Monday, 12 January 2009
It’s Monday morning. The world economy is calling in sick.
A Bloomberg report confirms last week’s news: the US economy lost more jobs last year than at any time since the end of WWII.. The jobless rate is now at a 16-year high.
The Dow fell 143 points on Friday. Oil stayed at $40. Gold didn’t budge much from $855. And the dollar rose – to $1.34 to the euro.
“Economists see longest recession since WWII,” is a headline at Reuters. Economists are always the last to know what is going on. If they see a long recession coming, maybe the recession is already over? But, no... this time, we think even the economists have it right.
“This is worse than the 1980s savings and loans crisis,” said our old friend Jim Rogers a year ago. “This is the first time – this is the worst credit bubble we've ever had in American history. No – never in American history have people been able to buy a house with no money down, never. That’s never happened anytime in the world. So, we have the worst credit bubble. It’s going to take a long time to work its way out. You don't cure a bubble in five or six months... It takes five or six years."
The world economy is clearly ailing. But what’s really wrong with it?
In 1945, the war economy was suddenly out of business. Orders for tanks, guns, and C-rations stopped coming. The economy felt a little ill. Economists feared the US would sink back into a ‘30s-style depression. And investors sold off stocks in anticipation.
Instead, the soldiers came home and got married. Women gave up their jobs building airplanes and began to build families. Then, the new families started spending the money they had saved up during the war years. In came the orders for refrigerators, houses, and automobiles... and the illness passed!
Once again, the economy is feeling like it has a touch of the flu. And once again, the cause can be traced to a change in the weather. After so many years of living beyond their means, Americans are reluctantly beginning to live beneath their means. Instead of spending every nickel they earn, plus a few they didn’t, they’re finally beginning to save. Not that they want to; but they have to. The easy credit is gone.
And so the orders for new cars, new granite-topped kitchen counters, and new televisions have stopped coming in.
But now there are no soldiers coming home – or not enough to make much of a difference. And there are no women giving up their jobs at the aircraft factories to start new families. And no kindling to light a fire under a new consumer spending boom – people have soggy debt, not savings.
This is not just a problem for the US; it’s a problem for much of the world. Americans were the world’s consumers. They could be counted on to spend money – even when they didn’t have any money to spend. They bought the gadgets made by the Chinese, the wine made the Chileans, and the automobiles made by the Japanese. They were the chumps of last resort for the entire planet. Now that American consumers are coming to their senses, the whole world economy is feeling a little ill.
Left to their own devices, people would adapt. Chinese factories would gradually switch from making gee-gaws for people in Minnesota to making things for people in the middle kingdom. Displaced Japanese autoworkers could open noodle stands. One way or another, things work out... the malady would pass.
But the quacks threaten to make it much worse.
Of course, they’re delivering the standard elixirs – in massive doses.
As to the ‘fiscal stimulus,’ the president elect says he will change the TARP program so that it corrupts more taxpayers – rather than just a few big ones on Wall Street. He says he aims to create 4.1 million new jobs. Already, the US deficit for 2009 is expected to come in at $1.18 trillion – BEFORE Obama’s new stimulus program is added in.
As to ‘monetary stimulus,’ there’s nothing left to cut in the Fed’s key lending rate. If they want to ease rates further, they’re going to have to pay borrowers to take the money.
Quantitative Easing
The new super drug at the Fed is its policy of “quantitative easing.” What is ‘quantitative easing,’ you may want to know? It describes the Fed’s latest ploy, in which it buys toxic assets from banks. The banks thus increase their reserves. If they were to maintain the same loan-to-reserve ratio, they would have to lend out more money. But when the Fed buys assets from the banks, it does not borrow the money; it creates it ‘out of thin air.’ In other words, between ‘quantitative easing’ and ‘printing money’ there is not enough space to wedge a subway ticket.
So far, this new treatment has produced no signs of recovery. But don’t worry; the quacks won’t give up. They’ll give larger and larger doses – until the patient dies.
More news:
“A 314-year low in UK interest rates and the pound is rising,” notes Theo Casey in our London office. “Surprising? Yes. Cause for concern? No.”
You’ll recall that Theo and his team at The Fleet Street Letter have been bearish on the pound. They showed their readers how to protect themselves against a sterling collapse back in August last year. Since then, the advice has done more than protect them – it’s made them some 17% on their money. That compares to an -18% fall in the stock market.
Theo believes there’s plenty more to come in this sterling down move.
“The pound’s recovery is unlikely to last. The negative economic data coming from UK businesses is relentless. Most recently, Nissan is to reduce the workforce at its iconic plant in Sunderland by nearly 30% (the plant is the UK’s biggest car producer). This is just the latest in a mounting pile of jobless news and is a good reason to expect jobless data to come in at record lows this month. The negative flow of data should break the pound’s suspicious bounce, which itself came in a December to January window where very little economic news was released.
“What will soon become clear is that further action from UK policy makers is on the cards and is likely to come soon. There is talk that it could come in the form of quantitative easing – economist speak for printing money. However, Alistair Darling is playing coy on how close the UK is to starting up the printing presses:
“[On quantitative easing] There’s a debate to be had about what you do to support the economy as interest rates approach zero, as they are in the US. But for us that is an entirely hypothetical debate.”
“Tough talk but the Government and the Bank of England are running out of ammo to prop up the UK economy and, as the FT notes, the availability of credit to both households and businesses has tightened further. They are desperate to increase the flow of lending. And there are few options left apart from printing money.”
[Editor’s note: Theo believes that the recent impressive rally in the pound against the euro is a great opportunity for investors to put on a position which will profit when sterling once more starts to slide. To discover how to place this position, click here.]
And more thoughts:
*** Our old friend Jim Davidson, founder of the National Taxpayers Union, sends this note:
“Obama has confirmed he will take rapid action to cut taxes for 95% of Americans. At first blush, cutting taxes for 95% sounds like a grand idea. However, look closer. The top 5% of income earners already pay 60% of all income tax, up from the top 36.64% in 1980. The corollary to Obama's tax reduction, which will go mainly to people who don't pay income taxes, is that a large increase is scheduled for the high earners.
“A hint of the magnitude of the coming burden was offered by The Washington Post on January 2, when it published its assessment of the cost of the bailout as already announced.
“According to Post, if equally apportioned over the 139 million tax returns filed last year, the toll of the bailout would be $61,871 per taxpayer. But taxes are manifestly not apportioned equally. Even before Obama's tax hikes take effect, 60% of the tax burden falls on 5% of earners – roughly speaking, those who earn $250,000 or more annually.
“If you are one of them, your share of the bailout cost will be about $750,000. Pencil that into your balance sheet.”
*** A dear reader writes:
“I hear people telling me that things are heading up again, that the market reached the bottom in December, blah, blah, blah. Consider this:
- My wife and I were in an excellent sea food restaurant on route 1 in Saugus – an extremely heavily traveled commercial strip north of Boston – back in mid-November. We were there from 12:45 to 2:00. There was one couple there when we arrived, and two more came whilst we were there.
- Traveling over the Mystic River Bridge into Boston, the parking lot below the bridge where imported cars are parked before being shipped to dealers was full to overflowing. A news item along about that time reported that they were trying to find more parking for the cars that were still en route.
- In a mall store a day or so after New Years day I remarked to the clerk how dead it seemed. He said it was worse the day before when the store (Radio Shack) did only about $1,500. On a slow day he rarely did less than $5,000.”
“It’s unbelievable how fast that country has gone downhill. We had a house there that we sold in 2006. Now, the people who bought it from us are trying to resell it at a quarter of the price they paid us. Even at that price, there are no buyers.”
** “WWFM is what we call it in the family,” Elizabeth explained at a dinner party. “The Worldwide Financial Meltdown. Bill just goes on and on about it. He keeps hounding us all to cut expenses. So this year, we’re trying to cut back... turning out the lights... and staying at home.”
Yes, dear reader, the Bonner family is getting in the spirit of the WWFM. And it is amazing how much you can save, when you put your back into it.
“Elizabeth, can you sew up this hole in my sweater,” we asked on the weekend.
“Just give it to Katya [the cleaning lady]... she’ll sew it up for you.”
“But she charges us 10 euros an hour.”
“Well, it’s cheaper than buying a new sweater.”
We also found a guitar on the street. Someone had just thrown it away. We took it home and put on new strings. It’s not much to look at and it sounds funny; but it works.
And on Saturday, the heating system developed a leak.
“No, don’t call the plumber; Edward and I will fix it ourselves.”
“Uh oh...”
The connection between male and female is always a bit tricky. In the plumbing world no less than the rest of the world. Our union was uncooperative. But an economist armed with a wrench is a formidable foe. We banged the joint and then cursed it. And when the battle was over there was water all over the floor but the leak was fixed.
“There... see, we fixed it!” we announced in triumph.
“I don’t know if you really saved any money. The water probably leaked down to the apartment below us... they’ll probably have to fix the ceiling. And we’ll have to pay for it.”
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