We think something bad is going to happen - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 27 August 2012
We think something bad is going to happen A  A  A

Ouzilly, France

We've got some advice for you, dear reader. Get out of stocks and bonds. Instead, look for things of real value - profitable real estate, antiques...things that earn you money...things you enjoy owning.

Gold too!

Gold earns no income. It doesn't become more valuable over time (though the price...in paper currencies... may go up and down). But it doesn't lose value either.

And here's more advice: turn off the TV...don't eat so much...plant a garden...floss your teeth...call your mother...and remember to change your furnace filters.

Why so much advice? Because we think something bad is going to happen... Actually, we think bad things are already afoot. But badder things are going to begin happening.

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And as usual, when it comes to bad things, we look to the pampas for insight and instruction. Last week, Argentine Industry Minister Debora Giorgi told the world that "while industry in the leading economies of the world are showing a timid recovery which is below the pre-crisis levels or in some cases another dip, the economies of South America, with active government policies are rapidly recovering".

Yes, dear reader, thanks to 'active government policies' Argentina is a role model for the rest of the world. Its manufacturing is 10% above the pre-crisis level, said the minister (not mentioning that inflation is running at maybe 35% per year...also a consequence of 'active government policies.') Its minister of the economy, Hernan Lorenzino, says that the country has proven that it can beat the odds...and, apparently, the laws of economics. "For the last five years they have been rating us as a country in crisis and forecasting the country could blow up at any moment, but it doesn't blow up."

He might have added. "Or, at least, not yet..." Or perhaps, simply changed his phrase to say, "but it hasn't blown up." Then, he would have accurately reported the facts. Instead, he's issued a challenge to both gods and speculators.

But that is why we are giving you so much advice. Europe, America, and Japan could have blown up at any moment too, over the last five years. That they have not done so yet does not lead us to conclude that they never will...but only that the day of reckoning is closer.

For example, have you looked at Chinese stocks lately? The Shanghai Index is falling hard...

...it could mean nothing, of course. Or it could mean that the Chinese miracle economy isn't so much of a miracle at all. The Chinese are human too...and are subject to the same sin and stupidity to which all flesh is heir. And since they are operating on such a grand scale...and since there is so much central planning in many of China's capital allocation decisions...we can safely assume that China is going to err in a big way.

And then...there goes the developed world's Great Red Hope...its wish for an 'engine of growth' that will keep the whole world economy motoring ahead.

The developed economies have all been in a funk for 5 years. And there's no reason for optimism. While active government policies in China set up a new disaster...active government policies in the US, Europe and Japan make an old disaster worse.

It's late August. Brown leaves flutter down from summer-tired trees...a cool wind blows across the pasture onto the porch...

...the light is lower, more golden...older than it had been in July...

...and soon it will be September. Traders will be back to work. Investors will take off their baggy shorts and put on their spectacles and their thinking caps. What will they discover? Have the problems that caused a crisis in '08-'09 disappeared over the summer? Are European banks now solvent? Is America still headed off a 'fiscal cliff?' Is there anyway for the modern welfare/warfare state to make a clean transition into a slow-growth world? What will happen to America's $211 trillion worth of debt and unfunded government liabilities? Why will QE 3 work better than QE 2 or QE 1? And what's the idea, anyway, of trying to dry out a debt-soaked economy by pouring on more credit?

All these questions are likely to lead the poor investor to sit down...to pour himself a drink...and then to pick up the phone.

Adjusted for inflation, the poor fellow has lost money in stocks for at least the last 10 years. If he traded in and out...or has been swept up by the mania for FACEBOOK or another hot IPO...he's probably down much more. He's probably sick of it all.

Besides, the poor lumpenhouseholder has also seen his income impaired. It's down nearly 10% over the last decade. The New York Times reports:

Americans nearing retirement age have suffered disproportionately after the financial crisis: along with the declining value of their homes, which were intended to cushion their final years, their incomes have fallen sharply.

The typical household income for people age 55 to 64 years old is almost 10 percent less in today's dollars than it was when the recovery officially began three years ago, according to a new report from Sentier Research, a data analysis company that specializes in demographic and income data.

Across the country, in almost every demographic, Americans earn less today than they did in June 2009, when the recovery technically started. As of June, the median household income for all Americans was $50,964, or 4.8 percent lower than its level three years earlier, when the inflation-adjusted median income was $53,508.

The decline looks even worse when comparing today's incomes to those when the recession began in December 2007. Then, the median household income was $54,916, meaning that incomes have fallen 7.2 percent since the economy last peaked.

Let's see.
  1. The world economy slowing...possibly entering a period of worldwide recession.

  2. "Recovery" sightings have been largely illusory

  3. QE and other 'stimulus' efforts have been ineffective

  4. China...is slowing...possibly breaking down

  5. The US faces a 'fiscal cliff' in 4 months time

  6. The typical investor has lost money in stocks for 10 years or more

  7. The US householder has lost money on his house too, his biggest asset

  8. He also has less income than he did 4 years ago

Reflecting on these things...the investor is likely to react as follows:

"Sell!" he is likely to tell his broker. "Between now and the end of the year, I see nothing but trouble. I'm out until after the elections...possibly until 2013."

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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1 Responses to "We think something bad is going to happen"

R S Das

Aug 27, 2012

signs are too bad

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