanwhile, gave investors a buying opportunity. At $887, we’re not saying that that is the best price this correction will offer…but it wasn’t bad. And many buyers decided to take advantage of it. Gold rose back to $900.

Now let’s look at the US economy itself. Ah…so many foreclosures…so little time.

Food up 9%. Houses down 11%. What’s an upside down homeowner to do but walk away? According to yesterday’s USA Today, so many are walking away in Denver that it is producing an ‘Exodus’ of Biblical proportions. Some neighbours have one out of eight houses in foreclosure. City-wide, the total last year was one out of 32.

Where do these people go? They rent, naturally. Rental vacancy rates have fallen from 10% two years ago to 5% today

Meanwhile, from Manhattan come two bits of conflicting news: apartment sales are down to an 18-year low…but prices are at an all-time high. Buyers are holding back, in other words…but sellers hold out too – for more money.

Across the nation, repossession filings are up 93% from last year. And as we saw yesterday, food stamps are up big time. But there really aren’t any “stamps” any more. Now, the food comes via plastic, a type of credit card that can be used – theoretically – only for buying food. In practice, nice shopkeepers in bad neighbourhoods take the card and give back cash at steep discount. Say a $10 charge for 7 bucks worth of cash to buy life’s real necessities – liquor, cigarettes and gas.

It’s all going according to plan, as we see it. The empire is rolling over. Now, in its advanced, decadent phase, the imperial government must provide bread – in the form of plastic food stamps…and circuses – in the form of national party conventions, elections and foreign wars. The combination settles the public…and distracts them. They become docile, subservient, willing to stand in line to protect themselves from make-believe threats …and ready to put up with any nonsense, no matter how grotesque, absurd or faithless.

In the latest financial news comes word of new proposals to “regulate” Wall Street…and new initiatives to “save” homeowners. The free market is out. ‘Public responsibility’ is in.

Treasury Secretary Paulson:

“I think you will continue to see flexibility as we learn and go forward,” changing his tune from last month when he said proposals to use government funds were a “non- starter.”

Why are they a starter now? People come to believe what they must believe when they must believe it, is our observation. Both private citizens and the government too have taken on obligations that they can’t possibly fulfil. Since it cannot be paid, the debt must be made to disappear. The world – or at least most of the Anglo-Saxon part of it, must be de-leveraged. So, people must believe in a fantasy about how the government will “bail out” the homeowners… and how the Fed will “rescue” Wall Street.

How could they perform such miracles? When a man cannot pay for his house, can the feds make the mortgage disappear? When Wall Street has blundered –forgetting to sell its cheesy debt before it started to stink – what can the feds do about it? All they can do is to spray some deodoriser around the room.

Still, the voters have been conditioned by television, public education, and maybe something in the water; people will believe anything. And what they need to believe now is that the feds can somehow ease their hurt. This will make it possible to shift the debts that cannot be paid onto the government, where they will not be paid.

Among all the great debtors in the USA, circa 2008, only one has the power to pay its debts – no matter how large they are. Only one has printing presses that turn out pieces of paper with pictures of dead presidents on them. And only one can trade bad debt for political favour. That one is, of course, the US federal government…lender of first, last, and holiday resort.

Already, the Fed has taken onto its balance sheet some $30 billion in smelly collateral from Bear Stearns…and billions more from other financial institutions. That is just the beginning. Somehow, the whole shebang of mistakes, misjudgments, greed-stoked miscalculations will end on the shoulders of the US Treasury…on the backs of US citizens…and dollar holders all over the world.

Eurostat, the European statistics agency, said prices rose in March at a 3.5 percent annual rate in the 15 countries that share the euro, the highest rate since June 1992. The rate in February was 3.3 percent, which had itself been a record. Inflation is running far above the European Central Bank’s 2 percent guideline.

The concern about rising prices is not confined to the euro zone. In a speech on Monday, the governor of the Bank of England, Mervyn King, noted that “food prices on world markets are more than 50 percent higher, and oil prices two-thirds higher, than they were a year ago.”

Read on at the NYT.

Swiss bank UBS makes front-page news on The Wall Street Journal for its thumping quarterly loss of more than $12 billion on write-downs of $19 billion. The losses have claimed chairman Marc Ospel.

– USA 2008: The Great Depression

Brit newspaper The Independent leads with “dismal projections” that in the fiscal year starting in October, 28 million people in the US will rely on government food stamps to survive, the highest level since the food assistance programme was introduced in the 1960s.

– Paulson plan will be DOA

Paulson plan will be “dead on arrival”, according to The New York Times, as “lawmakers and lobbyists from an array of industries” oppose to the plan to create a new financial regulatory system in the US.

– London stocks lift despite UBS writedowns

Shares in UBS and British banks Barclays, Royal Bank of Scotland and Alliance & Leicester rise in London, despite heavy writedowns for the Swiss banking giant.

– Worst month for hedge funds since LTCM collapse

Figures from Chicago-based Hedge Fund Research show that the average fund tracked by its HFRX index was down 2.4% in March, its worst month since the collapse of Long Term Capital Management in 1998.

– Gas prices at record high

High crude oil prices are being passed on to US consumers. From Rueters: “The U.S. retail price for gasoline set a new high of $3.29 a gallon after rising 3.1 cents over the last week, the federal Energy Information Administration said on Monday.”

– Oil slides, dollar climbs

Oil is back at $101 a barrel as the euro fell to a six-day low against the greenback.

– Gold falls for fourth day

The yellow metal fell for the fourth consecutive day to $896.75 a troy ounce.