Delaying the Process of Correction

Bill Bonner - Wed 12 Nov, 2008

There are said to be almost 8 million houses with negative equity in the US.

London, England

Poor Mountain House, California.

The town is underwater, reports the International Herald Tribune. Nine out of ten houses are worth less than their mortgages. There are some 1,856 mortgaged properties in the zip code area of Mountain House. Only 209 of them have any positive equity.

How the screw turns! Is this the “ownership society” promoted by the Bush Administration? Now, people own less than ever!

There are said to be almost 8 million houses with negative equity in the US.

Of course, people own a lot less in stocks than they did a few months ago, too. Worldwide, stocks have shucked off about $28 trillion worth of value.

Poor... rich... middle class – everyone has been hit. The marginal homeowner has already been tossed out onto the street. And now comes word that an extraordinary resort in Montana, designed for the super-rich, has gone bust.

“Where did the money go,” asked Montana governor Brian Schweitzer, speaking of Tim and Edna Blixseth’s swanky resort in the Gallatin mountains.

Of course, he might have been referring to almost anything – the Russian stock market, the oil market, the mining industry, Wall Street... everywhere you look... from trailer parks to Park Avenue... poof! – the money’s disappeared.

The oil price is signaling more doom and gloom ahead too. It slipped below $60 yesterday...

... And now, in the art market, “prices finally plunge,” reports the Daily Telegraph. An auction in New York of Impressionists and modern art was supposed to bring in $800 million. Instead, it barely fetched half that much – only $470 million by Friday night. Some lots didn’t sell at all. Only 60% of the artworks sold... at prices most about 30% below estimates.

Let’s take a quick look at how these losses are transformed from financial problems into economic problems.

“The domino effect,” is how today’s “Independent” describes it.

On the cover is the photo of a “news agent”, someone who runs a little shop selling magazines, newspapers, snacks, and so forth.

“Hit by falling sales, he decided not to repair his window. Thousands of other people did likewise. So Chemix, a chemical company in Stockport that supplies the building trade, went out of business – with 60 people losing their jobs. These are the sort of tiny decisions that lay behind the loss of 5,000 jobs yesterday. And this is why experts predict 2,000,000 people [in England] will be unemployed by Christmas.”

In the US, the figure is 10 million.

So great is America’s economic squeeze that people can’t even afford a cup of coffee. Starbucks reports that its profits are off 97%. Not much left.

And, yesterday, General Motors shares fell to a new low of $2.79. The last time you could have bought the automaker so cheaply was in 1937. Back then, it would have been a good investment. The US auto industry was on the way up. Now, Detroit is going down – hard. In the town itself, you can buy mansions for pennies. Empty warehouses are available almost for free. But who wants them?

Investors fear GM may run out of cash within weeks and be forced into bankruptcy. Nancy Pelosi says a special lame duck session of Congress may be called to get emergency cash to Detroit.

Of course, that’s they way the feds do business – always trying to prop up failures... trying to block progress... trying to delay the process of correction. In short, they’re trying to stop “nature’s delight” – change.

Meanwhile, the Dow fell another 176 points. The panic is gone, but the retreat continues. The Dow stood at 8,694 at the close of business yesterday.

At these prices, many investment pros are ready to get back in. Stocks are a bargain, they say. You get more value for money than you got in years, they point out. “Both my money and my mouth say the same thing,” adds Warren Buffett: “Buy equities.”

Take a look at Starbucks, for example. It used to be such a growth company that shares traded at 50 times earnings. Now you can get them for 12 times earnings. But with collapsing earnings... the share price could fall a lot more.

The stock market bulls aren’t necessarily wrong. But we announced a “Trade of the Decade” in 2000 – sell stocks, buy gold. The decade has a few more months to run, so we’ll stick with it. At the beginning of this decade you could get about 40 ounces of gold for a unit of the Dow stocks. Now, you barely get 12. If you’d done the trade and stuck with it, you’d be up about 200%.

Besides, it looks to us as though the Dow is going to drop below 5,000 before this is over. Dividend yields have risen to almost 4%. When the dividend yield reaches 6%... and you can trade one ounce of gold for the entire Dow... call us.

*** More bad news:

“Again the pound is getting smashed!” says UK editor of our main advisory, The Fleet Street Letter. “I’m not happy about it in that I don’t want to see our currency getting smashed – and I don’t want our economy to be in the mess that it is in. But I face facts. We are in a mess, the pound is getting smashed – and the one good thing to come out of it is that our readers have a proportion of their wealth protected from this sorry saga. They are in an investment that goes up as the pound goes down against the euro.”

And how the pound is going down against the euro…

“The pound dropped to a record low against the euro after King today forecast a deepening recession,” reports Bloomberg.

The Bank of England has already cut rates twice in the last month. The first was in a coordinated 50 basis point move with other central banks. And then last week, it stunned the City by slashing another 150 basis points… to a five-decade low of 3 percent.

That’s bad for the pound.

And it’s about to get worse, explains Theo Casey:

“Mervyn King as good as said he’s prepared to cut rates to zero to stave off deflation. Given that today’s inflation data shows that we’re in track to miss the Bank’s inflation target, expect these cuts to happen sooner rather than later. The pound’s fall is not done yet.”

[Editor’s note: Act now to protect your wealth as the UK economic climate deteriorates… and as the pound continues to slump. Don’t miss out on this. Protect yourself and profit now. Read here now – while you still have time to get into this investment.]

And more thoughts...

*** A few months ago, we wondered what the surprise would be. Mr. Market always has some tricks up his sleeve. What must happen always happens, but never as you expect.

So when stocks started to slide and people began talking about a ‘soft landing for global growth’, we wondered where the surprise would be.

Now we know. The downturn has been much more violent than almost anyone imagined. And it’s beginning to look as though the long-term damage could be much greater too.

Remember, a correction is equal and opposite to the deception that preceded it. Where was the deception of the boom years most concentrated? In two places – the US and China.

Americans believed they could live beyond their means forever. China believed it could get rich by selling more and more manufactured items – even though its major customer couldn’t pay.

You’d expect the resulting suffering to be equal and opposite to the aforegone enjoyment too. That is, those who lived highest on the hog should fall the farthest, no? And those who benefited most from selling to these people should lose most money.

So far, we’ve seen the beginnings of these redressments. But probably only just the beginning. Some people in America have lost their houses... some have lost their jobs. Spending has begun to fall. But the typical American continues to enjoy a standard of living that most of the world’s people cannot afford – including most Americans.

It will get worse. The third quarter showed the biggest decline in consumer spending in 28 years.

This is a “balance sheet recession”, remember? Consumers, businesses, investors – all need to pay down debt and build up savings. This will mean a huge turnaround for everyone – especially consumers. They have to reduce their standards of living dramatically in order to save money. And especially the baby boomer consumers – who also have to sock away some cash for retirement.

Saving went out of style in the ‘90s... but it’s becoming very popular, very fast. We’re going to see national savings rates rise... back to nearly 10%... and maybe beyond. This is exactly what consumers need to do. Consumers need savings. But the trend is murder on a consumer economy. A 10% savings rate means about $1.3 trillion in money that is NOT spent every year. (That’s why Obama is going to have a $2 trillion budget deficit... more on that tomorrow.)

And here comes the bad news from the Wall Street Journal: “Retail Losses Sap a Jobs Safety Net.”

We’re not sure how you sap a safety net. But for millions of people, when budgets got tight, someone could always go to work as a clerk in a retail shop. The money was poor, but at least it was money. And it filled in the gaps. For retired people... students... part-time working spouses – retail employment was always there... a fallback position... a “safety net.”

But with sales collapsing, the safety net is on the hard ground. The complaint of working stiffs used to be that “good jobs” were hard to find. You could always find a ‘bad job’ – flipping burgers or stocking shelves. But jobs with health benefits and union wages were few and far between. Now, even bad jobs are getting hard to find.

*** The other big loser will be China. Here, too, investors have suffered huge losses already. But China is still growing... still producing beaucoup stuff for people who no longer have the means or the desire to buy it.

“No one should underestimate Asia’s exposure to this crisis,” writes Richard Duncan in Far Eastern Economic Review. “At best, Asia is facing a severe recession. September 2008 may mark the end of the era of export-led growth, rather than merely the beginning of a more typical global recession. Asia’s export-led economic model is just as threatened as the Anglo-Saxon model of highly leveraged capitalism.”