Wednesday, October 14, 2009

Crash Flag has been raised!

Greetings good citizen,

I wasn’t really ‘paying attention’ today although I did notice this morning that the Dow had shaved a 115 point gap from hitting ten thousand down to just a 19 point deficit.

And what do you suppose the reason was for this 100 plus point gain on the Dow? What else but ‘outstanding profits’ reported by JP Morgan Chase!

I don’t know about you good citizen but JP Morgan reporting ‘big profits’ doesn’t make me all ‘warm and fuzzy’ about the future of the US economy. If the only ‘enterprise’ in this economy that remains prosperous also happens to be the one that brought the entire [global] economy to the brink of disaster, I fail to see ‘the progress.’

Aren’t we standing in the same place we were when the wheels fell off?

[Hat tip: The Automatic Earth]

The Biggest Bust Will Follow the Biggest Bubble

By Bill Bonner, 10/13/09 London, England

Our ‘Crash Alert’ flag goes back up the pole…October is almost half over. Will we get through the month without a major sell-off?

Dear reader, if you think we know the answer to that, you’ve got us mixed up with someone else. Someone who is crazy.

No one with his wits about him thinks he knows what the stock market is going to do.

Still, here at The Daily Reckoning, we have our hunches. We think it’s time for a major pull back. Frankly, we’ll be disappointed if we don’t get one soon. Because, once again stocks are too expensive.

Too expensive for what? Too expensive for the circumstances.

The Dow rose another 20 points yesterday to a new bounce record. Oil rose to over $73. Gold didn’t budge.

Of course, everyone now knows that the recession is over. NABE interviewed 44 economic forecasters. Four-fifths of them said the recession was over.

But we don’t care what they said. These are the same seers who missed the biggest single event in financial history. There are many banking crises, recessions, panics and defaults in the record books. But none were as great as the one that hit September a year ago. Most economists didn’t see it coming; why should we trust them to tell us when it is going?

Besides they’ve got the whole thing wrong. It isn’t a recession; it’s a depression. There is no recovery from a depression; instead, the economy has to re-invent itself in another form. Things aren’t going ‘back to normal,’ in other words. Because the period leading up to the crisis was not ‘normal;’ it was a bubble. After a bubble explodes, you have a lot of debris to clean up. The bigger the bubble, the more damage it does when it blows up.

“The force of a correction is equal and opposite to the deception that preceded it.”

You’ve heard our dictum before. In fact, you’ve heard our explanations for all these points before.

We just lived through the biggest bubble in history. Get ready for the biggest bust. Not just two years of falling stock prices and news-making bailouts. Not just 10% unemployment. Not just 100 bank failures and 30% off housing prices.

Noooo… We’re talking about a worthy correction…a real correction…a noble and distinguished correction…a correction that can hold its head up in public.

This is a correction that will take many years…one that will knock housing prices down for at least five years…and stock prices down to the point where people no longer want to buy them. It’s a correction that goes deep enough and continues long enough to do its work – wiping out the bad investments and mistakes of the Bubble Era, while allowing the survivors to pay down their debts and build up their savings.[Sadly, this outlook is overly optimistic…given that civilization is only 9 meals deep…]

Now, here’s a confusing little item. Yesterday’s news tells us that consumer spending as a percentage of the entire economy has edged up to 71%. Now wait just one cotton-pickin’ minute. How could consumer spending be going up?

Hold on, cupcake. It’s not going up. It’s going down. It’s just that the other components of the economy are going down even more.

In the second quarter consumers spent $195 billion less than they did the year before – a 1.9% drop. In the 20 years before that, consumer spending increased at an average rate of 3.3%. So, you do the math… that’s an about-face of more than 5% of GDP – a loss to the economy of about $700 billion!

Consumer credit is going down (we reported the figures earlier in the week)…unemployment is going up…consumer spending is going down…

…those are not the circumstances in which stocks sell for 27 times earnings…and move higher. Those are the circumstances in which stocks crash.

David Rosenberg:

“By some measures, the S&P 500 is already trading at valuation levels that would ordinarily be consistent with an economic expansion that is five-years old as opposed to a recovery that, at best, is in its infancy stages.

“On an operating (‘scrubbed’) basis, the trailing P/E multiple on the S&P 500 has expanded a massive 10 points from the March lows, to stand at 27.6x. Historically, when the economy is taking the turn away from contraction towards expansion, which indeed was the case in Q3, the trailing P/E multiple is 15x or half what it is… While we will not belabor the point, when all the write-downs are included, the trailing P/E on ‘reported’ earnings just widened to its highest levels in recorded history of nearly 140x, which is three times the levels prevailing during the height of the tech bubble.”

So, here goes…yes…today, we are officially running our “Crash Alert” flag up the pole here at the London headquarters of The Daily Reckoning. Cross Blackfriars Bridge and you might see if flapping in the wind, between the two huge gold balls on the roof.

Our Crash Alert flag is out because stocks have become too expensive…and because this bounce should be reaching its apogee by now. Already, central banks are talking about cutting back on their efforts to sustain the bounce with easy credit. Australia led the way last week with a rate hike.

It is also becoming clearer and clearer that the feds’ efforts aren’t really working. They can give money to their friends in the banking industry. They can give money to speculators who then make bets on the stock market, among other things. They can bailout major companies. But they can’t really get much money into the real economy.

Au contraire; they take money OUT of the real economy. The feds will absorb $700 billion of private savings this year alone…to finance their deficit. They expect $1 trillion deficits at least for another 10 years. That won’t leave much money for the private sector.

Naturally, Washington, DC, is doing well. While unemployment is near 10% in the rest of the nation, it’s only about 6% in the Washington area. [And it less than that in the land where the Credit Card companies hold sway…go figure?]

But let’s face it… What’s good for Washington is bad for the rest of the nation. The feds have used this correction to increase their power…and add to their wealth. The average federal employee now earns twice as much as his counterpart in the private sector – if the fellow in the private sector has a job at all. [Bizarrely, how can consumer spending be going up when the big news in this morning’s NY Times was about paychecks being cut in half?]

A news item tells us that TARP recipients spent $114 million lobbying for their bailout money – most of it going into Washington, of course.

And the feds now own major stakes in what used to be the private sector – insurance, automobiles, and banking industries. [nor should anyone be shocked to learn just who’s reckless practices sent them running for the ‘protection’ of the taxpayer, never mind who, precisely, offered that protection?]

Er, ‘snip’, what comes next isn’t particularly ‘relevant’…if you want to read radical right wingers bloviating (as they are wont to do) you need only follow the link for the rest of the article…

Which leaves us in an interesting spot…why the hell am I using ‘conservative’ material? Truth be told good citizen, there isn’t much difference between a conservative and a ‘gold bug’. They both believe in fantasies…which is another way of saying they don’t enjoy a particularly firm grip on reality.

But every once in a while they do manage to make a valid point! And today’s valid point was it is not so much that consumer spending is going up as it is the value of the dollar is tanking big-time!

What you’re really seeing (That the clueless pundits are putting a positive spin on) is that you’re PAYING MORE for the same amount of junk you normally buy, making it appear like consumer demand is rising!

Worse, considering most of us have ‘cut back’ on what we buy, the ‘spike’ they’re pointing at really represents, er, runaway inflation! They’re ‘price increases’ tacked on solely to make it ‘look like’ people are spending money! (While employers are actually slashing paychecks!) Talk about a ‘fuckaree!]

So it doesn’t matter if you’re happy or upset that the Dow is back over 10,000…even if there isn’t a good reason for it to be there. What should make most of us ‘happy’ is the fact that none of us bought this stock market and if people were smart, they’d be cashing out their 401k’s while the cashing was good! I mean tomorrow.

The conservative ‘gold nuts’ are right to run up their ‘crash flag’. The trick is to get out now, before it crashes!

Gegner is not an investment advisor and nothing here should be construed as ‘investment advice…’ but if you have half a brain, get the fuck out now!

Thanks for letting me inside your head,


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