Debt to cause all kinds of trouble - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 2 June 2010
Debt to cause all kinds of trouble A  A  A

Baltimore, Maryland

Gold is still getting up. Hemlines are going down. That's all you need to know.

Gold rose toward $1,230 yesterday. Why? Reports said investors were worried about Europe.

Well...yes...Europe...and Asia...and North America...

The problem in the world economy is debt. There's too much of it. Investors who aren't delusional know that too much debt spells trouble. And when government adds more debt it's not really going to make things better. It's going to make them worse.

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What kind of trouble will it cause?

Well, that's what we're going to find out.

Inflation...deflation...bankruptcies...defaults...bear markets...our guess is that we're going to see it all. But not necessarily in that order.

Gold buyers are stocking up on insurance against trouble. They're using GLD - a gold ETF - as a kind of "people's central bank." It's a way of maintaining do-it-yourself monetary reserves. (More on the vernacular gold standard...below...)

The private sector is now de-leveraging - getting itself out of debt. Banks are building up their own reserves. Corporations are cutting spending and beefing up profit margins. Households are cutting back too. Everybody wants reserves.

But reserves take money out of the active economy...causing the symptoms that are so disturbing to economists and politicians - unemployment, bear markets, and deflation.

Doesn't bother us. We like corrections. They wipe away mistakes and set the stage for new growth. And as near as we can tell everything is still happening as it should. The private sector went too far into debt. Now, it's straightening itself up.

We were puzzled when savings rate declined earlier this year. It looked like our de-leveraging hypothesis might be wrong after all. But why shouldn't savings go down. Consumers are probably as confused as Nobel prize-winning economists, Fed chairmen and the US Treasury Secretary. They probably thought the economy really was recovering. So why not spend?

But then, the savings rates rose again....and de-leveraging was back on course.

The next problem is in the public sector. As expected, governments reacted to the debt problem by going deeper into debt! And now, they're in trouble too.

Small sovereign well as state governments - have already begun to de-leverage too. The bond market told them to cut back; who were they to argue?

Meanwhile, investors who are paying attention are selling. Alan Abelson reports that the smart money is getting out of stocks. Insiders are selling 3,933 shares for every one they buy, he says. This sends stocks lower too. Yesterday saw another 112-point drop in the Dow, for example.

But investors should be more careful. When they dive into the bushes for cover, they roll right into the poison ivy. They try to protect themselves from stocks and Greek debt by
buying US debt. They feel safe. For a while, they are safe. Then, they start to itch!

*** We asked Henry what he was going to do this summer. "Get a job,' is the normal answer. But where? The New York Times:

Job Outlook for Teenagers Worsens

This year is shaping up to be even worse than last for the millions of high school and college students looking for summer jobs.

Some state governments are cash poor. Kentucky has pulled back on mowing lawns at some facilities to save money.

State and local governments, traditionally among the biggest seasonal employers, are knee-deep in budget woes, and the stimulus money that helped cushion some government job programs last summer is running out. Private employers are also reluctant to hire until the economy shows more solid signs of recovery.

Students seeking summer jobs, generally 16 to 24 years old, are at the end of the job line, behind the jobless baby boomers who are competing with new college graduates who, in turn, are trying to elbow out undergraduates and high school students.

The unemployment rate for the 16-to-24 age group reached a record 19.6 percent in April, double the national average. For those job seekers, said Heidi Shierholz, an economist at the Economic Policy Institute, "This is the worst year, definitely since the early '80s recession and very likely since the Great Depression."

*** If you think gold is moving up now...just wait. A dear reader from Slovenia reports:

"The Greek Central Bank is selling one ounce gold equivalents as high as $1,700 (40% over spot), and prices on the black markets are even higher. The punchline, as Athens slowly returns to a forced gold standard: "A popular spot for street vendors to sell their coins is near the Athens Stock Exchange. There the traders wait for citizens to bring payments received from unloading their paper assets like stocks and bonds." That's good - downtown Manhattan close to the NYSE has some free space for gold vendors to set up shop as well, they just need to push some of the frontrunning/collocation boxes off to the side. And in other rhetorical ruminations, is it safe to say that the last days of the fiat experiment are among us now that people themselves are bypassing the government and enforcing their own gold standard?

However from the boots on the ground perspective I can not (yet) confirm the above info (I'm reaching through a friend to an Athens based banker to check with him). However, i can give info regarding Austria and Slovenia.

I've just spoken with the head of Slovenia's (historically) first and biggest bullion dealer and got the info, that demand is so big that waiting time for acquiring the physical stuff is about 3 weeks long and that reserves are at an all time low.In her words the situation is comparable if not even more dire than the last time this happened, which was in 2008.

This is an email from yesterday from neighboring Austria:

"I am sorry that I have to tell you that it is now not possible for me to order gold coins, they told me that maybe in September it is possible again.

But we have the chance that a customer will sell us the coins you would like to have! So I will give you information when I have the desired coins."
*** Our own ace researcher for the family office, Charles Delvalle, seems to have his eye on other things.
The "Hemline Index" was first developed by technical analyst/economist George Taylor in 1926. It gained popularity around the 1929 stock market crash. The theory states that the stock market rises and falls with women's hemlines. Below is a famous graphic depicting the stock market and hemlines from 1897 to 1990 constructed by Alan Shaw's legendary technical analysis group at Smith Barney.

If this theory still holds, the story below is a bearish indicator for the stock market.

From the New York Times:

The New York Times - A Long, Lean Backlash to the Mini
"There is definitely a movement to a very lengthy look, especially among the young," said Nevena Borissova, a partner in Curve, a progressive retailer with stores in New York, Los Angeles and Miami. Ms. Borissova favors radically stretched-out skirts and dresses that "drag on the floor, with raw edges, and worn with combat boots," she said. And as she pointed out, these myriad calf- or ankle-grazing iterations of the milelong skirt bear no relation to "Big Love" or, for that matter, the Summer of Love. There is nothing remotely prim or saccharine about the latest interpretations of this look, with their distinctly urban overtones. Current versions, even the most languid, are likely to be toughened up with a military parka or a biker jacket and thick-soled shoes. A muted, and at times ascetic, successor to the sweet-as-a-bonbon, Hamptons-worthy maxi-dresses that first alighted on downtown streets a couple of summers ago, the new maxis are more Morticia than Ophelia. They are "darker and more sophisticated" than last summer's flounced beach dresses, said Morgan Yakus, a partner in No.6, a haven for style-setters in downtown Manhattan.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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3 Responses to "Debt to cause all kinds of trouble"


Oct 3, 2010

waiting for ared view on india state manipur stocks



Jun 2, 2010

Yes, we are waiting for Bill's view on indian stocks.



Jun 2, 2010

Following the CHINA article, I wish that bill provide his direct views on INDIA for the benefit of the readers and his direct views on indian stock market...

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