by Bill Bonner
“Look at what happened on Friday. The Dow dropped 93 points. Oil stayed below $100. But gold added $16 to close well above $1,500. Fluke? Or trend? Hey, you’re asking the wrong person. What do we know? No one knows. But what we do know is that the Great Correction is continuing to do its work. All the recent reports tell us that the economy is weak…and weakening. Housing starts, manufacturing output, consumer confidence – all are pointing to a long, hot, sultry, sluggish summer.
So far, the big sell-off has not even begun. But it could start any day. Maybe Friday’s numbers reflected the new trend. Maybe not. But just so we get to say ‘I told you so’ here is what we expect:
1) Stocks will be weak…maybe a big sell-off in the summer months. Investors will begin to realize that the economy is not as healthy as they thought. And the effects of QE2 will wear off.
2) The Great Correction, combined with the feds’ battle against it, will continue. Economic reports will be mixed and confusing as a result. But no clear, real recovery will begin.
3) The Fed will announce new measures – QE3. These could come anytime, but will most likely follow a new crisis. For example, a default by Greece…or a sharp break in the stock market.
Analysts say the punky figures are not confined to the US. The entire world is slowing down. Emerging markets are being forced to try to control inflation. Europe is worried about what happens when Greece defaults – which is coming soon. And the US is suffering from the worst housing slump in its history. Prices are already down 33%…more than one out of four homeowners is already underwater…and prices are falling at the rate of about 1% per month.
This latest bit of information is worth a pause. The total value of US housing stock is about $20 trillion. So, a 1% loss equals $200 billion. That’s $9 billion every working day.
Now, say there are about 100 million wage earners. This puts the losses per day at about $90 per day per wage earner. The typical worker takes home about $2,500 per month – by our calculations, barely more than he loses in housing prices. And here’s another fact to toss in front of you this morning. In 1980, US federal, state and local debt per person declined at the rate of $2 per working day. As recently as 2000, debt declined again – at the rate of $4 per day.
But never have we seen anything like this. Government debt per working person is now increasing at $115 per working day. And that doesn’t include the build-up in social welfare obligations. Add housing losses to government debt, and the typical working person’s balance sheet is deteriorating at the rate of $205 every working day. The poor lumpen! He rolls out of bed this morning. By Friday evening he’s $1,025 poorer! How long can that go on?
And here’s another thing. Seniors are supposed to be protected from inflation by COLA (cost of living) adjustments to their Social Security payments. But the feds compute the CPI as they choose. And they make their adjustments when it pleases them. The result is a big lag between the supposedly inflation-proof Social Security payments and the actual costs of living that old people face. According to a study done by a senior group, the post-65 population has suffered a real loss of purchasing power of 32% over the last decade.
This is a serious situation. The average household is desperately trying to hold onto its standard of living. It has not had a real, substantial hourly wage gain in 40 years. Prices are now rising faster than income – both for people who are working and for people who are retired. And those people who own a house are losing wealth, collectively, at the rate of about $200 billion a year.
In a way, of course, this is good news. The whole point of the Great Correction is to wipe out bad debt, eliminate bad investments, and reduce living standards to a level people can afford. The feds may be protecting investors and bailing out banks – but at least they’re letting the poor lumpen households get what is coming to them!
Notice that gold seems to have ended its correction. Way too early and with far too little losses to suit us. Gold is doing its job. It’s acting as a monetary reserve – something you can hold onto when other forms of money go bad. As the Great Correction does its work, the financial authorities get to work too. They’ve already pumped so much paper money into the system – most of it still in reserves – that it will be hard to avoid a substantial increase in prices (that is, a drop in the value of the paper money). But the feds probably won’t give up. QE2 ends next month. As the Great Correction continues, and the economy slumps in the summer, the cries for the Fed to ‘do something’ will grow louder. But what can the Fed do? Interest rates are already at zero. And the federal government is already running the biggest program of counter-cyclical stimulus spending in history – with about $4.5 trillion of total deficits over the last 36 months.
What’s left to do? Only more ‘unconventional’ methods – such as QE3. If it comes, QE3 will mean even more paper money and credit in the system…and the potential for even higher rates of inflation. The Wall Street Journal reports that the Chinese have become the world’s largest gold buyers. Central banks, generally, have become buyers again. The smart money has been buying gold for 10 years. The smart money knows it needs real reserves – not just phony paper money. If the Fed won’t back the dollar with real reserves, smart households know they have to stock up some reserves of their own.”