Themes: Economy, Market Cycles, Debt
What’s ahead?
A “Lost Couple of Decades... ” says Comstock partners.
Yesterday, we estimated that it would take 19 years for the economy to complete its de-leveraging . It was not a very scientific estimate. But total debt has gone down about $2 trillion over the last 24 months. So, if it continued at that rate, it would take about 19 years to erase the extraordinary amount of debt built up in the bubble years.
Now, along comes the Comstock crowd with roughly the same guess – two decades. They figure that the savings rate will go up to 10% and that the effect of taking that money out of the consumer economy will be to put the US into a long, soft slump – just as we predicted in our first book.
And there’s another reason to expect a very long period of downsizing: that’s just the way economies work. Market cycles are very long. Interest rates went up from the Great Depression all the way to the Reagan Administration. Then, they went down... and may still be going down. Stocks go up and down in cycles that last 30-40 years, peak to peak. The peak in ’29 was followed by another peak in ’66 which was followed by another peak in ’99.
Economic cycles are long too. Consumer debt, compared to disposable income, hit a low in 1945. It went up for the next 62 years. It only peaked out in 2007. If the chart were symmetrical, the process of de-leveraging (getting rid of debt) would show a downtrend until 2069!
And maybe it will.
But there’s no point in looking that far ahead. What we have in front of us is the opening stage of a depression... a market crash followed by a major economic re-adjustment. The new reality is that consumer demand is down... and will stay down for a very long time, at least until debt has reached more manageable proportions. Ken Rogoff says that will take 6-8 years. We say it could take 19 years. There’s about $20 trillion in excess private sector debt to be eliminated. It will take time to get rid of it.
And it will take time to re-jig the world’s economies to the new economic realities.
John Hussman explains...
“The U.S. economy lost a quarter of a million jobs in July. Meanwhile, over 400,000 workers abandoned the labor force (and are therefore no longer counted among the unemployed), which prompted a slight decline in the unemployment rate despite the job losses . In the context of an economy still strained by high levels of consumer debt and still record delinquency and foreclosure rates, labor market conditions are still troublesome. Still, the pace of job losses and new unemployment claims has clearly softened from the pace we observed early in the year.
“If we knew that this was a standard economic downturn, we might conclude that the recent improvements are durable. However, nothing convinces us that this is a standard economic downturn.
“Call me skeptical. But if you look carefully at the economic data that shows improvement, and correct for the impact of government outlays, it is difficult to find anything but continued deterioration in private demand and investment. What we do see is a government that has run what is now a trillion dollar deficit year-to-date, representing some 7% of GDP.
“That sort of tab will undoubtedly buy some amount of Cool-Aid, but it has been something of a disappointment to watch how eagerly investors have guzzled it down. It is not at all clear that short-term, deficit-financed improvement necessarily implies sustained growth in the context of a deleveraging cycle. This is like somebody borrowing money from their Uncle and then celebrating that their income has gone up.
“When market crashes are coupled with changes in the fundamentals that supported the preceding bubble – as we observed in the post-1929 market, the gold market of the 1980's, and the post-1990 Japanese market, and currently observe in the deflation of the recent debt bubble – they typically do not recover quickly. Indeed, the hallmark of these post-crash markets is the very extended sideways adjustment that they experience, generally for many years. “
*** It’s a real Ouzilly summer... bright sun... long evenings on the veranda... cool nights.
Yesterday, while we were painting in the sun room, we noticed a group of people wandering around the yard. They were taking photos... pointing at things. It was as if a group of tourists had walked in and decided to have a tour. But with them was an old man, bent over ... and wearing the blue outfit of a French working man. This was no tourist.
“Mr. Bonner?” a middle-aged woman began the conversation.
She then introduced the group. It turned out that the old man – Mr. Brillaud – had been born on the property 90 years ago. Now, here he was... with his children and grandchildren. She asked if they could have a look around the place.
“Of course,” we replied.
“I was born right up there,” said the old man – pointing to the top floor of the house. “Oh, Mr. Bonner... you’d like to hear the stories this house could tell. I was born in 1919. My father came back from the war in 1920. He worked on the farm until he had a heart attack when he was 55 years old. My grandfather lived here too. He had gone over to the nearby village with a wagonload of gravel... the horse reared up and turned the wagon over. My grandfather was killed.
“My mother was a cook here.” He pointed to the kitchen.
“But it was very different then. There was a whole community around the farm. There were the Cornettes, who lived in the house across the road. And the Desportes, who lived in the house down the lane. Oh... and a few other families too. It took so many people to make the place work.
“And is the old bread oven still there? You know, in that building at the end of the courtyard?”
“Yes... it’s still there,” we told him.
“We used to love that place. It was where we made bread for the whole village. It was always warm. And it smelled so good.
“We had to do everything ourselves. We grew the wheat. Then, we milled it. And then we made bread. And we had chickens for eggs. And cows for milk. And, of course, the vegetable garden. I don’t think we had any money. But it wasn’t a bad life.
“Then, they changed the whole thing in the ‘60s. They put in place a law that said you had to pay the people on a farm... and contribute to their social security. Then, there were too many people on the farm for it to support. So, they all moved away. The only ones left when you got here were the Debonnet family, weren’t they? Francois was still here. And now he’s retired too.
“Oh, and what have you done to the octagon?” he motioned to the building that we transformed into a library/office. We walked over to have a look.
“It used to be for ironing,” he continued. “There was a big brick fireplace in the center. We didn’t have electric irons, you know. Instead, there were heavy irons on top the fireplace. It had an iron top, you see. You’d come in here and there would be irons on the fireplace, getting hot... and usually one of the maids ironing sheets. It kept them pretty busy.
“Of course, it kept us all busy. We didn’t have any 35-hour workweek back then. We worked all the time.”
*** Donovan is coming! Donovan... a handsome young Swiss man... a friend of a friend... did the cooking for us a few years ago. He is widely remembered.
“Isn’t he the one who got that girl in the village pregnant?” asked one of the boys at dinner last night.
“No, he’s the one who took the car and wrecked it. He didn’t have a driving license... ” explained another.
“And I remember when he went out in the evening... he went into town... and then, for some reason, he had to walk back. That’s about a two-hour’s walk. And he was so out-of-it he walked by the house and just kept going... until he finally realized he had gone too far... so he had to walk an hour back. He came into the driveway about 6AM... looked like he had been hit by a truck... ”
“ He made quite an impression on all!” said another source.
“I will never forget Donovan -- not to mention the most memorable week of my life! What a thrill it was to sit under the spreading linden tree near the garden wall, reading and sipping on a peach royale whilst millions of bees happily kept to their work above my head. Later, I toured the garden below and helped the Dashing Mr. D. gather gooseberries. One of my fave pics is Chef Donovan at the outdoor grille off the veranda, cooking up the evening's feast: wild boar steaks. Incredible! And incredibly delicious! My first experience of centuries old art work and architecture in Europe was on our impromptu guided tour of churches in and near Montmorillon on a rainy Monday; Donovan, of course, in the lead with all manner of historical information. And I believe Donovan had a hand in the spectacular midnight fiery pyre display that thrilled and awed us all, and celebrated St. John's Day if memory serves. Is it exaggerating to claim Donovan the sine qua non on our d'Ouzilly experience?”
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