Son of a Bubble

Bill Bonner
Provided as a courtesy of Agora Publishing & The Daily Reckoning
Oct 22, 2009

What a great recovery! No jobs... No credit... No sales... But look at those stocks! And oil! And gold! And even London property!

Real estate agents in London say they are sold out as prices go to records. Well, asking prices that is. As for sales prices, that is another story. Still, London is driven by finance, and finance seems to have gotten out of rehab. It's party time again.

The Wall Street Journal is talking about a "full recovery" in luxury goods sales by 2011. And Wall Street itself is pricing stocks as if the record profit margins of '05 and '06 were just around the corner.

In other words, investors' expectations have not changed. They think things will return to the way they were in the Bubble Epoque.

How could that happen? A full recovery implies a number of things...

...that the 'Son of Bubble' will be as big as his dad...

...that all those people without money or jobs will somehow find the wherewithal to spend again...

...and that the baby boomers will stop saving for their retirements and begin to party like it was 2006 again...

Remember, Bubble Epoque spending, sales and profit figures were made possible by borrowing. People spent every penny they earned... and then "took out equity" from their houses in order to spend more.

What they really got was a house with a bigger mortgage ­ without moving!

At the height of the bubble period, if we recall correctly, Americans were taking out more than $500 billion per year. Now, they're putting back nearly $500 billion a year in savings.

We don't like to be party poopers here at The Daily Reckoning. But there is no way to get a rerun of the Bubble Epoque on those numbers.

What we see happening is a typical post-crisis bounce, powered by easy cash and credit from the feds. How long can it go on? How far can it go? No one knows. But if you want answers, we'll go way out on a limb:

It won't go on forever. And it won't go to the moon.

And most likely, it won't be long before the whole thing comes to a crashing end.

Here's noted analyst John Hussman:

"The stock market has never been this overbought."

Hussman says that the only time stocks were this overbought was on Nov. 28th, 1980. That was the last rebound in the great bear market that had begun in 1966. Afterwards, stocks fell another 30% before finally hitting bottom in August 1982.

That's why we have our Crash Alert flag flying over the headquarters of The Daily Reckoning. We put it up two weeks ago. No crash so far. But it can't be too far in the future.

And more thoughts...

While champagne and caviar is served out in the speculative economy of bankers and hedge fund managers, it's bread and branch water for the poor folks stuck in the real economy.

First, we have some figures from the Center for Responsible Lending. Nearly 3 million houses are expected to be foreclosed in 2009. And there are 8 million still to go!

Yes, we've crossed the foothills of sub-prime already. But the Rockies of Alt-A, jumbos, and other salacious mortgage instruments are still ahead.

And what happens to people who lose their houses? The New York Times reports that more and more foreclosure sufferers are becoming homeless. The article gives a 'typical' story. A woman loses her house. She stays with friends. She sleeps in her car. She tries to find work. Eventually, she runs out of options and checks into a homeless shelter.

What's a little odd about this story is that this woman has three grown children... six grandchildren... and even a great grandchild. Now, what's going on here? Are all those kids so heartless that they won't take in grandma? Or is grandma so insufferable that no one can stand her?

We always take the 'glass half full' approach here at The Daily Reckoning. So this reminds us of what is so nice about depression: it brings families together. It also improves manners. Grandmothers know they need to watch their behavior, or they'll be sent to a homeless shelter.

Once you knock them down it is harder than ever for grandmothers to get back on their feet. Why? They're not as flexible as they used to be. Besides, they have no way to earn money.

Mortimer Zuckerman, editor of US News & World Report, provides the figures:

Of people who are out of work, more have been jobless for longer than at any time since 1948. More exhaust their unemployment benefits before finding a new job than ever before. And if they are lucky enough to find work, they'll work the shortest workweeks since 1951.

In other words, the baby boomers have never seen times so rough... for themselves as well as for their children. One American in nine depends on the government for his daily bread. There are 6.2 million more people on food stamps than when the recession began. And there are 6 people waiting in line for each job opening, up from 1.7 when the recession started.

The baby boomers meanwhile figure they will have to keep working longer than expected. Sixty-three percent of them say they expect to delay retirement in order to build up more retirement savings.

This is bad news for younger workers, who were hoping the boomers would get out of the way to free up some jobs. Among young Americans, unemployment hasn't been so high since 1945.

If that weren't bad enough, the government has made things worse by increasing the minimum wage; that alone cost the young an estimated 300,000 jobs. In a depression, prices fall. The price of labor falls too... but not easily. That's why inflation usually helps increase employment - it lowers the real cost of labor. But people do not accept wage cuts readily. And then, along come the feds with a crackpot scheme to INCREASE wages... making the situation worse.

Naturally, Zuckerman looks at these facts and comes to the wrong conclusion. The headline:

"The free market is not up to the job of creating work."

"Only massive programs are equal to the challenge of restoring stable growth to our economy," he writes, in The Financial Times. What kind of massive projects? He mentions an "infrastructure bank." He might have said a war. WWII worked wonders for unemployment. All of sudden, anybody who wanted a job could find one.

But it's all hokum and claptrap. The Soviet Union put everyone to work. You can see where that got them. It's not the fact that people are sweating on a job site that makes a society prosper; they also have to be doing things that add to their wealth. Infrastructure, like any other capital investment, makes sense only when it pays off. The Japanese poured more concrete per square inch than anyone before or since. They proved that you can put up all the bridges and canals you want; it still won't restart the economy.

The free market is the only thing that can create worthwhile work. Because it is the only thing that knows - by sales and earnings - which projects make sense.

But we're facing a losing battle. People much prefer soothing lies.

Heck, we like them too.

Mundus vult decipi et decipiatur!

Source: http://www.dailyreckoning.com/son-of-a-bubble/

Oct 20, 2009
Bill Bonner
email: DR@dailyreckoning.com
website: The Daily Reckoning

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