IPFS
The Credit Cycle Has Turned
Written by Bill Bonner Subject: Economy - Economics USAThese are the times that try our souls…
…well, maybe not our souls…but at least our convictions.
But look at gold this morning!
Yesterday, we got word that the PPI rose 1.7% in August. Let’s see,
if producer prices are rising…consumer prices follow, right?
Well…usually…
…but these are strange times…
We also got word that retail sales were up…that’s UP…2.7% last month – the biggest increase in three years.
Now hold on. We’ve been saying that retail sales were going down.
Not up. Our view of the big picture has a consumer in the center of it. And it’s a consumer who is NOT increasing his spending. Instead, he’s
reluctant to buy anything.
There’s a reason for that. He’s a guy who didn’t save anything over
the last 10 years. Now, he’s 10 years older…facing retirement with
insufficient funds…and scared to death that he’ll run out of money
before he runs out of time.
The US consumer was counting on rising house prices to pay for his
retirement. Now, he’s disappointed…and worried. What can he do? He has
to cut back. He has no choice. He can’t depend on his house. He can’t
expect pay increases. Having neglected his savings during the fat
years…he has to tighten up in the lean ones. He has to save at the worst possible time – in a downturn!
We don’t see any way around this situation. We don’t see any
shortcut. We don’t see any way to make it disappear or ignore it. THE
CREDIT CYCLE HAS TURNED…from expansion to contraction.
Meanwhile, the feds are muddying the waters.
They’re trying to fool the consumer…to trick him…to make him think that
up is down and down is up. They want him to believe that the fat years
are coming back…that he doesn’t have to save. In fact, they want to
cause inflation…to encourage him to get rid of his money as soon as
possible. That’s why that PPI figure is important. If they can
successfully inflate consumer prices (not just producer prices) the
whole picture might change. Then, we’d have an inflationary depression
rather than a deflationary one.
Our commodities man, Alan Knuckman, was on Bloomberg Television yesterday, talking about this very phenomenon. (You can watch the whole interview here.)
“What do you make of the PPI numbers?” the host asked him.
“What do you make of the PPI numbers?” the host asked him.
“They did come in higher than expected. Is inflation going to be a concern for the market?”
“That is always a question,” answered Alan. “The fed was trying to
spark inflation and get money moving again. There is a delicate balance
there, but we’re coming off record lows and inflation numbers from last
month. That is to be expected. I am not that concerned, but I think you
are touching on something very important as far as the market momentum.
If the market momentum is so strong right now – the one disconnect is
crude oil. It is failing to make the highs, even though the market is.
That is something to really pay close attention to I think.”
For now, it appears to us that retail prices are still going down.
And we doubt that the feds can cause a genuine recovery – simply by
throwing money into the economy. You can boost spending when you’re in
a credit expansion…but not when you’re in a credit contraction.
That’s why we’re suspicious of that retail-spending figure. How much
of that is just spending funded and coaxed out by the feds? 60%? 80%?
100%?
David Rosenberg says it’s 100%. He’s probably right. And what would the economy look like without the phony demand ginned up by the feds? It would be shrinking at a 6% rate. And what will happen when the feds stop goosing it up? It will fall back.
But can’t the feds continue stimulating the economy indefinitely?
Maybe. Even so, the lesson we learned from the Japanese is that even
with huge inputs from the government (the Japanese passed 11 separate
stimulus measures totaling some $30 trillion yen) the real economy
won’t budge. Over nearly 20 years, the Japanese economy went from
on-again, off-again recession to on-again, off-again deflation. The
government muddied the waters. Still, consumers saw clearly what they
needed to do. They had lost money in the crash of ‘90. Their Bubble Era
stocks went down first. Then, their property went down too. They needed
to save money for their retirements. This they did, resisting all of
the government’s efforts to get them to save.
Will the situation be any different in the United States?
Probably not.
Without extra earnings, the only way the consumer can increase his
spending is by going further into debt. He is unwilling and unable to
do that himself. The banks won’t lend him money and he wouldn’t take it
if they would (at least, that’s our view). So what’s happening? The feds are borrowing big time – IN HIS NAME.
They’re running up federal debt – that he’ll have to pay, one way or
another. This money is then funneled to him in various devious and
mostly ineffective ways…resulting in enough activity to make it look
like something is happening in the economy.
It’s a fake. It’s a fraud. It’s fundamentally counterproductive. But
it’s all it takes for people such as Ben Bernanke to believe the
economy is recovering. Today’s headline news:
“Bernanke says recession ‘very likely’ has ended.”
And so, our convictions are put to the test. Everything seems to be
improving. The numbers – many of them – show an increase in business
and retail activity (New York’s manufacturing index is at a 2-year
high…).
The commentators, economists, and analysts all say things are
getting better (except for those who know what they are talking about)…
And the stock market is still going up. The Dow finished up 56
points yesterday. Gold closed at $1006 yesterday. This morning, it’s up
to $1017. (More about gold later in the week…we’ve done a lot of
drinking on the subject…) And oil is just under $71.
So, who’s right? Who’s wrong? Us? Or them? We say there is no real recovery going on…and there won’t be one. They say the recovery is already here.
Stay tuned.
“You can still sell property,” said brother Jim. “But only if you’re willing to discount it.”
Jim is visiting from Virginia. He is a real estate agent of some
renown in Charlottesville, VA, dealing only with large farms and
estates. His customers are on the golden side of the light spectrum; they tend to pay cash.
“Yes, these are not people who need to mortgage property. But the
story is not very different. They still have their lives…and their
problems.
“What’s happening now is that there aren’t many buyers and those who
are buying expect to get very good deals. So, you can still sell a nice
property, but only if you’re willing to heavily discount it.
“Prices are down, say, 20-30% from where they were a few years ago.
But the buyer wants another 30% discount. Not many sellers are willing
to give up that much, so in my area there aren’t many sales that go
through.
“I’m lucky because I’ve been at it a long time. People know me. So
when they want to move a property…or to buy one…they contact me. But I
have to tell them what’s going on. And I tell them that if they’re not willing to sell at a big discount, it will be hard to sell at all.
“As I said, most people just sit tight. But a few get into
situations where they don’t have a choice. One poor woman has gotten
sick. She is going into a nursing home and apparently the children need
the money to pay her medical expenses…so they’re forced to sell.
Sometimes there’s a divorce that forces a couple to sell a place.
Otherwise, not much activity.
“And I feel sorry for all those real estate agents who came into the
market over the last ten years. What do they do? There aren’t enough
transactions to keep them in business. But what else can they do?
They’re not a lot of jobs open in other areas either.
“My guess is that they are all treading water…hoping for a change…living off savings…until they have to make a big change.”
We wonder how much of the economy is treading water…hoping
for a lifeline…hoping that all this talk of ‘recovery’ is going to make
it possible to avoid any unpleasant changes… hoping that things go back
to the old normal…that somehow, everything will be all right again…
Until tomorrow,
Bill Bonner
The Daily Reckoning
The Daily Reckoning
The Credit Cycle Has Turned was originally published in the Daily Reckoning on 9/16/2009
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2 Comments in Response to The Credit Cycle Has Turned
What did I tell you just yesterday?
http://www.freedomsphoenix.com/Article/044911-2009-02-02-today-another-day-to-watch.htm
But the mantra reciters just wanted to be hysterical.
Retail sales up month over month? Uh huh. And when did we count cash for clunkers in? These guys are confirming Denninger--it's all pulled-forward demand.
As far as "market momentum" we already know most of the trading volume is by insider high-speed computers with an edge on the market.
What's fascinating to me was the guy saying “The fed was trying to spark inflation and get money moving again."
Well the Fed has been changing it's story on why they did what for some months now but sparking inflation wasn't stated. And if that was their intention (highly dubious), man, did they ever screw that pooch. The simpler answer is the question: cui bono?
This continual business of associating falling consumer prices with deflation is getting tedious. I still think we're blowing off excess inventory and capacity. True, businesses will cut margins down to whatever they can afford to stay in business, but once capacity reduces for a reduced market, we'll find a "support level" for consumer prices.
The deflationary implosion threat is real due to known factors: we've got junk on the books, our investment system is a joke, we're maxed out on credit and there ain't many eligible borrowers. We KNOW it's not a crisis of liquidity, these guys can invent money. We know that if they truly wanted to trigger inflation they'd spend stimulus into......drumroll.......you know what's coming.......
The "real economy".
This is the single biggest economic development of our time: the broad recognition of a "real economy" as opposed to Wall Street's and the Fed's. It's not exactly a new idea but it's broad adoption at this point represents a paradigm shift.
Not just a conservative thing, some heavy duty socialist economists are throwing the term around liberally (hardy har har).