Agora Financial’s Rude Awakening

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Taipei, Taiwan

• Mixed mood on Wall Street as investors reassess “green shoots” claims,
• Recovery: it won’t happen overnight, but it WILL happen,
• Bernanke’s name on every bathroom stalldoor and plenty more…

Eric Fry, reporting from Laguna Beach, California…

The stock market thrashed around for six and a half hours yesterday, before ending the trading session with a 15-point gain. This modestly favorable outcome seemed more the result of chance than conviction. If stocks had traded for another thirty minutes, they might have ended the day DOWN 15 points…or 150.

Yesterday’s directionless trading action aptly reflects the directionless trend of public opinion. One week ago, everyone knew that the economy was recovering and that stocks were a “buy.” Today, no one knows anything.

Last Thursday’s grim unemployment report seemed to suck the chlorophyll right out of the “green shoots” of economic recovery. But even before the unemployment report, the “green shoots” of recovery were more a matter of faith than fact.

Warren Buffett put it best when he said recently:

“I get figures on 70-odd businesses, a lot of them daily. Everything that I see about the economy is that we’ve had no bounce. The financial system was really where the crisis was last September and October, and that’s been surmounted and that’s enormously important. But in terms of the economy coming back, it takes a while. There were a lot of excesses to be wrung out and that process is still underway and it looks to me like it will be underway for quite a while. In the [Berkshire Hathaway] annual report, I said the economy would be in a shambles this year and probably well beyond. I’m afraid that’s true…

“I had a cataract operation on my left eye about a month ago and I thought maybe now I’ll be able to see green shoots. We’re not seeing them. Whether it’s retailing, manufacturing, wherever. We have a big utility operation. Industrial demand is down like we’ve never seen it for a simple thing like electricity. So it hasn’t happened yet. It will happen. I want to emphasize that. But it hasn’t happened yet.”

So there you have it…the recovery hasn’t happened yet, according to the Oracle of Omaha. But, he promises, “It will happen.” Your editors here at the Rude Awakening are completely persuaded by Buffet’s remarks. We are absolutely convinced that the recovery has not happened yet…but that it will happen eventually.

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What’s the Purpose of a Correction?
By Bill Bonner

The purpose of a man is to love a woman…
And the purpose of a woman is to love a man…

Remember that hit from the ’60s?

How about this?

To everything there is a season
And a time for every purpose under Heaven…

That is a line from Ecclesiastes that The Byrds turned into another hit song…

Well, what’s the purpose of a correction? It’s to destroy the illusions of the previous bubble period.

How’s this one doing?

Progress is mixed. US consumers seem to have straightened up pretty fast. After the crash, they went into therapy and rediscovered their inner squirrel. Now, according to news and anecdotal reports, they’re saving all the cash they can. Savings rates, which had been near zero, are now bouncing up towards 5%. When they aren’t stashing nuts, they are becoming more independent. Reports tell us that they are planting backyard gardens…and putting in their own power plants. (Yesterday, we came across a website for people who wanted to generate their own power.) They’re said to be cutting their own hair…and their own grass, driving less, cooking their own meals, and so forth.

They are prone to backsliding at any moment, of course. And with the feds waving the bottle under their noses every day, many are bound to fall off the wagon. But on the whole…consumers seem to be breaking free of the illusion that they can get rich by spending money.

The property bubble illusion seems to have been given a good whack too. Few are those in the United States of America or Britain who would say today, ‘houses always go up in price.’ Or that ‘you can’t lose in property.’ People know it doesn’t work like that. Many speculators and homeowners alike have lost big. They’ll remember it.

Still, while the lesson has been taught…it probably has not been thoroughly learned. Many people still look for the bottom of the property bear market. They think the bottom will come soon…and that they will be able to profit from another big move up. This is not the sort of thinking you get at the real bottom. It’s the sort of thinking you get at false bottoms on the way down. It’s the sort of illusion that needs to be beaten out of people by successive waves of disappointment.

Here’s what will happen: Prices will seem to stabilize. Hopeful speculators will begin to buy property again, counting on capital gains. Then, either property prices will fall again…or go nowhere. Eventually, the illusion will disappear. People will cease looking at houses as anything more than very durable consumer items, which cost money to maintain and never reward their owners with anything more than a roof over their heads and a place to keep their collections of Playboy magazines and Cabbage Patch dolls.

But in stocks – and in economics – the illusions of the bubble era have barely been dented. Okay…stocks were involved in a major fender- bender a few months ago. Investors realized that profits weren’t guaranteed…and weren’t steady. But they knew that already. That was the lesson of the downturn in 2001-2002. What they took from that earlier experience was that even though stocks go down – and may go down sharply – if you keep your nerve you can still do quite well. We can’t remember the figures exactly, but it seems to us that if you had bought at the bottom in ‘02 and held for the next 5 years you could have almost doubled your money. And if you had been lucky enough to buy Google (we advised against it…) you could have done far better.

So stock market investors know there is some risk. But they still believe that you can make money by buying the dips…even the big dips. This strategy works in a bull market. It is murder in a bear market. In a major bear market, the investor comes back into the market after a dip…only to find himself in a bigger dip later on. He does this a few times and finally realizes that he is the biggest dip of all. Then, when stocks have gotten down to their major lows – at price to earnings ratios of about 5 or 8 – he is fed up. His illusions have all died in the bear traps. He’s ready to give up on stocks altogether.

Of course, that was the infamous message of the BusinessWeek cover of August 1982, which proclaimed “The Death of Equities.” BW, speaking for the great mass of disillusioned investors, had thrown in the towel.

We are far from there now. No major journal has run an obituary of the stock market. Instead, the question is ‘how much further will this rally last?’ Some think it is already exhausted. Others think it will last forever. But everyone’s thinking about it – and it’s not the sort of thinking that happens at a real bottom. At a real bottom, people have given up thinking about stocks. The illusion that stocks always go up over the long term is replaced by a new illusion – that they never go up at all!

But is it in the economic area where the illusions are most intact. Miraculously, or perhaps just stupidly, people still have faith in the economics profession…and in the economists who steer the world’s major economies. It doesn’t seem to bother them that these are the same people who failed the critical test. When the tsunami approached in the spring of ‘07…these lookouts didn’t see it.

Today, the whole world economy is underwater and the same economists who failed the critical test are manning the pumps. What makes anyone think they know what they are doing? On the surface of it their plan is absurd. Commerce, industry and households drown in a sea of debt; these fellows throw them a bucket of water. Asked to explain themselves, they resort to voodoo economics. “If we give Wall Street a lot of taxpayer money they will feel more like lending to households. That will bring a recovery,” they say. “And oh yes, we’ll give money to automakers who couldn’t make it on their own, too.”

The feds are spending trillions – buying up trillions worth of Wall Street’s mistakes…bailing out failed banks, insurance firms and even automobile companies…subsidizing borrowers…and realizing their own boondoggle projects.

If Ben Bernanke were a teenaged girl, his name would be written on every public bathroom wall in town.

“Where does the money come from?” we ask.

“Oh…it comes from lenders…” say the fed economists, “and if we don’t get enough from lenders, we will print up the rest. The important thing is that business has enough money to keep doing what it is doing.”

“Isn’t it losing money?”

“Well…yes…but only because people aren’t buying enough.”

“Aren’t they saving rather than buying because they saw what happened the last time you told them they didn’t need to save? “

“Well…maybe…but now they are gumming up the economy by sitting on idle capital. We need to put it to use.”

“Is that what you call paying bankers’ bonuses?”

“Look, if we don’t support the banks, they will collapse…and then the whole financial system will come down on our heads.”

“But isn’t a mismanaged bank supposed to collapse?”

As you can see as well as we can, this conversation is a waste of time. The cornerstone illusion is never even addressed. And people never even question it.

The meddlers claim that their central planning will do a better job of directing the economy than free people will do on their own. Instead of letting honest lenders and borrowers set interest rates, for example, the interveners set them – much lower than they would otherwise probably be (we don’t really know…we never get a chance to find out)… Rather than let companies fail in the open market, the feds prop them up. “They’re too big to fail,” they say. And rather than let people spend their own money according to their own preferences, the feds borrow trillions of it – on the pretext that only Treasury bonds are safe – while simultaneously undermining the value of the dollar through excess debt and excess currency creation.

The illusion is so big we scarcely see it – that a global economy with billion of participants, speaking hundreds of different languages in more than a hundred different countries and 24 different time zones…can be successfully ‘managed’ by a group of mountebanks who missed the biggest financial event in history.

That illusion will take a long time to be crushed. In the meantime, inflation is likely to go up and share prices are likely to go down.

Just watch!

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[Rude Endnote: Markets elsewhere traded sporadically after mixed signals from Wall Street yesterday. Japan’s Nikkei 225, for example, slipped another 1.4% after yesterday’s selloff. The Aussie All Ords fell slightly while Hong Kong’s Hang Seng managed a 0.4% gain for the session.

Europes main measures were up solidly last we checked. London’s FTSE had registered a 0.7% gain while France’s CAC and Germany’s DAX were higher by 0.9% and 1.2% respectively.

Over in the commodity pits, gold continued itd downward spiral. The yellow metal made fresh two-month lows yesterday and trades for about $913 per shiny ounce as we type. Crude gain a buck after its slide and sits this morning just over $61 per barrel.

Speaking of “barrels,” your out of practice, editor did non manage to score one today, despite surfing the famous Kuta Reef until his arms nearly fell off. We’ll try harder tomorrow (for the reader, of course), and let you now how it goes.

Until then…

Cheers,

Joel Bowman

The Rude Awakening
aussiejoel@the-rude-awakening.com