Should we change our opinion? - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 10 July 2013
Should we change our opinion? A  A  A

Normandy, France

Everything is looking good! Or, is it?

Auto sales - up.

House prices - up.

Oil prices - up.

And yesterday, both the Dow and gold went up too...75 points and $11 respectively.

Oh, and jobs are up too.

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As to this last point, even uber-gloomy David Rosenberg feels the light of a rising sun on his face. It's a 'game changer,' he says:

    First came the healing in the credit markets in 2009-2010.

    Then came the healing in the housing market from 2011 to now.

    And now we have the third act in full swing, which is the healing of the labour market.

    It's not merely the +195k in the headline payroll data for June and the upward revisions that really made it a +265k reading. It was the fact that the private sector added 202k net new jobs and that basically has been the norm now for the past five months. Considering the magnitude of this year's intense fiscal squeeze, only the most ardent pessimist would regard this anything than downright impressive. In the leveraged 2002-2007 cycle, the average monthly gain in private payrolls was 136k. In the tech boom 1992-2000 cycle, the average was 210k. So I'll leave it up to you to judge how the current pace of 200k should be treated in that context. The case for the Fed's above-consensus forecasts to be met this time around, especially as the budget cuts fade in 2014, looks pretty strong to me...
'When the facts change,' said Keynes, 'I change my opinion. What do you do?'

What this suggests to us is that Keynes' opinions weren't very good in the first place.

But what about us? Should we change our opinion, dear reader? Could it be that we were wrong? Could it be that the economy really is recovering? Could it be that stocks are in a real bull market...not just a hysterical, Fed-fueled bounce? Could it be that you don't really need gold any more, because the feds really do have this credit cycle thing under control?

Should we admit we were wrong, sell our gold and buy all the US stocks we can afford?

Nah. Remember our dictum from yesterday:
    You can't cure an alcoholic by buying him another drink. He may get high again. But the problem is still there...and getting worse.
The US economy (this applies broadly to the economies of Japan and Europe too...but we'll leave them out for the moment) reached a turning point in the '80s. Natural, healthy, sustainable growth gave way to credit-boosted phony growth.

We've been over this many times already, but it's important to understand. The 'growth' of the last 30 years was not like the growth of the 30 years before it. It was not based on rising productivity, increased wages, and real capital formation. Wages stagnated. The only way people could increase their standards of living was by spending money they didn't have. That's where the credit came in, made possible by America's post-1971 flexible paper money system.

Spending money you don't have is one of those things that Herb Stein had in mind when he said that 'when something can't go on forever it will stop.'

In the event, it stopped in 2007, with total US debt at about 360% of GDP, up from under 200% in 1980.

Since 2008, the feds have worked feverishly to get their mojo back...administering larger and larger doses of credit to an economy that already had more than enough.

But wait. "More than enough?" How do we know how much debt an economy can carry? And looking around the world, we find that Japan, the UK and Ireland have far more....over 500% of GDP for each of them.

Hey...if they can do can we! At least, that seems to be the theme of the whole show now. The Fed offers more EZ credit. Investors believe this will lead to more good times. And consumers - bless their stupid little hearts - are getting in the spirit of it. They're spending even more money they don't have on even more stuff they don't really need.

Yes, dear reader, after a short period of de-leveraging, Mom & Pop...bro' and sis'...and all their kin from Palm Beach to Prudhoe Bay...are taking up the challenge. Here's Reuters with the report:
    Consumer credit increased in May by the most in a year, a sign low borrowing costs were boosting economic growth although interest rates have since risen.

    Total consumer installment credit advanced by $19.6 billion to $2.8 trillion, Federal Reserve data showed on Monday. Economists polled by Reuters had expected consumer credit to rise $12.5 billion during the month.

    Consumer debts grew both for non-revolving credit, which includes loans for cars and college tuition, as well as for revolving facilities like credit cards. Overall consumer debt rose the most since May 2012.
So, now the government is adding debt...and so is the private sector. Whee! Is this a great economy, or what?

The feds wanted to get the economy moving - in the worst possible way. From where we sit - in rural Normandy - it appears that they may have succeeded. That is, they may have once again prevented a big correction...and now they'll face an even bigger one down the road.

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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