What happens when people are reluctant to borrow...

Oct 30, 2015

- By Bill Bonner

Bill Bonner
Normandy, France

Again, we were overwhelmed by the volume of mail...almost all of it centered on Charles Koch. We will drop the subject - promise! - but only after one small observation. See the PS

In the meantime, investors didn't seem to know what to make of things yesterday. Stocks sold off, rallied, and sold off again...ending the day slightly lower.

The signals that came out yesterday were mixed and left investors confused. The press was confused too, with reporters giving out good news and bad news without any clear idea which was which.

Everyone is waiting for clarification. A sign in the heavens. A booming voice. A crash in the stock market. A kick in the pants.

Lend money below zero interest rate? It is true, as our friend, economist Pierre Lemieux corrected us, that "capital values are not determined by short term interest rates." But it is also true that lending below zero is nuts. This situation 'can't go on,' we tell ourselves. And yet it does, somehow.

So, we crane our necks and stare at the sky, as if we were waiting for an extraterrestrial invasion. When? How? What will come?

And the signals keep coming....

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The Baltic Dry Index - a measure of freight traffic - has just dropped to its lowest level in 29 years, suggesting a major, worldwide slowdown in global trade.

And over on the other side of the world the Chinese Containerized Freight Index is dribbling along the bottom of the chart - down 30% since 2013.

Hitachi, another big maker of yellow construction equipment, just slashed its profit outlook to only half the level of last year. Bloomberg, on the case:

    Hitachi Construction Machinery Co., Asia's second-biggest maker of building equipment, cut its sales and profit targets for the year as a slowdown in demand in China extends to the developed world. Its shares fell the most in a month. The company trails only Komatsu Ltd. in Japan's construction equipment market and is among the world's top suppliers of the large excavators and dump trucks used by miners.

In addition to the yellow machines, the red, white and blue machines are also slowing down. Cummins makes the motors for many of these big trucks. And sales are bad. Bloomberg again:

    Cummins Inc. fell the most in more than three years after third-quarter profit trailed analysts' estimates and the company reduced its annual sales forecast because of weakening demand for its heavy-duty engines. The company also said it's cutting 2,000 jobs as part of a plan to save as much as $200 million a year.

"US Recession Alert," says Tyler Durden at ZeroHedge. "Core capital goods orders plunge most since 2009."

Back in China, demand for steel - you can't build anything without it - is "collapsing," says Bloomberg, with new orders falling faster than production cuts.

You can get any opinion you want on China. But, despite 8 rate cuts, the economy is clearly not growing at the same pace it was. And that means less seaborne traffic...less demand for primary commodities...less output...and less cash and credit flowing around the planet. This last point is perhaps the most important one. It has been the rush of credit that was largely responsible for the booms and bubbles of the last 20 years.

Now, people are reluctant to borrow. The aversion to borrowing is so great that lenders now have to pay their best customers (sovereign governments) to take their money. Five-year yields are negative in 8 European countries. Credit slows....and the economy slows with it.

PS: Most of the anti-Koch opinions maintain that Charles subverts our democracy by using his money to 'buy votes.' At the core of that sentiment is the idea that a voter (in Congress or at the polling station) may not actually pull the lever for the proposition that would be best for the nation but the one that would be best for him, personally. The voter has been, in effect, bribed.

We believe that is the way democracy works. And it will only work properly when people with a personal interest in an issue - salary, pension, reputation, tax break, subsidy, business advantage - recuse themselves. That's the way it works on corporate boards and church vestries all over the country. If you have a conflict of interest, you excuse yourself and remain silent.

An election is "an advance auction of stolen goods," wrote Ambrose Bierce. Charles Koch's money, however, is not stolen. He earned it. Besides, it is a pittance compared to the other amounts involved. All of the federal budget (and hundreds of billions more in tax and regulatory favors) is up for grabs in every election. And for every penny a voter or lawmaker might get from Charles Koch's own money, he might expect to get hundreds of dollars from the medical industry, the education complex, the military establishment...or directly from the feds themselves. And for every lobbyist Charles is able to put to work for his less-is-more campaign to reform the federal government, there are hundreds of people lobbying for more-is-more...including many who are already on the government payroll. There are thousands and thousands of organized groups pushing for higher wages, higher medical benefits, new computer systems to spy on us, new warplanes, new wars, new this, new that...trillions of dollars' worth...all of it to be bought with other peoples' money. Can you really blame Charles for trying to push back?

Democracy is often described as a system in which three wolves and one sheep vote on what to have for dinner. Charles is a lamb.

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

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