Themes: China, Stock Markets, Recession, Recovery
Now the summer days are dwindling down to a precious few. This morning, it is overcast and chilly here in central France. The leaves on the aspen and linden trees have turned yellow already; whenever the wind blows, they flutter to the ground as if they were trying to get away from something.
This afternoon, we have been invited for a private tour of a grotto not far away. According to our information, the grotto was sealed off by falling rock hundreds of years ago. Thus it was protected and preserved remains of human habitation from 30,000 years ago.
“Yes, there is a span of about 10,000 years in which there is little evidence of human habitation in Europe,” said the owner. “Maybe humans almost died out during that period; we don’t know what happened. But when this cave was opened, we found some remains that were dated from that era. It’s a remarkable find. A group of 20 scientists has been working there all summer. They told me they found 1,000 artifacts a day. Of course, we’re not talking about statues and battle axes. Most of these discoveries are bone fragments... maybe even grains of cereal...”
We’ll find out more this afternoon...
Meanwhile, we turn our attention to the world of money. And we begin by asking:
Just what are we trying to figure out?
Well, we want to understand what is going on... don’t we?
And we want to try to guess about what is likely to happen next, don’t we?
We’d like to know, for example, whether stocks were going up or down... and whether this is a good time to buy property... or gold... or Treasury bonds. We’d like to know, wouldn’t we?
Of course we would. Unfortunately, ‘it is not given to man to know his fate,’ as the ancients put it. All we know is what happened in the past... and the fate of men who came before us... Even that we know only in a wispy, uncertain kind of way. All we have are stories...
Back to that in a moment...
Here are the facts from yesterday:
The Dow rose 30 points. Oil closed down – to $72. Gold remained where it was.
Ben Bernanke was put up for another term as head of the Federal Reserve. And the Obama administration said the downturn was a little worse than it had thought, so its estimate for the 2010 budget deficit had to be updated – increased by 19% – to $1.5 trillion. The Congressional Budget Office did its own count and came up with $1.4 trillion. Either way, it’s a lot of money.
We have wondered where the money would come from. Yesterday, Goldman’s top economist, Jan Hatzius, said he thought much of it would be ‘monetized’ by the Fed... with the Fed’s balance sheet increasing as much as $2 trillion. The Fed’s balance sheet is the monetary ballast for the whole economy. As it increases, so does the amount of sail the economy can put up.
In theory, the potential for inflation increases geometrically; one dollar on the Fed’s balance sheet could be multiplied into $10 in the economy. Bernanke has already doubled the Fed’s balance sheet – buying up an additional $1 trillion worth of Wall Street’s failures and the feds’ debt. He might have to buy another $2 trillion worth – bringing the total to $4 trillion – before this crisis is behind us, said the Goldman fellow.
Home prices are still going down, says the latest report, but ‘less than forecast.’ Is that good news? Well, it could be worse.
The latest sales figures show an uptick. But careful analysis shows that homes sales figures are still terrible... People are buying $250,000 houses... but they’re the houses that sold for $500,000 in 2005. And the poor folks with $500,000 houses... and jumbo mortgages... are sinking. Almost half of them will be underwater by 2011, according to one estimate.
The feds now say that 10% unemployment is unavoidable. Naturally, when people lose their jobs they have a hard time keeping up with mortgage payments.
“Bay Area Delinquency Rates Soar,” says a typical headline.
Two years ago, when a homeowner was late on his mortgage payments, there was a 45% chance that he’d catch up. This is known as the “cure rate.” Well, now the cure rate is down to 6.6%. Homeowners never catch up... they fall further and further behind until the house is foreclosed.
Want some more news? In past recessions, the US emerged first and pulled the rest of the world out of its funk. This time, the US is still on its way down... so analysts look to China. The Peoples’ Republic says it is growing fast. It also says it will have an inflation rate of 2% this year. Currently, prices are falling at a 1.8% rate. China is in deflation, not inflation. What’s up in China? We won’t know for a while... but don’t count on it to pull the world out of a correction. China needs a correction as much as anyone.
More on China… world markets… and fat merchants… from our emerging markets specialist:
“The Chinese benchmark index is now 14% below the high for the year that it hit on August 4th. China’s markets have declined because corporate earnings in that country have not met analysts’ forecasts.
“The more data that comes in, the more obvious it becomes that analysts were overly optimistic about the outlook for company profits. And that undermines any justification for the ridiculous run-up in share prices we have seen globally over the last six months.
“Just listen to this Australian fund manager quoted on Bloomberg this morning. He sums-up the growing caution about the sharp rise in share prices across the Asia-Pacific this year. To quote: “Companies aren’t yet seeing the signs of improvement coming through, even though the market is anticipating it. We need to start seeing some pretty broad profit upgrades coming through driven by revenues rather than cost cutting. Until then, we’ll be cautious.”
“As you can see in the graph below, China’s market has been heading downwards over the last three weeks. That’s bad news because global investors have taken their cue from the Chinese market this year. And as I write this morning, markets are down across Europe as well.
Shanghai Composite Index performance year-to-date: 
Source: Bloomberg
“Here is a point that I want to stress though. I am bullish on China. Its economy is still growing at rapid pace. It should grow by at least 8% this year and next year. There are very good reasons for investing there – but not at the current price. I would much rather let the correction in its markets play out before we buy-in.
“More than that though, China’s economy just isn’t big enough to carry the world out of recession, no matter how fast it grows this year or next. At the end of 2008, it accounted for just 8% of the global economy. So the rise in global markets on the back of China’s performance really can’t be justified.
“Over the last month, we have had several false starts of a global correction. But speculators have always been ready to pile back in.
“The whole thing conjures up the image of fat merchants running back into the house to grab the last gold coin while Vesuvius is erupting. I think that they are setting themselves up for a nasty loss.
“The problem with bubbles is that they rarely burst when they are meant to… or when you expect them to. But signs that reality is starting to overwhelm the greed and blind optimism that have carried markets to this point are growing.
“And the sooner we get there the better. Our patience should be well-rewarded.”
Editor’s note: Manraaj Singh is Chief Investment Strategist for Profit Hunter. Manraaj advises a small group of investors on special situations and emerging markets opportunities. His latest report is well-known. To access it and put yourself in line to receive his next recommendation, click here.
And back to Bill’s rumination:
*** For 40,000 years – maybe longer – our ancestors have walked the very earth where your editor puts his feet. They lived. They died. What did they know? Scientists say they were as smart as we are. What did they talk about? What did they think about?
“Every time something is given, something is taken away,” we suggested over dinner last night.
“No, that’s not right. You’re saying that life is a zero-sum game... that it can never get better... that it can never really improve... that there can be no real progress...” Elizabeth replied.
“Well, not exactly... I’m saying that there are no free lunches in nature. That if a man is smarter, he is not likely to be faster too. But I’m not saying anything particular... or scientific... I’m just announcing a general principle... more like a vague intuition about the way things work. According to one theory, for example, mankind migrated from Africa to Europe. In Europe, during the Ice Age, he encountered a great challenge: cold weather. Most humans and pre-humans probably couldn’t survive it. But some did. And they did by evolving into maybe smarter... maybe slower... people with bigger heads. According to the latest thinking on the subject, the bigger brains were a disadvantage in warmer climates... because they got too hot. I guess they took up too much energy too. But they were an evolutionary necessity in colder climates... where the cold weather not only made possible a hotter head, but also made it a necessity. People needed bigger brains to anticipate the change of seasons and save for winter, for example. They had to see what was coming. They had to look at what was coming... and prepare for it. They had to work together too... to hunt large game... and to fight off competitors. Those who couldn’t do so died out. Well... that’s the theory...”
Every day, here at the Daily Reckoning, we give you information on the latest trends and events in financial markets. But everybody has access to the same information. And what is information, anyway? What is it worth? What does it mean?
For thousands of years, people exchanged information. Then, it must have been a different kind of information... things we can barely imagine... about where animals were getting their water... about where to find seeds and how to avoid sickness... how to prepare for winter... and how to fend off wild animals. Then, the dominion of the human species was not so sure. There were saber-toothed tigers, lions, wolves, even mastodons... giant sloths... Early man was probably as often prey as hunter. He had to be on his toes to survive.
Information was one thing. But there was more. He needed wisdom... and technology... as well as facts. He had to learn to store food for winter as well as beat back attacks by wild beasts. He had to know how to make cloaks out of animal skins... and how to stock firewood for a rainy, snowy winter... and how to find shelter.
We imagine tribes sat around the campfire and told stories. The stories reported victories and defeats... disasters and triumphs... heroes and enemies. But the stories were more than just information: they carried lessons... moral lessons... about what to do and what not to do.
That is the tradition to which we are heirs here at the Daily Reckoning. We pass along information: but without a story, the information is just noise.
Our story is the story of the seasons. It’s the story of heroes and villains... of fatal flaws and inevitable disasters.
The common flaw is an old one. The Greeks couldn’t seem to tell a story without mentioning it. ‘Hubris’... the kind of pride that goeth before a fall... the arrogance that leads people to think they can get away with something... that they not only can know their fates... but that they can control them.
Today, Ben Bernanke is our tragic hero. His flaw is as obvious as his challenge. He thinks he can stop the world from turning... stop the seasons... avoid the hard, correcting winter by tempting the sun with bailouts, stimulus and cheap credit. His arrogance is an affront to the gods.
The old tales tell us what will happen. He will fail. But when... how? That is a different story. It is the story future generations must tell. We must live it.
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