Author: Bill Bonner

What’s dead now? Hmmm…

What’s so dead it’s beginning to stink? The only thing we can think of is Japanese stocks. Every time we mention them, dear readers write to ask if we’ve lost our mind. The Japanese are growing old. They are up against not just a retirement crisis; they face extinction. They are not just figuratively dead…but literally dead. The government is headed toward monster debts…with no way to finance them. Already, they borrow more than a dollar for every dollar of tax receipts. Besides, the Chinese work cheaper. And the Chinese have the same technology…and the same access to capital…and a much bigger market.

As if to prove that Japan is dead, Toyota seems to have fouled up its accelerator mechanism. According to press reports, some Toyota automobiles go faster and faster even when you tell them not to. Drivers do not like that kind of insubordination. Only vulture lawyers do. So Toyota has had to shut down its assembly lines in order to mitigate the damages. So investors took a whack at Toyota shares yesterday; they fell 9%.

Is it the end of the road for Toyota…and for Japan?

Probably not. But we wait to see what happens…just like everyone else.

Bill Bonner
for The Daily Reckoning Australia

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Now, here’s some good news:

“US cattle herd falls to ’58 levels.”

That’s good news because it means that maybe we’ll be able to make some money from our scrawny ‘sand fed’ cows in Argentina. We bought the farm down there 4 years ago. Then, we had about 1,000 head. But we called in an expert – a tall, good-looking blond fellow named Juan Anderson. He told us to reduce the number of cows so they’d get enough to eat in our desert pastures. Now we’re down to 600 cows. That leaves us with a crew of 7 gauchos with not enough work to do. So we’re planting grapevines and walnut trees. Plus, we’re going to build a masterpiece – a cottage of stone and adobe, with solar heating and a vaulted roof. But that project is for the future…stay tuned. In the meantime, we’re trying to keep the gauchos busy…and hold down the losses.

Is this a good business model? Of course not. It’s a hobby.

But there must be millions of hobby/businesses all over the world – marginal enterprises…struggling…barely making ends meet.

“Everything happens at the margin,” said Keynes. A big, well-funded business, especially one with the government behind it, has the resources to survive a downturn. Even our little hobby business in Argentina can limp along for a few years – or until we go broke – whichever comes first. But there must be millions of other small entrepreneurs who are already at the end of their ropes. They can’t get financing from banks. And they’ve run out of their own money. Every month the depression continues, more of these marginal businessmen must give up.

We have no statistics on this. Many of these small business people are not on the employment roles. They’re entrepreneurs, not employees. So they don’t get laid off…and don’t get counted in the jobless figures; they never had jobs in the first place.

The official jobless numbers tell us that 10% of the workforce is unemployed. But here at The Daily Reckoning mobile headquarters, we don’t believe any statistic…unless we twisted it ourselves. Even then, we have our doubts. What seems likely is that the number of people counted as ‘jobless’ understates the number of people who are not earning money the way they used to. That’s why tax receipts are down…and why so many states are going broke.

Likewise, the latest statistics on housing were mixed – one up, one down. And now comes news that the number of used houses sold in December was disappointing – down 7.6% from a year before. The Washington Post says a housing recovery could take a decade. They’re optimists at the Post. Most likely, there will be no recovery to Bubble-Era levels in our lifetimes.

Of course, that is not what the President of the United States of America thinks. He believes a recovery is underway…and that he can now take action to reduce the feds’ stimulus. He’s announced a partial spending freeze. This spending freeze is not exactly glacial. It’s more like a spending breeze. Over the next 10 years it’s expected to trim $250 billion from federal spending. Yet, the budget deficit for this year alone is $1.35 trillion. The cuts are negligible, in other words.

Just as we expected. The feds can talk the talk. But they can’t walk the walk. Instead, they stumble from one error to a bigger one. From inciting a credit riot in the private sector…they’ve moved on to instigating a credit revolution in the public sector. When it is finally over…many nations will be broke…and the dollar will be worth a fraction of what it is worth today. What else could possibly happen? Well, nothing that we can see now. But there are always surprises, aren’t there?

Most economists think the recession is over. And more investors think there is a bull market on Wall Street, and they expect it to continue. They are all going to be surprised. We are in a depression. It will cause stocks to fall again…probably pushing below their lows of March ’09, down to the final bottom.

How can we be so sure? Well, we’re not sure of anything. It’s just an educated guess. Markets tend to oscillate between fear and greed over long periods of time. In the greed stage, credit generally expands. In the fear stage, it contracts. Obviously, there’s a lot more to it than that. But people are -grosso modo – either optimistic and expansive or they are depressed and hunched over. When they are optimistic, asset prices rise…because they expect everything to get better. When they are depressed, asset prices fall…because they can’t imagine that things will ever get better.

That’s why August 1982 was such a great opportunity. BusinessWeek announced that the outlook for stocks was so bad it was the “Death of Equities.” Death is about as bad as it gets. It couldn’t get worse. So, it got better – a lot better, with stocks up 11 times over the next 20 years.

Then at the end of the ’90s, a similar announcement was made about gold. We can’t remember the source; perhaps it was Newsweek Magazine that pronounced gold ‘dead’ as an asset class. Then, what do you know? Gold rose from the dead and outperformed stocks by five to one.

Regards,

Bill Bonner
for The Daily Reckoning Australia

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Poor Tim Geithner. He’s got to appear before Congress and explain how come the US bailed out AIG by paying off its counterparties at par. You’d think everyone involved should have taken a haircut on that deal. But the only ones to get scalped were those who had nothing to do with it – the taxpayers.

Why, Tim?

Of course, the Secretary of the Treasury will have answers. He’s been rehearsing them for weeks. He’ll explain that the integrity of the system was at stake…etc…etc… Blah…blah.

The real reason was that the authorities have a different agenda. They have no idea how an economy really works. So, they merely react to the incentives laid before them. On the one hand, the taxpayers may be annoyed…but the common man will never really understand what went on. On the other hand, Goldman Sachs pays its top operatives very well…and Tim Geithner is still a young man. He’s going to need another job, after his term at the Treasury is up. And the way it’s going, his boss may only have three years left…not 7.

Goldman had a lot of money at stake in AIG. And why not bail it out? Wouldn’t that be good for the economy? Wouldn’t it help protect investors’ confidence? Wouldn’t everyone be better off as a result?

Of course they would, Tim. Of course they would…

The British economy finally pulled out of the worst recession in 50 years. At least, that’s what the government claims and the papers report. GDP growth was positive in the last quarter of 2009. By exactly 0.1%.

This was such a poor showing that the pound fell on the news. And given the way governments track GDP it is hardly proof of anything. A number that close to zero is meaningless. It could end up being revised in either direction.

The real story in Britain is the same as in the US…only worse. Britain’s economy boomed when London’s financial industry boomed. If we’re right…the financial industry is now in a downturn that will last for decades. Not since the ’40s has there been such a decline in consumer and business credit. And when this de-leveraging cycle finally bottoms out, it could be many years in the future. Then, the new center of world finance will probably be in a different city – perhaps in Singapore.

Regards,

Bill Bonner
for The Daily Reckoning Australia

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Good news and bad news. But which is which? The situation is so confused, we can’t tell.

The good news is that housing prices are going down. That’s what The Wall Street Journal says. “Home prices declined in November.” Good. People will be able to find more affordable housing.

Wait. That’s not good news, is it? Doesn’t that mean we’re still in a depression? Besides, another report says housing is going up. What to believe?

Let’s try something else… Consumer confidence rose in the latest reporting period. No argument there…

Now, that’s definitely good news, right? Nope. The better things get the more likely the feds are to clamp down on the recovery by “exiting” their stimulus efforts and reducing the deficit. That’s part of the reason stocks often decline when the news is “good” and go up when it is “bad.” Investors are afraid the feds will take away the juice. That would risk a return of the “error of ’37,”…say economists such as Paul Krugman and Richard Koo. Ignoring the calendar a bit…it would turn our president into “Herbert Hoover” Obama, as one commentator suggested.

What happened in the ’30s? Well, in the approved storyline, the feds had their stimulus foot to the floorboards…and they were happily driving right out of the depression. But fearing inflation…deficits…and a backlash against excessive spending (and believing that they were clear of the bad neighborhood) – they slowed down…they eased off their stimulus efforts in the mid-’30s. This sent the economy into another downturn and stretched the depression out for another 3 years.

It’s nonsense. What really caused the relapse of ’37 was the feds’ own meddling. But that’s not the way mainstream economists and analysts look at it. In their cockamamie view, an economy grows thanks to the good stewardship of publicly elected officials. In their view, government spending is actually BETTER than private spending. Why? Because it produces nothing of value. Really; we’re not making this up. And so what if the government doesn’t have any money? To them, money that doesn’t exist – created ‘out of thin air,’ as Keynes put it – is BETTER than real money. Because it creates consumer price inflation. Up is down. Good is bad. Better is worse. In their view, what makes a strong economy is government action. Specifically, government spending. So, anything that might incline the feds to spend less is BAD news.

According to the papers, there’s some bad news coming. ‘Cause Mr. President is going to tell the nation in his State of the Union address that it’s time to put on the brakes. If we don’t, people will get the impression that government spending is out of control. We can’t have that. Because lenders might refuse to lend. Investors might refuse to invest. Voters might refuse to vote for the scalawags now in office.

On the other hand, if the Prez really does cut spending, none of the aforementioned are likely to be very happy about it. Federal spending doesn’t really make people richer; it makes them poorer. Still, appearances are what really matter. Dim economists want a president who puts into action their loopy theories. And dim voters want a president who takes action to save them from their own mistakes…especially when it means getting their hands on someone else’s money.

The stimulus offered by government spending is phony. But it appears real to the masses. Take it away and the economic consequences will appear very real too. The ‘creative destruction’ of the market will finally get to express itself. Businesses that should fail will fail. Speculators who ought to lose money will lose money. There will be blood, in other words.

Like most people, we don’t mind a little blood…as long as it’s not our own. So you can imagine how the parasites will howl when they see the knife draw near to their own arteries!

They can relax. The feds are not likely to reduce spending significantly. The deficits are structural…they’re built-in to the system…they won’t go away.

And as the depression lingers, the debt piles up…

What will happen? We don’t know. We can’t look into the future. But we can look at Japan…a country that is at least 10 years ahead of us.

Why is Japan ten years ahead? Because its stock market turned down in 1989…a decade ahead of Wall Street. And because its population is about 10 years older. And because it’s been fighting the de-leveraging process for 20 years. What can we learn? Here’s the latest from the WSJ, warning of an explosion:

“S&P lowers Japan’s outlook to negative.”

Uh oh. Not too encouraging. The rating agency told Japan that if it didn’t cut its deficits its debts would be downgraded.

Ah yes… Thanks to the Japanese, we get to see someone cross the minefield ahead of us. After 20 years, Japan hasn’t been able to get clear. But it hasn’t blown up completely, either.

But watch closely. It’s putting its feet down on some dangerous ground. Deficits have grown and grown and grown. Now, it risks an explosion with every step. This year, it will borrow $480 billion. It will receive only $405 billion in tax revenue. As far as we know, no major economy has ever run so far into the red without a blow-up.

And what can it do? They are getting the same sort of advice as Obama. They’re told they must cut the deficit to protect the currency…the economy…and the credit rating. But they’re also told that good is bad, or bad is good…that if they do the right thing – cutting the deficit – the economy will suffer. Tax revenues will fall further…widening the deficit!

The Japanese economy has become so dependent on debt-fueled government spending that, take it away and things fall apart. In the long run, that is exactly what should happen. The economy needs a shake-up…so it can rebuild on more solid foundations. But what politician wants to risk his own blood?

Bill Bonner
for The Daily Reckoning Australia

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Paris is not a bad place to be delayed for a few days. Yesterday, we went out for a drink at a bar in the “Marais” – once a swampy area…then the Jewish quarter…and now a very hip part of town. The bar was crowded and lively.

“My business was going well until last year,” said our friend, who rents apartments in Paris to visiting Americans. “But Americans aren’t coming to Paris anymore. It’s too expensive. No one has any money, I guess. My occupancy rate is way down.”

Americans who used to have their own pied a terre in the city are now settling for ‘fractionals.’ Instead of owning the whole apartment, they own a share of it.

“It’s actually a great deal,” explained our friend. “People only come for a month or two. They don’t need a whole apartment. And they don’t want the hassle of owning an apartment when they’re not there. This way, for about one fifth the price, they can get as much time as they actually want…and afford a much better apartment.”

Back at our own apartment, we’re happy to have some company. Our son Jules is working on his musical career, composing and performing songs. He just has to figure out how to market them.

And a pretty 23-year-old French woman has taken up residence in Edward’s room. Marie-Helene is a friend of the family. Last night, she was our audience as Jules and I performed a repertoire of songs by Willie Nelson, Hank Williams and Jules himself. After a rendition of “Your Cheatin’ Heart” we put the question to Marie-Helene.

“Have you ever heard that song?”

“Yes, but never quite like that.”

Regards,

Bill Bonner
for The Daily Reckoning Australia

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It’s gray, cold and snowy in Paris this morning. We were supposed to be on our way to warm India, but a change in visa procedures caught us off guard. Our passage to India will have to wait until next month.

And so we turn to our Daily Reckoning, as we do everyday. Our goal is not to make readers rich. Nor is it to win a Pulitzer Prize for financial journalism. No, we set much lower targets. We just don’t want the cleaning lady to be embarrassed to work for us. Even in that, we frequently fall short…

“Mr. Bonner… I spotted another split infinitive in the DR…” said Clara.

“I’m sorry,” was our response. “I will try to always do better.”

(Mistakes are inevitable. But, rather than try to catch them all, it’s probably easier to get a new cleaning lady. One who is not an intellectual.)

In the meantime, what a recovery! If the economy keeps recovering like this we’ll soon all be busted…

House sales are falling…unemployment is rising…and people are getting poorer!

The Dow rallied a piddly 23 points yesterday. Oil is selling for less than $75 this morning. Stocks are in trouble. As we said yesterday, this could be the beginning of the end for this bear market. We’ve seen the first leg down. We’ve seen the rally. We’re ready for the next big plunge.

Yesterday, the latest numbers on existing house sales for December came out. They were disappointing – nearly 17% lower than the year before.

Unemployment is still rising, as near as we can determine. It is rising for two reasons. Because we are in a depression. And, because the feds are trying to ‘do something about it.’

In this regard, we refer to three different phenomena. They are inter- related…they all show the same thing: an economy going downhill.

First, initial jobless claims surged last week…with 36,000 more claimants.

This also from Bloomberg:

“Employment dropped in 39 US states in December, seven more than in the prior month, indicating job losses were widespread.

“Payrolls in California showed the biggest decline, falling by 38,800 last month, according to figures issued today by the Labor Department in Washington. Texas followed with a 23,900 decline and Ohio was next with a 16,700 drop.

“With the national unemployment rate projected to average 10 percent this year, state budgets may continue to be strained by limited tax revenue and jobless insurance payments. While the pace of firings has eased over the last year, the time it is taking to find a job rose to a record 29.1 weeks in December.

“Employment is ‘still very weak, which is why we think the unemployment rate is going to continue to rise,’ Marisa Di Natale, a director at Moody’s Economy.com in West Chester, Pennsylvania, said before the report. ‘There are some states that are in pretty big trouble, fiscally speaking. 2010 is not going to be a good year.’

“The jobless rate in the US held at 10 percent in December, the Labor Department said on Jan. 8. A jump in the number of discouraged workers leaving the labor market kept the rate from rising…

“Employment in all 50 states dropped in 2009, with Wyoming, Nevada, Michigan and Arizona showing the biggest percentage decreases. The District of Columbia gained jobs, adding 6,200 in the 12 months to December.

“Nevada and West Virginia had the biggest increase in joblessness among states last year, each climbing 4.6 percentage points. Alabama was next with a 4.5-point gain, followed by Michigan’s 4.4-point increase.”

An analysis done by the AP shows that stimulus spending has no effect on employment. The AP looked at counties that got a lot of stimulus money to repair roads and bridges, and those that didn’t. They found no connection between the spending and employment rates.

Even we are a bit surprised. We knew that stimulus spending was a waste of money. But we figured the feds could force a little extra hiring here and there if they really put their minds to it. Apparently not… At least not on the scale of the present stimulus spending program.

Stating the finding a bit more broadly: stimulus spending doesn’t really stimulate at all. In fact, it retards. And then it debilitates…by taking capital out of productive uses and squandering it. Instead of leaving the private sector alone so that it can find new ways to put resources to work, the feds take the resources and waste them in the old-fashioned, unproductive ways. Result: money spent; no stimulus; people poorer.

Second, the Brookings Institution came out with a warning yesterday. It said 30% of the nation was either in poverty already or headed to it. The US is becoming like a ‘developing nation,’ said the report, with 39.1 million people living in poverty.

Many cities have already reached the 30% poverty rate – including Cleveland, Detroit, Youngstown, Buffalo, Syracuse, Dayton and Hartford, Connecticut. But poverty is increasing fastest in the suburbs, says the report.

We add a footnote. About 40 million Americans are also living on food stamps – a new record.

Third, while the feds take money away from productive enterprises and honest savers, they also encourage people NOT to work. How is this possible? Alan Reynolds, writing in The New York Post last month, explained how the feds had probably added two points to the unemployment rate simply by stretching unemployment benefits from the traditional 26 weeks to the current 79 weeks.

“When you subsidize something, you get more of it…” he writes.

That is how the feds operate. They punish success and reward failure. If a man is lucky enough to get a good job and earn a lot of money, the feds tax it away from him. If he fails to find a job, on the other hand, they give him money. The longer he stays unemployed, the more money they give him.

If a banker runs his bank well, he gets nothing but trouble from the feds…paperwork, bureaucracy, pettifogging regulations. But if he runs it badly, he gets billions of dollars worth of bailouts.

If an automaker takes the best business in the world and runs it into the ground, he gets the support of the federal government. If he runs his business well, he gets nothing but headaches.

The feds’ recovery program pays for failure. Naturally, they get a lot of it.

Breaking News: Expert researcher reveals urgent, once-in-a-generation market opportunity…

Ben Bernanke seems to be sailing to another term as the nation’s chief central banker. Obama gave him a big push. When it looked like that might not be enough, Tim Geithner tried blackmail.

Failure to return Bernanke to the Fed could cause market instability, he told the Senators.

These poor dumbos…all of them. Larry Summers, Ben Bernanke, Tim Geither…Barack Obama…and all the House and the Senate (the only exception we know of is our old friend Ron Paul)…

..None of them has a clue. They warned Congress in September ’09 that the world would come to an end unless Wall Street was bailed out. They got their way. Wall Street was bailed out; and the world didn’t come to an end. So, they must have been right about it.

None of them knows what is going on. And none of them has any interest in finding out. When it comes to the feds, ignorance pays.

Who wants a Fed chief who admits the truth?

“I’m sorry,” Bernanke should tell a televised joint session of Congress. “Our economy is de-leveraging. There is nothing we can do except get out of the way.

“If we bail out failed enterprises, we will have more failed enterprises.

“If we pay people not to work, we will have more people not working.

“If we provide more credit, we will have even more debt.

“If the government uses more resources, the private sector will have fewer resources.

“Forget it. There’s no way out. So, let’s stop all this gimcrackery. Let’s back off and let the markets do their work: let failed companies go broke…let homeowners who can’t pay their mortgages lose their houses…let speculators lose money…let the chips fall where they may, so that the next generation of entrepreneurs can pick them up and make something with them. Let it be.”

Mr. Bernanke would be lucky to make it out of the Capitol alive.

Bill Bonner
for The Daily Reckoning Australia

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The yen is falling. It’s down 5% against the dollar since November. Investors are finally noticing. With a deficit of 50% of GDP, the Japanese government walks where angels fear to tread. Americans aren’t far behind. To make a long story short, our money is on the angels.

Only an economist would dare to look 10 years ahead. Only a fool would put money on it. Today, we do both. But our new “Trade of the Decade,” is not so much a look into the future as it is a look at the past.

Ten years ago, your humble correspondent offered his first ‘Trade of the Decade.’ He should have stopped there, for the trade was a big success. It was a simpleton’s trade: Sell US stocks/buy gold. That was in the year 2000. At that time, US stocks had been going up for the previous 18 years, multiplying investors’ money 11 times. By then, stocks had been going up for so long that the memory of man ranneth not to the contrary. Investors’ imaginations saw no alternative. Stocks for the Long Run was the title of a popular book. It was also an investment formula that seemed unbeatable.

Alas, the formula proved beatable. It was time for stocks to go the other way. The first decade of the 21st century proved to be the worst time to hold stocks since the ’30s. Net returns were negative – especially when adjusted for inflation. Adjusted to the CPI, the Dow ended the decade down 40%.

The other side of the trade – the buy side – was just as simpleminded. Gold hit a high over $800 in 1980. Then, it slipped for the next 20 years. It didn’t come to rest until September 1999 at $260. That was the famous “Brown Bottom” in the yellow metal…when the then chancellor of the exchequer, Gordon Brown, sold Britain’s gold at the lowest price in two decades. (To bring readers up to date, now Mr. Brown applies his vision and energy to Britain’s economic recovery efforts.)

Gold is real money. But in the years when gold was being beaten down, other forms of money were running wild. Financial assets mushroomed all over the globe. A whole new ‘shadow banking’ system emerged…with new financial instruments, representing trillions…no, hundreds of trillions…of dollars. Prices on everything were soaring – equity, debt, real property. It did not take a genius to see that gold would have to catch up, sooner or later. As it turned out, no major asset class did better. Gold finished every single year higher than the year before. It doubled. Then, it doubled again.

What made the trade a success was neither clairvoyance nor omniscience; it was merely an observation known as ‘regression to the mean.’ The word ‘normal’ has been in the dictionary for a long time. It must be there for a reason. What it describes is where things tend to go when they’ve gotten out of whack. Regression to the mean is so powerful, no one escapes it. For every decade of walking around time, a person spends a million years dead. Over a century, practically every human regresses to the grave. So, what is so abnormal now that regression to the mean is as certain as death?

Almost all investments are expensive by most historical measures. But if all go down, what will they go down against? Money! That’s why real money – gold – is likely to go up again in the next 10 years. But gold is not cheap. It rose nearly 400% over the last 10 years and now is fairly priced. Gold in the treasure trove found in England last year is worth today about the same thing it was when it was buried 12 centuries ago. It cannot regress to the mean; it is already there.

On the buy side, we are looking for an investment that is despised…not one that is admired. And so, back to Japan, where equities peaked out in 1990 and have been going down ever since. While the Japanese government wanders among the stars, the private sector has dropped back to the ground. Or beneath it. Tokyo-listed stocks have lost 75% of their value, wiping out an entire generation worth of growth. Many Japanese companies sell for less than the value of their current net assets.

And now, after twenty years, Japan’s private businesses are finally benefiting from the stimulus programs. The government will go broke, but by destroying its own credit, Japan cuts the value of the yen and boosts profits for its exporters. Toyota’s local labor costs – in dollar terms – fell 5% in the last three months. And by the time the catastrophe is complete, Japan’s businesses could be the most competitive in the world. One way or another, 10 years from now, we’ll wager that Japanese stocks will be higher…if only relative to the rest of the world’s equities.

But of all the whack that investments might be out of, US Treasury debt stands above them all. For the last 27 years, the US government’s cost of borrowing has gone down. But while bond yields declined, the quantity of US debt exploded. Official, on-the-books debt trebled. Include off the books, unfunded financial obligations and the total reaches $118 trillion – 8 times GDP. And now the explosions come every month. As the depression continues, US deficit-financing needs could rise to $150 billion every 30 days. So far, the bond market has absorbed the shocks with good grace. But sometime in the next 10 years, the angels are bound to be proven right.

Sell US Treasury bonds. Buy Japanese stocks.

Regards,

Bill Bonner
for The Daily Reckoning Australia

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Fear. You can almost smell it. So far, there’s just a whiff of it…a faint odor…a little trace in the air…like the smell in a subway car after a bum has left.

Yesterday, the Dow fell 213 points. Oil dropped to $76. Gold lost $9.

What caused it? What sets off a crash? Yesterday was hardly a crash. But our Crash Alert flag still flies. Because this is a market in danger. It is a market looking for a reason to crash.

You never know for sure when or why markets crash. At a certain point, markets become like drunks who want to play a game of Russian roulette. First, they have to find the revolver. Then, they find the trigger.

It looked to us as though investors were flexing their trigger fingers yesterday. Some blamed China’s recent move towards tighter credit (or what they thought would be a move to tighter credit)…others blamed news from the US:

“Jobless claims in US unexpectedly rise,” said the Bloomberg report. Here is how the Associated Press described it:

“A surprising jump in first-time claims for unemployment aid sent a painful reminder Thursday that jobs remain scarce six months into the economic recovery.

“The surge in last week’s claims deflated hopes among some analysts that the economy would produce a net gain in jobs in January and help fuel the recovery.

“A Labor Department analyst said much of the increase was due to holiday-season-related administrative backlogs at the state agencies that process the claims. Still, economists noted that that would mean claims in previous weeks had been artificially low. Those earlier declines had sparked optimism that layoffs were tapering and that employers would add a modest number of jobs in January.

“The January employment report will be issued Feb. 5. But the surveys used to compile that report were done last week, so economists are paying close attention to the jobless claims figures from that week.

“‘The trend in the data is still discouraging,’ Diane Swonk, chief economist for Mesirow Financial, wrote in a note to clients. ‘Hopes for a positive employment number in January…are rapidly dimming.’”

Anyone who was ‘disappointed’ by the jobless numbers hasn’t been paying attention. Consumer and business credit are falling. That means businesses are not expanding. They’re contracting. And that means they need fewer employees.

People without jobs can’t shop like they used to…and they can’t pay their bills. One out of 4 mortgaged houses is underwater. One in 10 is in foreclosure. Many more will probably go into foreclosure as the depression continues and default becomes more socially acceptable. Previous generations regarded default and foreclosure as a disgrace. Lenders priced this aversion into their lending rates. But now, default is just a shrewd financial move. When the financial costs of defaulting are lower than the costs of paying…that’s what borrowers will do. Just like Wall Street.

As the depression continues, attitudes will change… Voters will probably want real change in Washington; that’s what the Massachusetts election may be telling us.

But back to our story…

This morning, we see another itchy trigger finger. Stocks are falling in Asia. This time it’s blamed on Obama’s pledge to punish the banks with higher taxes.

But the real cause of the wobbles on Wall Street is the economy. Trillions’ worth of fiscal and monetary stimulus aren’t stimulating at all. They’re just shifting control of the economy to the feds…and shifting the debt bubble in their direction, too.

Does that make a nation more prosperous? Of course not.

The stock market has been ignoring the fundamentals. It’s priced dozens of big companies over 50 times last year’s earnings. Overall, stock prices are closer to a top than a bottom. And yet, a depression brings a bottom, not a new top.

We say this with caution. A few years ago, we might have said it with reckless confidence, but we were smarter back then. Now, we even place our breakfast order with caution. You just never know…

No one ever knows exactly what Mr. Market will do. If he wants higher stock prices, he’ll get them – no matter what the fundamentals tell us.

But we have to stick with the fundamentals anyway. That’s all we’ve got. And they tell us to watch out. In a ‘normal’ recession, businesses would be re-hiring by this time in the cycle. They’re not doing so. Why? Because it’s not a ‘normal’ recession. It’s something quite different. Something we haven’t seen in the last 50 years. Something we never wanted to see again. But here it is – a depression. That’s what those higher unemployment figures tell us. People who own and run businesses aren’t hiring. They know the jig is up. The insiders who own businesses are selling 24 shares for every one they buy.

Unemployment is over 10%…and it seems likely to stay there for a long time. Consumer and business credit are declining – for the first time in half a century. And those trends too seem likely to continue. There are still beaucoup mistakes to correct and a long way down to go.

So relax. Buckle your seat belts. Sell your stocks. And enjoy the show.

“I spent some time driving around over the weekend,” began an Irish colleague. “The Irish property market is a disaster. Over in Cork is the highest residential building in Ireland, the Elysium Tower. It was begun a couple of years ago. They have something like 300 units. But they’ve only sold 7. And now the owner is trying to buy back those 7 properties. It costs him so much to keep the lights on and to maintain the building, he figures he would be better off buying back the 7 units he sold and shutting the whole property down.

“If you wanted to buy something in Ireland now, you could get a very good deal…”

Uh oh. Both good and bad news on our new Trade of the Decade. Japanese shares were rising, last time we looked…because the falling yen makes Japanese exports more attractive.

But to whom are they going to sell? US consumers look like bad prospects. Their real, disposable incomes have gone nowhere in nearly 40 years. In the last two years, household net worth and incomes have been falling. Credit is falling too. The young have no jobs – even the ones with college degrees. One out of 5 defaults on his college debt. And the old have no money. Seniors are holding onto jobs as long as they can…trying to make up for years of failing to save.

China is another big customer. And the Chinese economy is about ready to blow up. Some luxury properties in Shanghai rose 100% last year. And now the authorities are tightening up on credit.

What happens to an export economy when its major customers go broke? We’re going to find out… Japan’s business leaders sense trouble. Business borrowing is collapsing. It’s at its lowest point in 5 years.

This Trade of the Decade could be in for a rocky start.

Bill Bonner
for The Daily Reckoning Australia

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“China’s lending curb sparks a rush for safety.”

That’s how The Financial Times describes what happened yesterday. Investors were more moved by fear than by greed. Dow sold off 112 points. Gold dropped $27. The dollar and bonds were up.

The first thing we note is that investors are idiots. They’re looking for safety in the wrong places. Sell gold? Buy the dollar? And bonds?

It may be a good move in the short run…but this kind of safety is too dangerous for us.

The second thing that comes to mind is a question: is this the beginning of the end? Today, stocks in Asia are still falling…presumably for the same reason. China is reporting such hot growth that the authorities will be forced to throw a bucket of water on it. At least, that’s what a lot of investors are thinking.

What we’re thinking is that the Chinese economy is just waiting for an excuse to blow up. You can’t grow at a double-digit rate – with such massive investments in new plant, equipment, and infrastructure – without making a lot of mistakes. In America, developers put up condos that are left empty. They begin sub-developments that are never completed. They abandon a new building from time to time.

But in China, they build entire cities…which become ghost towns before they ever lived.

The Chinese are human. And humans err. Corrections, recessions, crashes, bear markets and depressions are nature’s way of fixing the mistakes and punishing the mistakers. And the longer the feds try to hold off these necessary corrections, the bigger mess of things they make.

Here’s another headline for you:

“World Bank: growth may wilt as stimulus fades.”

Why is that? Because government spending ain’t really very stimulating. In fact, it’s depressing. We’ve explained why in past editions of The Daily Reckoning. We’ll add today that the same is true, in a slightly different way, for monetary stimulus. They lower interest rates to try to revive a dying economy. The lower rates buy time – and more debt. Debtors are able to hold off the day of reckoning by refinancing at lower rates. But then what? Then, even lower rates are needed so they can refinance again.

Imagine a fellow who’s built a group of condos. He spent all his money…and borrowed millions more to do the project. Now, he’s waiting for buyers…and paying interest. The buyers don’t show up and he runs out of money. So, he refinances his old debt…adds more new debt…and he’s able to keep going…waiting for a ‘recovery’ that brings the buyers back.

But there are no real buyers. He made a mistake. In the heady days of the Bubble Era it looked like people had much more money than they really had. Now, where did their money go? He doesn’t know. But no one is stepping up to buy his condos – except for a few bargain hunters, who buy at such low prices, he still can’t pay his debt. So, he needs to refinance again. And so, the feds need to lower rates again so that he can get a better deal…otherwise, what’s the point?

But sooner or later, as the depression drags on, the feds eventually lower rates down to zero…the banks realize that his collateral is permanently impaired, not temporarily under-priced…and he realizes that the jig is up.

The real problem is not a lack of affordable credit. It’s a lack of able buyers. People are not really as rich as they seemed. It was a mistake, in other words; it had to be corrected.

But don’t expect mainstream economists, financial commentators, or the feds to understand what is going on. They are lost in their own claptrap theories and corrupt politics. What Wall Street bank will tell clients that the economy is in a depression? What Fed official…or elected politician…will admit that there is nothing they can do – except make the situation worse? What financial advisor will tell his customers that they should get out of US Treasury bonds…and the dollar…and stocks…?

Not many.

And so…dear reader…the depression continues. Few people have any idea of what is going on. None knows what to expect.

Of course, that is true for us too. We don’t know when the tools for being able to foretell the future were handed out, but we must have been out sick that day.

Obama…lucky bast***!

The president’s candidate lost in Massachusetts.

There are many different explanations for why the voters went with the Republican candidate. He seemed the more likeable of the two, is the one we’re seeing this morning.

Maybe so. Or maybe there are a lot of voters who would like to smack down Obama himself…but had Coakley at hand. Who knows? If we could look into the minds of Yankee voters it would probably make us ill. Year after year they sent Kennedy back to Washington. And now they’ve sent an exhibitionist to the Capitol. Clearly there is something wrong with them.

Scott Brown posed naked for Cosmopolitan magazine. His daughter was a finalist on American Idol. Maybe his wife would like to make a public spectacle of herself, too.

But the papers are concerned with Obama’s health plan. Now, he’ll have a harder time getting it passed, they say. Lucky fellow. This puts him in a much better position. The last thing he should want is for that health care plan to go through. As near as we can tell – we haven’t read it…but who has? – it is an abomination of boondoggles, corruption and poppycock.

Obama promised the nation a health care overhaul. Now, he doesn’t have to deliver one.

Regards,

Bill Bonner
for The Daily Reckoning Australia

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Does the stock market know something we don’t? Yesterday, investors bid up prices on the Dow stocks to a new high. The index rose 115 points.

According to theory, the markets know more than any single investor, analyst or economist. In theory, the markets know everything there is to know. In theory, the markets are always right.

But what the heck? This is the same stock market that signaled clear sailing ahead ten years ago. Soon after, equities hit an iceberg. They sank for the next decade.

Here at The Daily Reckoning, we had our own views. At the beginning of the ’00s, we told readers to sell their stocks. We were right. The stock market was wrong. Heh heh.

So, who ya gonna trust now? The stock market… Or, The Daily Reckoning?

Who knows… Maybe we’re wrong this time, but we see another 10 years of trouble coming. Two years ago, the credit cycle peaked out. After half a century of adding debt, the private sector had had enough. Borrowing turned down. Last November, it registered its 10th month in a row of declines, something that had never happened since they began keeping records after WWII.

Consumer spending has held up surprisingly well. But with credit contracting and unemployment high and rising, it can’t continue.

Small businesses create jobs. But who wants to take the risk of funding a small business now? Not the banks. And the capital markets are closed off to small businesses. You have to have a big business – preferably one that is dying… Then, you can get all the money you want from Wall Street and the feds.

Since the downturn began two years ago, 7.5 million jobs have been lost. There is no sign that they will be found anytime soon. Jobless people do not spend a lot of money. Ergo, you can’t really expect an economic surge until people get jobs.

When will that happen? Possibly years from now…maybe 2…maybe 5…maybe 10…

Yes, dear reader, we are in a depression. It is a period of adjustment…of correction…of de-leveraging…of paying down debt. And there’s not much the feds can do about it – except disguise it…delay it…and make it worse.

The government can spend money. The government can inflate the currency. But it’s neither government spending nor inflation of the currency that makes an economy healthy. If inflating the currency could make an economy prosper, where did Zimbabwe go wrong? And if government spending could boost an economy, what did Cuba do wrong? Or Venezuela? The two-bit, banana republic economies are almost all burdened by too much government stimulus. The feds tax too much, spend too much, borrow too much and inflate too much. Instead of doing their jobs – enforcing property rights, protecting people from crime, and staying out of the way – they meddle and spend. The president gets a fancy house and lots of security guards. And the economy rots.

Of course, we could be wrong about what is happening in the US. But our guess is that the stock market is wrong instead. Stock market investors anticipate a return to ‘normal.’ But the normal they’re looking at is a very unusual credit bubble that blew up and can’t be mended. The real normal is what we’re getting. And the real normal is a world where bad stuff happens. Investors make mistakes. Markets make mistakes. Often, they are misled by their own financial authorities, such as Ben Bernanke. The US Fed chief meddles in the economy and distorts the picture. Investors look, but get the wrong idea.

Our guess is that stock market investors are seeing the distorted picture caused by the feds’ meddling…not the real picture. They look. They see low interest rates. They see stimulus. They see a stock market that seemed so friendly and so rewarding for so long that they can’t imagine anything else. They see a government taking action…and making things better. They read Thomas Friedman and think the ‘political class’ can fix whatever problems it encounters.

But in the real world, the political class is a life-threatening parasite. Allow it to grow large enough and the host – the private economy – will shrivel up and die.

And in the real normal world, markets go up…and then they go down. We are in one of those periods of decline. We are in a depression, with a growing, parasitic political class. This phase won’t end any time soon.

Gary Shilling is probably right. He says to buy Treasury bonds and the dollar. They’re both probably going up this year.

Why? Because we are in a depression. And when investors finally realize it they will seek safety. They will buy US Treasury bonds, raising prices and lowering yields. Those Treasury bonds are in dollars, by the way. Investors will want dollars.

There are two main emotions that drive investors – fear and greed. Lately, greed drives them to buy emerging markets, stocks generally, and commodities. Fear drives them to dump all their risky investments and head for cover. They believe cover is found in the dollar and in US Treasury bonds – traditionally, the world’s safest credits.

“Ireland has changed so much,” said a colleague at last night’s dinner. He was speaking early in the evening. Later, we went to Henry Downs’ place…where the #9 whisky is as smooth as a baby’s derriere. We can’t remember what happened after that.

“The Irish had big families. Everyone had five or six children. We were a big exporter of people. People were our major export. And of course, the world is full of mics and paddies. America, Canada, Australia, New Zealand…but there are also a lot of Irish in Argentina.

“Birth control was illegal. I remember when I was 16…I had a friend who wanted to sleep with his girlfriend. Since I was tall and looked older he asked me to go into a pharmacy and buy condoms. It was so awkward. I waited until there were no other customers in the shop. Then, I went in….trying to make my voice lower than it really was…and asked the middle aged woman behind the counter for condoms. It was so embarrassing. It’s a wonder people had sex at all.”

“People in Ireland are still funny about sex,” said another Irish colleague. “My boyfriend and I ‘lived in sin’ before we got married. Everybody knew it. But ‘living in sin’ was not just a joke. People thought it was a real sin. They didn’t really mind it, but they expected us to pretend we weren’t sinning. So when my parents would visit we had to pretend we had separate bedrooms…even though it was obvious we were sleeping together.

“But nowadays, it’s different. Now couples only have one or two children.”

Regards,

Bill Bonner
for The Daily Reckoning Australia

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Markets were closed in America yesterday. In the rest of the world nothing much happened. This leaves us free to talk about whatever we want.

What do we want to talk about?

Let’s talk about Japan. You remember, Japan? It’s the country with the 20-year on-again, off-again depression. You could have bought stocks in Tokyo 20 years ago…held onto them…and guess what you’d have today? Well, for every dollar you invested two decades ago, you’d have about 25 cents. How’s that for ‘stocks for the long run?’ How’s that for capital appreciation? How’s that for getting rich from investing?

Stocks in Japan are back to their levels of the mid-’80s. So, an investor who was 40 in, say, 1984, is now 66. He’s retired. During his ‘investing years’ he made zero…nada…rien…zilch…from his money.

What to make of it? Is the whole promise of investing nothing but a Wall Street fantasy? The idea is that you can give your money to Wall Street…put it in a fund…in stocks…in some sort of investment…and it will grow larger. You will pay Wall Street a fee for this service. In fact, you could pay a lot of money…trading in and out of various investments.

And where would you end up? Well, if you were the typical Japanese investor you’d end up with less than what you started with.

The lesson we draw from that is that you only make money from investing when you buy assets that are cheap and sell them when they are dear. ‘Buy and hold’ doesn’t work. ‘Stocks for the long run’ is a trap.

But what about Japanese stocks now? We thought you would ask. Since we announced our new ‘Trade of the Decade’ – sell US Treasury bonds/buy Japanese stocks – we have gotten nothing but grief on the subject. Everyone thinks he knows what will happen to Japanese equities over the next 10 years; and everyone thinks they will go down.

Here is Ambrose Evans-Pritchard in London’s Daily Telegraph:

“…2010 will prove to be the year that Japan flips from deflation to something very different: the beginnings of debt monetization by a terrified central bank that will ultimately spin out of control, perhaps crossing into hyperinflation by the middle of the decade.

“Once a country embarks on such policies, the game is nearly up. The IMF says Japan’s gross public debt will reach 227pc of GDP this year. This is compounding at ever faster speeds towards 250pc by mid-decade.

“The only reason why this has not yet blown up is because investors (mostly Japanese) have not yet had the leap in imagination required to understand their predicament, and act on it. That roughly is the argument of Dylan Grice from Societe Generale in his latest Popular Delusions note released today. ‘A global fiasco is brewing in Japan.’”

We don’t doubt it. Evans-Pritchard is right. So is everyone who thinks Japan is going to meltdown or blow up. A global fiasco is brewing. But it will not necessarily be bad for Japanese companies. Investors will leave Japanese debt and buy Japanese equities. Inflation will reduce the real cost of operation for Japanese companies. Frugal, solvent, efficient Japanese companies will prove to be a refuge, not a trap.

More on this subject as the decade progresses. We will be proven right…or wrong… Geniuses…or idiots… Visionaries or hallucinaries… Depending on how the chips fall.

Regards,

Bill Bonner
for The Daily Reckoning Australia

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Oh happy days are here again. Obama is going to get our money back from the banks. Jeffrey Sachs is telling Haiti how it can get its economy back in order (with other people’s money, naturally). And Thomas Friedman is offering investment advice.

This should be fun. We’re all on the bus…and it’s driven by the blind, the deaf and the very dumb. Oh, sorry, we meant the visually impaired…the hearing impaired…and the mentally deficient.

Friedman is, as we all know, full of advice on just about everything. He advises finance ministers on how to soup-up their economies. He advises the Arab world on how to update its religious institutions. He advises whole nations on how to improve the future before it happens.

And here he is now counseling Mr. James Chanos, noted short seller, on how to make money:

“China’s markets may be full of bubbles ripe for a short-seller, and if Mr. Chanos can find a way to make money shorting them, God bless him. But after visiting Hong Kong and Taiwan this past week and talking to many people who work and invest their own money in China, I’d offer Mr. Chanos two notes of caution.”

First, he says: “Never short a country with $2 trillion in foreign currency reserves.”

Typically, investment wisdom evolves over generations of trial and error. People come to see what works and what doesn’t and pass on this wisdom in the form of cautionary rules. But how many times have investors shorted a country with $2 trillion in foreign currency reserves? Where does this wisdom come from? Not from experience. Nor from any theory we’ve ever heard. Which makes Freidman’s first bit of advice no better and no worse than every other bit of advice he’s given over the years.

It’s his second bit of counsel that causes muscle cramps:

“Second, it is easy to look at China today and see its enormous problems and things that it is not getting right. For instance, low interest rates, easy credit, an undervalued currency and hot money flowing in from abroad have led to what the Chinese government Sunday called ‘excessively rising house prices’ in major cities, or what some might call a speculative bubble ripe for the shorting. In the last few days, though, China’s central bank has started edging up interest rates and raising the proportion of deposits that banks must set aside as reserves – precisely to head off inflation and take some air out of any asset bubbles.

“And that’s the point. I am reluctant to sell China short, not because I think it has no problems or corruption or bubbles, but because I think it has all those problems in spades – and some will blow up along the way (the most dangerous being pollution). But it also has a political class focused on addressing its real problems, as well as a mountain of savings with which to do so (unlike us).”

Get it? Like…China has all these problems…see? And, of course, its problems developed because of, or with the connivance of its government. But it’s gonna solve these problems…see? Because its political class is focused on them.

We can hardly type the sentence. Our diaphragm is contracting in such spasms of delighted cynicism; our fingers shake…our brain recoils.

Yes, dear reader, China’s political class – communists, remember – is going to solve the problems of a dynamic, market economy headed for a blow up.

That settles it for us. We have friends on both sides of this play. Jim Rogers is long China. Others are short. But Mr. Friedman has just given us the Sell Signal of All Time. Every smart investor on the planet – all two or three of them – should short China now. If Friedman is long; you have to be short. Heck, even the angels are selling their China shares and the gods themselves are calling their brokers.

Friedman is long China. What’s he short?

“I’d rather bet against the euro,” he says.

Well, there you have it. A buy signal for the euro.

Nobody has ever liked the euro. The typical analyst is against it. “The US government stands behind the dollar,” he says, “but who stands behind the euro? Nobody.”

That’s as deeply as most analysts care to think about the subject. If no one stands behind the euro, it must be a weak currency. If it is weak, it must be weak as compared to something. The dollar, for example.

Here at The Daily Reckoning, we think the typical analyst errs. As for Friedman, he is beyond error. Mistakes only happen to people who bother to think about things enough to make the wrong choices. Friedman thoughts are not that profound. He errs like a squirrel or a donkey errs, not by thought but by instinct. He is wrong, not by accident, in other words, but by design; he is made for it.

Friedman’s pensée is not prone to error; it is fundamentally flawed, like a kitchen sink that is plumbed backward. You turn on the cold water, and it comes bubbling up out of the drain. You turn on the hot water and you hear Frank Sinatra.

How else could a walking, talking human being believe such preposterous and foolish things? Don’t bet against China because its political class is focused on its problems? Oh stop…our stomach muscles can only take so much… Economic problems, meltdowns, and crises can be caused by politicians; there is not a single example in the historical record where they have cured these problems. (The only exception is when they stop doing damage…temporarily, like a boxer who lets an opponent get up from the mat before slugging him again.)

Which brings us back to the euro. The continental currency is despised for the wrong reason: because no nation is actually capable of beating it up. All the world’s other paper currencies are controlled by people intent on weakening…or destroying them. The euro’s out of the ring…controlled by…well, no one in particular. It’s run by a group of countries that can’t agree on how to ruin it. The euro benefits from eurosclerosis. The Irish and Greeks want a weaker currency. The Germans want to keep it strong. The French can’t decide what they want. Result: paralysis. No one will rush to save the euro. But no one will rush to kill it either.

Besides, if Friedman is agin’ it…we’re for it.

Bill Bonner
for The Daily Reckoning Australia

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There was no joy in Baltimore on Saturday night. The Ravens lost their game against the Colts.

Football is often said to be a substitute for armed warfare. It has its strategies, its heroes, and its casualties. The city of Baltimore – or most of it – would probably have preferred a win against the colts to a win in Afghanistan or Iraq.

War is a game played for mortal stakes. But there is less difference between war and football than is generally realized. There is nothing at stake in most wars – just like football games. Still both sides are so keen to win they make fools of themselves. Supporters wave flags and sing victory songs. And if their team wins, THEY feel like winners, even though they played no role whatsoever in the victory.

Nor are all wars bloody affairs. Many societies conducted stylized warfare…often with very few battlefield casualties. The West was able to dominate the world, say some military historians, because the Greeks…and later the Romans…and later the Europeans…were more ready to die.

Regards,

Bill Bonner
for The Daily Reckoning Australia

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