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DeLeveraging

Simultaneous De-Leveraging?

Jul 2nd, 2010
by admin.
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Here’s a thought. The G20 meeting ended with a call to reduce deficits. The Obama team, on the other hand, warned that cutting deficits might undermine a very fragile recovery.

There seems to be no understanding of what is really going on. We are in a spell of debt de-leveraging in the private sector. There is no way to make the problem disappear. The only real question is who will bear the losses. We’ve seen what happened in Japan. That’s the alternative that most economists are urging (only they claim that this time the stimulus will work…if we keep at it).

But what if governments really take the path signaled by the G20? What if they cut spending? What then?

Well, then you’d have de-leveraging in the private sector. And de-leveraging in the public sector. At the same time. There would probably be hell to pay for a while. But it would at least cure the real problem rather than just disguising the losses and collectivizing the costs.

But don’t worry, dear reader. There is almost no chance that governments will follow through on their promises to de-leverage. Instead, they will reduce the rate at which they are adding debt. The private sector will continue to de-leverage. Government ‘austerity’ measures will be blamed.

And then? Well…who knows? But that’s probably when the printing presses get turned on…and gold enters the third and final stage of its bull market.

Stay tuned.

Regards,

Bill Bonner
for The Daily Reckoning

Simultaneous De-Leveraging? originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”


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gold

Economic Stimulus Can’t Stop De-Leveraging

Jun 24th, 2010
by admin.
No comments yet

You say yes, I say no
You say stop and I say go, go, go
Oh, no
– The Beatles

We keep saying the same thing here at The Daily Reckoning. Not because we lack imagination… It’s because things are still the same.

“Outlook for home prices grows darker,” says The Wall Street Journal.

Well, yes. Much darker. Bloomberg:

Sales of US New Houses Plunge to Record Low as Credit Ends

June 23 (Bloomberg) – Purchases of US new homes fell in May to the lowest level on record after a tax credit expired, showing the market remains dependent on government support.

Sales collapsed an unprecedented 33 percent from April to an annual pace of 300,000, less than the median estimate of economists surveyed by Bloomberg News and the fewest in data going back to 1963, figures from the Commerce Department showed today in Washington. Demand in prior months was revised down.

Exceeds Drop Projected

Sales were projected to drop 19 percent to a 410,000 annual pace, according to the median estimate of 76 economists surveyed. Forecasts ranged from 300,000 to 530,000. The government revised April’s purchase rate down to 446,000 from a previously reported 504,000.

Hey, what happened to that trillion worth of stimulus spending, guarantees and bailouts? We said it wouldn’t work from the get-go. They said ‘yes, it will.’ We said ‘no, it won’t.’ Can we have our money back?

Last week’s report showed that used or existing houses were not selling. Now we find that new houses are selling even worse. The tax credit doesn’t really expire until the end of this month. But you can’t build a new house in 4 weeks, so the May new house data reflects the end of the credit.

You’ve heard the expression, ‘bad money after good’? Well, stimulus money was bad money from the beginning. It headed down the drain the minute it left the bank. Trillions of dollars wasted. And for what?

That’s the interesting thing. The feds couldn’t really stop the process of de-leveraging. They could make-believe…with federal spending projects that looked a little like real work…and handouts that looked like real income.

But all they could really do was rob Peter to pay off Paul…or rip off them both with debts they couldn’t pay and phony money they couldn’t back with anything real.

All they did was make sure some people were hurt worse than others. Shareholders, for example, lost trillions as stocks fell. The market has recovered much of the loss, but US stock market investors are still out more than trillion. Homeowners lost big, too. Clip 20% to 50% off the value of America’s housing stock and you’ve erased as much as trillion. We don’t know yet. The housing market moves slowly. It discovers what things are worth…but only by fits and starts.

After the latest housing news, our guess is that house buyers are going to squeeze their nickels even harder. And house sellers are going to be even more desperate. Between the reluctance of the buyers and the eagerness of the sellers, house prices will probably come down another 10% to 20% – maybe more – before they finally reach bottom.

But thanks to the generosity or stupidity of the US government, bondholders have done pretty well. Instead of letting the whole capital structure collapse, so that it might be rebuilt on a more solid foundation, the feds bailed out the bondholders…who just happen to be very cozy with Wall Streets big banks and federal authorities.

Then, of course, the feds congratulated themselves. They avoided a disaster. They saved the world. They brought the world economy back from the brink of catastrophe. At least that is how they and the press spun the story.

For our part, we would have preferred to see the whole thing go over the edge. Not that we know what kind of catastrophe would have resulted. But we wanted to find out. And whatever it was, we doubt that it would have cost trillion.

In fact, the price would have probably been only a fraction of that amount… For every bondholder who would have taken a loss there was a debtor somewhere who would have been relieved of a burden he couldn’t pay. In the present case, the debtor was relieved of his burden. The feds took it over from him. Now, it’s on all our backs!

Bill Bonner
for The Daily Reckoning

Economic Stimulus Can’t Stop De-Leveraging originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”


Daily Reckoning
gold

Economic Stimulus Can Stop De-Leveraging

Jun 24th, 2010
by admin.
No comments yet

You say yes, I say no
You say stop and I say go, go, go
Oh, no
– The Beatles

We keep saying the same thing here at The Daily Reckoning. Not because we lack imagination… It’s because things are still the same.

“Outlook for home prices grows darker,” says The Wall Street Journal.

Well, yes. Much darker. Bloomberg:

Sales of US New Houses Plunge to Record Low as Credit Ends

June 23 (Bloomberg) – Purchases of US new homes fell in May to the lowest level on record after a tax credit expired, showing the market remains dependent on government support.

Sales collapsed an unprecedented 33 percent from April to an annual pace of 300,000, less than the median estimate of economists surveyed by Bloomberg News and the fewest in data going back to 1963, figures from the Commerce Department showed today in Washington. Demand in prior months was revised down.

Exceeds Drop Projected

Sales were projected to drop 19 percent to a 410,000 annual pace, according to the median estimate of 76 economists surveyed. Forecasts ranged from 300,000 to 530,000. The government revised April’s purchase rate down to 446,000 from a previously reported 504,000.

Hey, what happened to that trillion worth of stimulus spending, guarantees and bailouts? We said it wouldn’t work from the get-go. They said ‘yes, it will.’ We said ‘no, it won’t.’ Can we have our money back?

Last week’s report showed that used or existing houses were not selling. Now we find that new houses are selling even worse. The tax credit doesn’t really expire until the end of this month. But you can’t build a new house in 4 weeks, so the May new house data reflects the end of the credit.

You’ve heard the expression, ‘bad money after good’? Well, stimulus money was bad money from the beginning. It headed down the drain the minute it left the bank. Trillions of dollars wasted. And for what?

That’s the interesting thing. The feds couldn’t really stop the process of de-leveraging. They could make-believe…with federal spending projects that looked a little like real work…and handouts that looked like real income.

But all they could really do was rob Peter to pay off Paul…or rip off them both with debts they couldn’t pay and phony money they couldn’t back with anything real.

All they did was make sure some people were hurt worse than others. Shareholders, for example, lost trillions as stocks fell. The market has recovered much of the loss, but US stock market investors are still out more than trillion. Homeowners lost big, too. Clip 20% to 50% off the value of America’s housing stock and you’ve erased as much as trillion. We don’t know yet. The housing market moves slowly. It discovers what things are worth…but only by fits and starts.

After the latest housing news, our guess is that house buyers are going to squeeze their nickels even harder. And house sellers are going to be even more desperate. Between the reluctance of the buyers and the eagerness of the sellers, house prices will probably come down another 10% to 20% – maybe more – before they finally reach bottom.

But thanks to the generosity or stupidity of the US government, bondholders have done pretty well. Instead of letting the whole capital structure collapse, so that it might be rebuilt on a more solid foundation, the feds bailed out the bondholders…who just happen to be very cozy with Wall Streets big banks and federal authorities.

Then, of course, the feds congratulated themselves. They avoided a disaster. They saved the world. They brought the world economy back from the brink of catastrophe. At least that is how they and the press spun the story.

For our part, we would have preferred to see the whole thing go over the edge. Not that we know what kind of catastrophe would have resulted. But we wanted to find out. And whatever it was, we doubt that it would have cost trillion.

In fact, the price would have probably been only a fraction of that amount… For every bondholder who would have taken a loss there was a debtor somewhere who would have been relieved of a burden he couldn’t pay. In the present case, the debtor was relieved of his burden. The feds took it over from him. Now, it’s on all our backs!

Bill Bonner
for The Daily Reckoning

Economic Stimulus Can Stop De-Leveraging originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”


Daily Reckoning
gold

Combatting Debt in the Age of De-Leveraging

Jun 2nd, 2010
by admin.
No comments yet

Gold is still getting up. Hemlines are going down. That’s all you need to know.

Gold rose toward ,230 yesterday. Why? Reports said investors were worried about Europe.

Well…yes…Europe…and Asia…and North America…

The problem in the world economy is debt. There’s too much of it. Investors who aren’t delusional know that too much debt spells trouble. And when government adds more debt it’s not really going to make things better. It’s going to make them worse.

What kind of trouble will it cause?

Well, that’s what we’re going to find out.

Inflation…deflation…bankruptcies…defaults…bear markets…our guess is that we’re going to see it all. But not necessarily in that order.

Gold buyers are stocking up on insurance against trouble. They’re using GLD – a gold ETF – as a kind of “people’s central bank.” It’s a way of maintaining do-it-yourself monetary reserves.

The private sector is now de-leveraging – getting itself out of debt. Banks are building up their own reserves. Corporations are cutting spending and beefing up profit margins. Households are cutting back too. Everybody wants reserves.

But reserves take money out of the active economy…causing the symptoms that are so disturbing to economists and politicians – unemployment, bear markets, and deflation.

Doesn’t bother us. We like corrections. They wipe away mistakes and set the stage for new growth. And as near as we can tell everything is still happening as it should. The private sector went too far into debt. Now, it’s straightening itself up.

We were puzzled when savings rates declined earlier this year. It looked like our de-leveraging hypothesis might be wrong after all. But why shouldn’t savings go down. Consumers are probably as confused as Nobel prize-winning economists, Fed chairmen and the US Treasury Secretary. They probably thought the economy really was recovering. So why not spend?

But then, the savings rates rose again…and de-leveraging was back on course.

The next problem is in the public sector. As expected, governments reacted to the debt problem by going deeper into debt! And now, they’re in trouble too.

Small sovereign governments…as well as state governments – have already begun to de-leverage too. The bond market told them to cut back; who were they to argue?

Meanwhile, investors who are paying attention are selling. Alan Abelson reports that the smart money is getting out of stocks. Insiders are selling 3,933 shares for every one they buy, he says. This sends stocks lower too. Yesterday saw another 112-point drop in the Dow, for example.

But investors should be more careful. When they dive into the bushes for cover, they roll right into the poison ivy. They try to protect themselves from stocks and Greek debt by buying US debt. They feel safe. For a while, they are safe. Then, they start to itch!

Bill Bonner
for The Daily Reckoning

Combatting Debt in the Age of De-Leveraging originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”


Daily Reckoning
gold