Agora Financial’s Rude Awakening

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London, England

• The ultimate contrarian indicator: Greenspan declares recovery,
• Gold goes ballistic…but beware the Roosevelt years ahead,
• The long, slow death of the dollar continues and more…

Joel Bowman, reporting from Taipei, Taiwan…

Watching these markets is a bit like watching a game of Jenga, only the pieces are real economies, made up of real companies that employ real people…none of whom are particularly well equipped to suffer a fall from great heights.

But still the blocks come out from the foundation…and still the tower grows higher.

Under the spellbinding influence of recovery rhetoric, investors again piled into equities last week. The Dow Jones Industrial Average had grown 4% by Friday’s close. The 500 companies averaged by the S&P index did even better, finishing the week higher by 4.5%.

How long can they use fragments from the foundation to build higher the spire? The Feds can keep the illusion running for a while, but the structure grows more fragile with every passing day. We wouldn’t hold our breath…but we wouldn’t breathe too hard either. Having retraced over 50% of their initial selloff, stocks look mighty wobbly any way you dice them.

“If the bullish investors on Wall Street are too optimistic,” Eric Fry observed in this space last week, “it would not be the first time. Investors are prone to excess, both on the upside and on the downside. We cannot say that today’s upside is excessive, only that it is without any fundamental underpinnings.

“Stocks are trading at 19 times FALLING earnings,” Eric continued, “and there’s very little indication that earnings will improve – much less, accelerate – any time soon.”

Meanwhile, it is the gold/dollar story that has everybody in a real frenzy at the moment. The yellow metal is forging ahead. The greenback is taking a beating. A few more months of this kind of punishment and they’ll have to have a closed coffin service for the world’s reserve currency. By then, not even a founding father will be able to love its beaten mug.

Only two weeks ago, just after the G20 shindig in Pittsburgh, Timothy Geithener reiterated Washington’s “commitment to a strong dollar.” Then, last week, The Independent ran an article claiming that certain countries – China, Russia, some OPEC nations – were looking to ditch the greenback as their currency of crude trade. The news cleared the dollar store like a cigarette clears a room of pregnant women. Evidently, the word of the Treasury Secretary of the United States is worth nothing next to a few – later discredited – inches in an English newspaper.

Fearing the game may finally be up, investors – both man- and country-sized – are looking for a way to “get out of the dollar.” Many have bought gold. The metal crashed through resistance barriers like a prizefighter punching through wet napkins last week. $1,020…$1,030…$1,040…$1,050…

In the column that follows, Bill Bonner raises a few questions about the foundations of any recovery and the future of the world’s reserve currency. Please enjoy…

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Chronic Depression
By Bill Bonner

Last week, the Australian central bank became the first to declare victory. It raised its key lending rate 0.25% and gave a whoop…signaling an end to the slump. The European Central Bank fidgeted and vaguely threatened to raise rates too. But the Americans stayed in their trenches. New York Fed governor Bill Dudley said that even though the economy is recovering, any rate hikes in the United States would be over his dead body.

Then, word came that even Alan Greenspan thinks a recovery is underway.

“This is what a recovery looks like,” said the maestro. That settled the matter as far as we are concerned. Alan Greenspan didn’t see history’s biggest financial bubble until it exploded in his face. In the following few words we undertake to show that Greenspan is as blind as ever.

“Great time for US consumers, America is on sale,” says an item at YahooFinance. The “discounts are unbelievable,” adds a blogger known as Frugal Rhode Island Momma. All across the nation, merchants are no longer selling the merits of their products; they’re selling price. McDonald’s advertises its “dollar meals.” Hotels have cut room prices by 20% in the last year. House prices are down about 30% since 2006. Sellers are offering bargains and they want buyers to know it. “Sold for $365,000 in 2006. Now $195,000,” says a typical house ad.

Foreigners have noticed too. Colleagues in London say they are thinking of moving to Florida where they will get far more for their money. The dollar falls; foreign purchases go up. Stocks, for example. In the first quarter, foreigners were unloading US shares. Now they’re buying more than $100 billion worth per month.

It is a deflationary world, at least that part of the world between the Rio Grande and the 49th parallel. The CPI in the United States is negative and falling faster than at any time in 59 years. Households can only be induced to spend money by cutting prices. “Cash for Clunkers” cut prices on new cars by about 20%. As soon as it ended, so did auto sales. Most new house sales could be traced to a tax credit – which reduced the down payment by at least 20%. That program is scheduled to end in November.

And now, the White House frets about jobs. Unemployment is supposed to be a lagging indicator, but this time it seems to have dropped out of the race all together. Still, Congressional elections are coming up. Unemployed voters are surly and unreliable. So, the Obama administration is considering a $3,000 tax credit to bribe businesses to hire them. If the typical employee costs his firm about $40,000, this effectively reduces the cost of labor by 7.5%.

It’s beginning to look more and more like the Roosevelt years. By the end of this year, all the jobs created during the bubble era – 2002- 2007 – will have been eliminated, making it the first decade with no job growth since the ’30s. We’re expecting a fireside chat any day.

Typically big businesses cut workers in a recession. Then, when the economy recovers, small businesses are quick to take them back. But this is unlike the typical post-war recession. This time, deprived of capital as well as customers, small businesses don’t have a chance. Neither does a genuine recovery.

The authorities still do not understand what is going on. They are used to fooling most of the people most of the time. They think they can dupe them again – with bailouts and boondoggles. But real demand has vanished as households try to pay down their debt. That is not going to change anytime soon. Not while the federal government is sabotaging a genuine recovery. It’s savings – capital – the US economy needs. A capitalist economy in which the capitalist have no capital won’t work. Why is there no capital? Because the feds take it.

Supplying cash-for-this and cash-for-that is an expensive proposition, especially when tax receipts are falling. The money has to come from somewhere. As it turns out, the feds borrow it from the very people who are trying to rebuild their personal balance sheets. Of the $1.6 trillion the US government will borrow this year, the biggest single lender is the private sector, chipping in $700 billion. But instead of being put to use in a way that might stimulate a real recovery – providing credit for small business and consumers – it is taken up by the US government and then frittered away.

The banks are happy to play the government’s game too. They can borrow overnight money from the Fed at only one quarter of 1%, annualized. But lending to small business is hard work. And it is risky. Why bother? The US Treasury will pay them 4 % for lending back to the government, long term. This is practically free money to the banks. Both the bankers and politicians end up ahead – with a bigger piece of the economy under their control.

Meanwhile, the real economy staggers. “Drought of credit hampers recovery,” summarizes The Wall Street Journal. The United States needs to create a million and a half new jobs each year just to keep up with population growth. Currently there are 15 million people without jobs already…and a couple hundred thousand more unemployed every month. And if this recovery continues long enough there won’t be a single person left in America who still has a job.

Even if the economy could be stabilized, it will leave millions without jobs – more or less permanently. Add the people working reduced hours, and those who have been looking for work so long they are no longer counted, and their families, and you have a quarter of the population without money to spend. That’s why this slump is not going away any time soon. As in Japan in the ’90s, we may have to live with this depression for the rest of our lives.

Joel’s Note: Word came in over the weekend that the updated, second edition of Bill and Addison’s book, Empire of Debt: the Rise of an Epic Financial Crisis, was back atop the Amazon bestsellers list. Could it be that people are beginning to wonder about the foundations of the Great American Jenga Economy? One can only hope. You can grab a copy yourself for a nice little discount right here.

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[Rude Endnote: Don’t forget, this is the last week we will be publishing our daily missives in this space. From next Monday, October 19 onwards, you ca catch us over at The Daily Reckoning. To ensure you don’t miss a single issue, sign up free here.

Until tomorrow…

Cheers,

Joel Bowman

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