Positive Collapse

Bill Bonner - Mon 09 Mar, 2009

The commentators have it all wrong. Look on the bright side. The world economy is not in a period of negative growth. It’s in a period of positive collapse!

“Negative growth,” says today’s paper.

Yes, dear reader. Stocks are advancing to the rear... and economies are growing... smaller. How we love these oxymorons! If only we could age negatively... and eat all we wanted and gain minus pounds!

The commentators have it all wrong. Look on the bright side. The world economy is not in a period of negative growth. It’s in a period of positive collapse! That’s why the Great Depression was so great, after all. What’s positive about this depression is that it is clearing away a generation’s worth of mistakes, misallocations of resources and misplaced confidence.

Stocks are down more than 20% this year. The US economy is retreating at more than 6% per year. Britain is walking backwards at a 2% pace. And Japan? Wow... when it comes to negative growth, the Japanese are experts. Their economy is growing negatively at more than 12% per year. If this keeps up, by the time the next bull market comes along, there won’t be any Japanese economy left.

The Asian Development Bank says the losses so far have cost the world $50 trillion.

The Financial Times reports:

“The ADB’s estimates take into account falling stock market valuations and losses in the value of bonds supported by mortgages and other assets, though not financial derivatives. About a fifth of the losses in dollar terms arise from the depreciation of many currencies against the dollar.”

The last estimate of the total world’s wealth we saw was $100 trillion. If these estimates are correct, the planet has lost about half its value. But who bids for planet earth?

Just about everything that existed – the real wealth of the world – still exists. What disappeared were the fantasy financial evaluations. A truck is a truck is a truck. It doesn’t become less of a truck just because the world has entered a period of financial contraction. It is just as serviceable now as it was 2 years ago. And the poor guy who had a trucking company keeps on trucking...

But now he has a whole lot less trucking to do than he did before. The stores aren’t moving as much merchandise... so no need to deliver so much. And so the value of his truck – in terms of how much revenue it can produce – has gone down. So too has the value of his trucking company. Maybe he should never have bought that truck in the first place...

The Dow is down near 6,500. Only 1,500 points to go. At least, that was our guess a few years ago. We figured that the Dow would have to go to 5,000 in order to get down to real bottom prices.

Will the bear market finally be over then? Nope. That’s just where you can begin looking for a bottom. Remember, markets tend to overshoot.

So far, the Dow has wiped out 43 years of gains. Adjusted for inflation, it was at this level back when the Beach Boys and the Beatles were just starting out. Actually, we don’t remember when the Beach Boys and the Beatles began... but it must have been in the mid-‘60s.

Back in ’66, the Dow hit a high for the cycle. It had been going up since the bottom in 1949. After the peak in 66, it retreated... and then staged another attack on the summit two years later. But inflation was getting pumped up too... and in real terms, the ’68 high failed to better the peak of ’66.

From ’66 to ’82 it was down, down, down. Then, Business Week threw in the towel: “The Death of Equities” said the cover story. Then, it was up, up, up... until... well, you remember the rest.

We only bring this up to warn readers: these major cycles take time. So far, the Dow has only gotten down to the ’66 TOP. Now, it has to get to the ’82 BOTTOM... adjusted for inflation. Where would that be?

Well… as we recall, the Dow was barely at 1,000 when the bull market began. And if you adjust that to consumer price inflation, we come to a 2,000 – 3,000.

Will it get there? Who knows.

The Dow gained 32 points on Friday... a slight bounce up at the end of a dismal week. Oil rose to $45. And gold, which seems to have finished its correction, ended the week at $942.


*** More news:

“These measures, we think, will work in the long run. I can’t be sure how long it will take.”

That was Bank of England Governor, Mervyn King, on last week’s £75 billion “money printing” exercise.

Theo Casey of The Fleet Street Letter isn’t so sure…

“The Bank hopes that buying gilts and corporate bonds will prove more effective than turning on the printing presses and handing out wheelbarrows piled high with ten pound notes. The move is meant to encourage bank lending as the sellers of assets – investors, banks – will have a fatter cash cushion. This in turn is meant to bring down the lending cost in the corporate sector and thus greasing the wheels of the UK economy.

“Will it work...?

“No one knows, but history is not on Mervyn King’s side.

“In any case, the confirmation of quantitative easing is good news for The Fleet Street Letter. This is phase one of our plan to “shake hands with the government” or capitalise on their spending plans. Our newly recommended corporate bond play will be on the receiving end of some of the funds being spent by the Bank of England. There could be enough spending to prompt a bull market in high quality corporate debt – a market with good fundamentals and great income prospects in any case.

“Phase two will be revealed in the coming months. You see, while we position our portfolios today to profit from King’s plan, today’s QE is tomorrow’s inflation. Printing all of that money is going to put pressure on the spending power of the nation and inflation could come back in a big way. When it does, we will provide you with a specific inflation-fighting position.

“Despite the uncertainty and gloomy outlook for the economy today, if you know what to do and when to do it you can prosper in any climate. The Fleet Street Letter’s plan is very clear – play the cards that we’ve been dealt.”

Editor’s recommendation: The Fleet Street Letter may be very bearish on the outlook for the UK’s economy and the market. But they are not sitting around moping about it. In fact, they have specific ways that their readers can profit from the unfolding misery. For a snapshot of just how you can get their strategy working for you – and receive their just released bond play – read their special outlook report here.

Theo Casey writes every Wednesday in The Right Side, a free e-newsletter where you can receive Bill Bonner’s daily articles too. To sign up enter your email in the top right signup box.


And more thoughts...

*** An Economist headline: “Are Investors Still too Optimistic?”

Our guess: yes. Most of the action on the stock markets is professional buying and selling. The amateurs seem to be largely sitting on the sidelines, waiting for a rebound to get back in.

They still haven’t gotten the message. This isn’t a recession. There won’t be a quick recovery. And the bailout/stimulus plans won’t work.

This is depression. It will take years to restructure the economy. And bailout/stimulus plans just slow down the process.

Looking back at the Dow... if you take the market peak of January 2000 as the long-term cyclical top... you might expect an eventual bottom 10-20 years later... and then a new bull market that would return prices to their peak highs 10-20 after that. Between the high of ’29 and the next major high in ’66 was 37 years. Between the ’66 high and the ’00 high was 34 years.

So sit back. Relax. Most likely, we’ll see stock prices much lower... for much longer. Look for a return to ’00 highs in 2035.

Learn to make a correction your friend. Remember, this is a positive collapse, not negative growth. It is correcting the stupid ‘growth’ of the bubble years. What really grew during that period was consumer spending in the US and Britain. And it grew far beyond the ability of Anglo-Americans to pay for it. Because they were spending too much, the whole world economy bent to sell them too much. The Chinese built too many factories. The shippers built too many vessels. The truckers bought too many trucks. The homebuilders put up too many hovels. The retailers expanded too much... the malls were overbuilt... etc. etc. etc.

Now, in this period of positive collapse, all that surplus capacity is being marked down to what it is really worth... liquidated... and restructured.

Give it time, dear reader. Let Mr. Market do his work.

*** The company that Thomas Edison started cut its dividend for the first time in 71 years. Some analysts think GE, too, could default – thanks to the company’s move into the financial sector.

*** Hotels are going into foreclosure too, says USA Today.

*** Dow Chemical is trading at a 24-year low.

*** And the “Great Red Hope” – the idea that China will pull the entire world economy out of a depression – is “pure fantasy,” writes William Pesek.

China relies on exports. And the export business sucks. It will be lucky to get through this downturn without a revolution.

*** On March 15th OPEC will trigger oil’s biggest ever “PRICE BOOM”!

Position yourself to profit from this – BEFORE MARCH 15th – and you could make a HUGE return on your investment... as much as 181% by the end of 2010!

Read on here for full details...