Consequences of being subject to influence

Jun 14, 2011

Baltimore, Maryland

For 6 weeks, the Dow has been going down. It should be ready to bounce.

But stock market investors didn't get a bounce yesterday. They didn't take a loss either. It was a draw. The Dow closed 1 point higher than on Friday.

As for oil, it was down to $97. And gold lost $13.

Business profits have been near record highs. This is not a good reason to buy stocks. Profits are famously "mean reverting." That is, they go back to normal pretty fast. Which should mean lower profits in the future.

When profits are high it is usually because labor costs are relatively low. That is the case now. But that's not good news. In the US, labor's share of national income is the lowest it has been for almost 100 years. People who own and run corporations enjoy higher earnings. The rich get richer.

But the working stiff doesn't share the joy. He feels he has been cheated. He just doesn't know who cheated him. With 25 million people looking for decent jobs, he has no pricing power. He can't threaten to walk off the job. There are too many people ready to take his place.

So what happens to him? Does he take his losses philosophically? Does he cut back his standard of living...spending less time driving his big SUV and more time reading the classics?

Or does he become bitter...and feel like he has a score to settle?

We have an uncomfortable feeling this morning. It comes from reading before we go to bed. Next to our bed is "The Forgotten Soldier," a personal history of war on the Eastern Front in WWII. The author - a private soldier in the Gross Deutschland division -- knew nothing of the strategies, logistics, or politics involved. He merely tells us what he saw...what he did...and what he lived through.

What disturbs us more than the events - which were unbelievably shocking and brutal -- is the cast of characters. They sound like normal people. But what sensible man would invade Russia - without winter clothing - and let himself get bogged down in a four-year war of hellish slaughter in nightmarish weather? And yet, millions of apparently sensible people did.

The author of "The Forgotten Soldier," Guy Sajer, seems like a decent sort. He joined the Wehrmacht willingly, happily and proudly. And he wasn't even German. He was French. He barely spoke German.

Which just proves our point. People are neither good nor bad, but subject to influence.

In England, CEOs got huge pay increases last year. Their compensation rose 32%, thanks largely to such high profit margins.

We haven't seen comparable figures for US CEOs but they are probably not too different. Bankers, for example, are partying again, just like it was 2005.

In Britain, as in America, the middle and lower classes got no raises last year. Or the year before. Or the year before. In fact, their real incomes are going down as the cost of living goes up and their wages stagnate.

Who will they blame for that? Will they carefully analyze the situation...and see who their central bankers and politicians misled and betrayed them? Or will they point their fingers at softer, easier targets.

People are always the authors of their own success. Their failures are always written by someone else.

What kind of influences will be felt by the American people...when they realize that they are no longer on top of the world...when they have lost their houses...and their jobs? And the Chinese try to force an austerity program on them!

Yes, dear reader, borrowers may want to spend, but creditors demand austerity. In Europe, the Germans are trying to force the Greeks to cut expenses. And now, America's major creditor -- China - is demanding that the US put its finances in order too.

There are bound to be some feelings of resentment. In Greece, people denounce the Germans as "Nazis." And in America...the pentagon prepares its next dopey war. (More below...)

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*** Hey, we told you so. Sort of. Bonner & Wiggin. In their New York Times best-seller, "Financial Reckoning Day." Published in 2003.

At the end of the 20th century, people thought they were going to get richer and richer, forever and ever...thanks to the internet! No kidding.

We knew it was nonsense. But we thought the bust that followed might lead to a Japan-like stagnant economy.

We were wrong. Instead, the bear market of 2001-2002 led to a giant bailout...then to a huge bubble in real estate ...and then, to a blow up. Then what? A Great Correction...which looks for all the world like a Japanese style slump!

Yale professor Robert Shiller explains how the housing debacle brought Japan to the USA:

An unprecedented bubble in American home prices started in 1997 and ended five years ago. Home prices rose 131 percent in that time, or 85 percent in real inflation-corrected terms, according to the S & P./Case-Shiller National Home Price index. (I helped to develop that index, along with Karl Case of Wellesley College.)

Around the same time, there were bubbles in the nation's commercial real estate and farmland. And there were real estate bubbles in many other countries, too.

Consider this: Home prices rose nearly 10 percent a year on average in the United States from 1997 to 2006, long enough for many people to become accustomed to the pace and to view it as normal. The conventional 30-year fixed mortgage rate averaged 6.8 percent over those years, far below the appreciation rate on housing, so even if you had a substantial mortgage, you were becoming wealthier by the day, at least on paper. People who owned a home over that period had reason to feel pretty well off and proud of their investment acumen. That fed a contagion of optimism and helped to drive the speculative bubble, propelling the economy and the stock market in a feedback loop that repeated year after year.

Instead, home prices tumbled 34 percent nationally from the peak in the first quarter of 2006 to the first quarter of 2011 - or 40 percent in real terms - and they still appear to be falling. The brief "recovery" in home prices of 2009 and 2010 was most likely spurred by federal housing stimulus measures like the home buyer tax credit. After that stimulus ended, prices resumed their downward trend.

During the bubble, the sense of rising wealth and high expectations gave people a good reason to spend and a greater willingness to plunge into investment, too. Government policy makers breathed in the same optimism, which no doubt encouraged them to be lax on regulatory restraint.

The mood is far different now. Our latest survey, covering April and May of this year, included 296 home buyers, and their median expectation for annual home price appreciation over the next decade was down sharply, to just 3 percent. And, in comparison with the 2005 results, few people had extravagant expectations.

The 3 percent figure is well below prevailing rates for 30-year mortgages, now hovering between 4.5 and 5 percent. Amid such low expectations, buying a home with a mortgage certainly isn't being viewed as a way to get rich.

Even for people who have other reasons to buy a house, there may be little urgency to do so. Our 2011 survey found that the median expectation for home price appreciation next year is just 1 percent. So it won't be surprising if new home sales remain abysmally low and few jobs are created in the hard-hit construction industry. And it shouldn't be a shock if the personal savings rate stays at around 5 percent, as it has recently, up from around 1 percent in 2005. This would mean that consumer spending will not drive a strong recovery.

*** Here's William Pfaff, wondering about the US military's next move:
Paris, June 7, 2011 - U.S. Defense Secretary Robert Gates was in Kabul at the start of June talking about withdrawal -- or non-withdrawal -- from Afghanistan, but before he went home he was in Singapore to talk about an enlarged American military engagement in Asia. That was a speech to an International Institute for Strategic Studies meeting, in support of "a robust [U.S.] military presence in Asia." He said that one of the "principal security challenges" to the United States is that some nation would try to keep it out of Asia.

... the United States is now a militarized and militarist empire, of benevolent intention in the minds of the people who have been running it under both Democrats and Republicans since the end of the Cold War. Before that it was a fortress nation, focused on a big single threat and a few auxiliary troublemakers. Now it goes in for civilization wars, globally utopian ideologies, and altruistic dominion.

The Second World War left the public determined to bring the troops home in a heedless rush, reversed just as quickly when Russia posed a menace. Vietnam ended in a shameless precipitation and lies, the conscripts who had fought it punished by their elders for having done so. Creation of an all-volunteer army afterwards guaranteed that such sunshine patriots and parasitic careerists as Richard Cheney would never again be personally inconvenienced by a national priority.

Now America's perpetual wars can be conducted by profitable corporations mostly behind the public's back, while the Members of Congress conduct their private affairs and pick up their envelopes at K Street addresses. ...

...The secretary of defense's Singapore press conference last week was alive with questions of a single tenor: will you protect us if China threatens us? ...They are thinking of going to war against China.....

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

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2 Responses to "Consequences of being subject to influence"


Jun 14, 2011

"People are always the authors of their own success. Their failures are always written by someone else"......

Well said Bill. golden words similar to "consequences of being subject to influence".

Thanks for your sage words.



Rishi Poddar

Jun 14, 2011

Robert Shiller's analysis of the US housing market bubble gives me an eerie feeling that in India we may witness something like that very soon. In Delhi NCR, particularly Gurgaon, real estate prices are up 300-400% in last 4-5 years in all localities and investors feel they can borrow heavily and invest in real estate which will appreciate faster than their debts which has been the case for the last few years. Will history repeat itself in India the way it did in US, UK, Ireland, Spain, etc?

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