This market is headed down - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 25 June 2010
This market is headed down A  A  A

Baltimore, Maryland

Another week gone by! Another week closer to Tokyo!

The Dow dropped another 145 points yesterday. Gold rose $11.

Will stocks recover today? Or will they just keep going down?

We're not a soothsayer. We can't read the stars...or interpret the charts. Still, we don't mind taking a guess about the future from time to time. And don't bet on it, by the way...

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But we have a hunch that this market is headed down. Because now even the Fed can see that this recovery ain't happening. The Fed announced that it was keeping its ultra-low interest rates ultra-low for an ultra-long time. That is, it extended its extension one more time.

Readers with even a faint recollection of recent financial history will remember that this is what Alan Greenspan did when he was still the smartest man in the world. He kept extending the period of emergency low rates after the mini-recession of '01. The Fed kept lending money at less than the rate of inflation - for 4 years, as we recall. The result was the huge bubble of '05 - '07...and then came the blow-up of '08-'09.

But times have changed. Now, the economy is no longer bubbling up. There's no fire under it. Instead, it is cold. Shrinking. Contracting. Like a 'possum that has been hit like a truck but isn't dead yet.

And even Tim Geithner must realize that all those trillions spent on 'stimulus' were largely wasted.

He'd argue that at least they saved the world from a dreadful meltdown. But none of us knows what would have happened. He's got his opinions. We've got ours...

But it looks more and more like our opinions were right all along. We can scarcely believe it. We don't take any forecasts seriously. Especially not our own. But what do you know....

Yes, dear's Bonsai! Or whatever they say in Japan...

Years ago, we wrote a book, along with Addison, predicting that the US would follow Japan down that long, lonely road...

...where people get older...sales go down...prices fall...

...where they save for their retirements, rather than spend, spend, spend...

...where real estate loses as much as 80% of its value over a period of 15-20 years...

...where stocks go down, down, down and don't get up for two decades...

...where the government pumps money into arteries and veins but it can't revive the economy...

It's been three years since this slump began. We've seen the biggest stimulus effort ever mounted; and the economy is well, not dead...but it's beginning to smell funny.

The roof fell in on the housing market this week. But you already know that...

What don't you know?

Oh never mind, you know everything we know. Probably more.

What can we add? Just that maybe we're right about this Japan thing after all.

When the crisis hit, we recall wondering where the surprise would come from. There's always a surprise, isn't there? Everyone expected a quick recovery. But there was no recover. Neither quick nor slow. But that was too obvious.

It was taken almost for granted that if the feds pumped in enough adrenaline, they'd be able to get this beast upon on its feet and walking around again - just as they did after the '01 downturn. Worst case, they'd cause an inflationary blow-off.

But what if the downturn lasted much longer than people expected? What if it dragged on year after year, despite the feds? What if it acted just like Japan, in other words?

We seemed 10,000 miles from Tokyo back then. Now, we're much closer.

*** A letter to the editor of the Financial Times:

"I am a pensioner and a shareholder in BP.

" I understand that the board of BP is handing over to the US government $20 billion with no conditions, though the company has no legal obligations to do so. I also understand that the representative of the US government who has responsibility for disbursing has said he will "err on the side of the claimant," an invitation to every conman in the southern USA to get his spoon into the pot at my expense.

"This action by the board of BP is so financially irresponsible that I think not only chief executive Tony Hayward but every other member of the BP board needs to consider his position."

Now we will deconstruct this letter following our new Zombie Theory of History. BP is a producer. It is alive. Its flesh is solid. The blood of profits runs through its veins. The zombies are after it.

The company was doing fine. But it tripped up in the Gulf of Mexico. The zombies saw an opportunity. In order to buy time...and perhaps save itself...the company paid an enormous ransom...bribe.. or tribute to the federal government.

Now, 'political risk' - more properly known as 'zombie risk' - is higher in the US than it is in emerging markets.

*** The zombies are gathering outside our window. No kidding. Busloads of them.

There's a rally by a group called "The Heart of Baltimore." Someone is spending a lot of money on it. Danny Glover is supposed to be out there. Poor man. It's about 100 degrees in the shade.

What's going on?

"Free & Fair Union Elections" is the order of the day. Ah ha...zombies! One of five Baltimore workers is allegedly working in the health care business. According the pamphlet, they are struggling to "survive on poverty wages," because they are "without a union."

Dear readers may wonder how having a union makes what they do more valuable. We wondered too, for about 2 seconds. Of course, it doesn't. The only way the health care providers could pay higher wages would be if a) the workers were more productive or b) they raised the cost of health care. Health care is already through-the-roof expensive in the US - far more than it is in other countries. Why? Because the zombies have control of it. The US claims to have a free market in health care. It's not true. The whole system is rigged by unions, pharmacy companies, insurance companies, tort lawyers - and regulations, regulations, regulations.

We will ask you a simple question. Suppose a group of doctors set up a "McDonald's of Health Care - lowest prices in town." They said: 'We'll treat you. But only if you sign this paper saying you won't sue us.' Without the tort lawyers breathing down their necks they could eliminate their malpractice insurance and cut out all the unnecessary tests.

And then...suppose a drug company decided to launch a brand of Free Market Drugs. They offered customers 'unapproved drugs...neither tested nor reviewed by the FDA or anyone else...take them at your own risk!'

How long would these companies last? About 24 hours. Too many zombies.


Phony choices from a bogus profession

We got a look at how the world really works last week. Bloomberg ratted out Sophia Constantinidou:

The 52-year-old gets 400 euros ($496) a month from the Greek government, part of her late mother's state pension. Under the current system, Constantinidou qualifies to receive the payment for life as the only surviving child of a deceased civil servant, provided she doesn't tie the knot."

Ms. Constantinidou is on lifestyle support, thanks to the generosity of the Greek government, which is on lifestyle support itself, thanks to the generosity of the European government, which is only able to pay its own bills thanks to creditors who may or may not know what they are doing. The big debate among economists is when to pull the plug.

'Austerity!' insist the Germans and Canadians. 'Growth!' promise the English and Americans.

Several things have become obvious: first, a 'recovery' is not going to happen; second, after 60 years of credit expansion, the world has entered a long period of financial adjustment and debt destruction; third, most economists should be put to work picking up trash along national highways. Not that they would do a very good job of it, but at least they would be kept out of mischief.

Imagine poor Pharaoh...7 lean years and only the advice of a slave to help him through. And think of how the Dark Ages might have been brightened up if Charlemagne had had an economist at his right arm. But now we have thousands of economists. And they offer us a stark choice: Austerity or growth?

Advocates of austerity say they have no choice. They have to cut public deficits. Besides, deficit cuts will lead to more private spending and investing.

Canadian Prime Minister Stephen Harper, in a letter to his G-20 counterparts, said world leaders should agree to reduce their deficits by half by 2013. "Nobody can seriously dispute that excessive public debts, not only in Europe, are one of the main causes of this crisis," added German Finance Minister Wolfgang Schaeuble. "That's why they have to be reduced."

Not so says Martin Wolf howling at the Financial Times.

"What we are seeing is an epidemic of private sector frugality," cries Wolf, warning that "cutting public spending will not automatically raise private spending."

Both positions are claptrap.

Through no fault of her own, Ms. Constantinidou has become a leech. Resources are being diverted from savers, investors, and householders so that she can get something for nothing. Economists on the one side pretend that giving her the money increases 'demand' and helps the economy grow. On the other, they pretend that taking away her unearned income would impose a hardship on the whole economy.

As to the first proposition, if you could really make people better off by robbing Peter to pay Paul, Peter would already be penniless. There is no shortage of people willing to take away his money. As to the second, too bad for the leech. Paul will have to give up something he had no right to in the first place. But where is the austerity? Resources don't disappear. Ms. Constantinidou may have to say goodbye to her unearned transfer payments. Someone else will say 'welcome home' to their long-lost money.

But in last Wednesday's Financial Times, Mr. Wolf, slipped another ace up his sleeve. Instead of larceny or usury, he suggests trickery: why rob Peter or borrow from him, in other words, when you can scam him with phony money? "Why it is right for central banks to keep printing," is his headline.

Cut off from reality by their own conceits and fantasies, it is as if economists were describing the perfect woman: how pretty she perfect her little nose turns up and how she never needs she always does what she is told and never talks back. Then, you turn and you see the woman herself. She is no lady; she's an inflatable doll! Like a simpleton's economy, she resembles the real thing - except in the ways that really count.

A mannequin can be programmed to say what you want her to say. Raise government spending enough and you may be able to get her to say the GDP growth is positive. Pay enough people to do enough make-work jobs and she will tell you the employment rate has gone up. Get the software right and she will spend when you want her to spend, and save when you want her to save...and pretend that you are the smartest economist who ever lived.

But a real woman has her own ideas. Sometimes she is lighthearted and spendthrift. Other times she is anxious...such as when she sees too much debt or too much money-printing. There are times when she will look lovingly upon her husband and do as she is bid...and times when she sighs, realizing the economist she married is a hopeless jackass.

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 "This market is headed down"


Jun 26, 2010

I think the readers of Mr. Bonner is not thinking that what he is predicting is for the US Market alone. And ofcourse, his predictions will come true in near term. WE INDIAN INVESTORS NEED NOT WORRY.


Ralph Rau

Jun 25, 2010

By Mr. Bonner's own admission he is making a preediction which has a 50% probability of being right. This means there is a 50% chance of being wrong. It's like guessing the sex of an unborn child.

The undeniable fact is the developed world (50% of global GDP) is indebted to the gills. USD debt =100% of GDP & Japan debt = 200% of GDP. EU is also heading for sub-par growth. All these countries have been living beyond their means. Their shrinking GDP and ageing populations also means the tax base will never rise and in fact will start falling.

The real question is whether the developing world can continue to grow. If China can survive as a consumer instead of producer and if India can find investors with 1 Trillion US$ to develop its infrastructure.



Jun 25, 2010

The reviews from the daily reckoning are always bearish on the market and gives me less optimestic about the market. why is it so?

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