Baltimore, Maryland
The depression is alive and well!
US unemployment claims just came in higher than expected.
And new house sales in January were at their lowest ever. Pundits were quick to blame the snow. But sales were off even in areas that had better-than-usual weather.
Household income has gone nowhere in 10 years. Stocks have suffered a lost decade too. And now Ben Bernanke says we’d better be careful... because the recovery ain’t no sure thing.
The economists have no clue. But average people know what’s going on. They know how hard it is to find a job. And if you’re in the building trades... or you have only a year or two of college... you’re pretty much out of luck. You may have to retire before you ever start work again.
That’s why there was such a big drop in consumer confidence.
But look on the bright side. Building more houses for people who couldn’t afford to live in them was not exactly the greatest business strategy. And all the people who were appraising, mortgaging and selling houses can now find more useful work. Real jobs. What are those real jobs going to be? We don’t know yet. But it could take a long time to find out. And in the meantime, we have a depression on our hands...
So, let’s enjoy it…
How do you enjoy a depression? Well, the first thing is to make sure you’re not in its way...
Dear readers may not know this, but in addition to writing the Daily Reckoning your editor also has a serious job...
Yes, in the morning he is a moral philosopher... gratuitously insulting public officials, whole professions, and entire nationalities. He is grateful to them all... they make life so entertaining! Imagine what kind of world we would have if people minded their own business and got on with their lives... People would be richer and happier, we don’t doubt it... but at whom could we point a finger and laugh?
No, dear reader, the world needs its bumblers, fools, politicians (are we repeating ourselves?), grifters (sorry... we did it again!), and megalomaniacs. It needs someone to challenge the gods from time to time. Otherwise, the gods wouldn’t have the fun of whacking them. And we wouldn’t have the fun of watching.
But getting back to the point... what was the point? Oh yes, the point is we have a serious job to do too. In addition to writing about the world of money, we also have to actually figure out what to do...
You see, we have a Family Office... a little group of researchers and analysts that actually has to make decisions... What to do? Long or short? Buy or sell?
One thing we need to be on guard against is allowing our emotions to take over. For all our deep thinking and cynical detachment, we’re human too. We get emotionally attached to our own ideas. Then, we’re very reluctant to give up on them... no matter how bad they turn out to be.
We remember... sadly... our own feet dragging after the bull market in gold of the late ‘70s. We didn’t want to sell. So we, delayed... we hesitated... By the time we realized how wrong we were we didn’t have to sell. The bear market in the yellow metal was over! Gold had hit bottom. We’d lost 70% of our money. Much more in real terms. But there’s nothing like a 20-year bear market in your favourite asset class to sharpen your wits.
We realized that we needed a better way. Some discipline... some rules. So, we’ve developed a methodical approach that let’s us choose investment themes very carefully – after much thought, consultation and deliberation. And then it prevents us from making any changes... again, except with much reflection and discussion. We also have our own timing index which would practically take an act of congress to over-ride. If the timing index says to get out... we get out.
Why are we telling you this? Oh yes, because you need to make sure you enjoy the depression too, rather than suffer from it.
*** What the risk of the depression? There’s the risk of losing your job, for example. How do you avoid that? Easy, you work harder than the guy next to you. So when it comes time to lighten up the payroll, management fires him, not you.
Just to make sure, you could encourage your fellow workers to take more breaks... and offer them sips from your whiskey flask, just before important meetings... just make sure you don’t have any yourself!
Another risk is that you lose money from your investments. How does that happen? Everyone loses in a depression. All assets go down. Against what? Against money... cash. So, the thing to do is obvious. Get rid of your investments. Sit tight. Do nothing. When you’re given an investment opportunity, just say no. But there’s something in human nature that makes doing nothing almost impossible.
That’s why you need rules... discipline... a system that is hard to ignore. Right now, we’re still in a deflationary trend. If Japan is any indication, this could go on for another 10 to 20 years – with generally sinking prices for just about everything, but particularly for stocks and real estate.
It’s going to be hard to sit out a downturn that long. You’re going to be tempted to speculate... to get back in... You’re not going to want to be left behind.
And yet, in a real depression, getting left behind is best you can hope for...
More news: Investors are getting the jitters about China
Writes MoneyWeek editor, John Stepek:
“The upheaval in Greece is of course making investors nervous. With the country riven by mass strike action, and Greek politicians now throwing the Second World War in Germany's face, the odds of a bail-out are surely declining.
“But it's not just Greece. China is giving investors the jitters with every suggestion of tighter monetary policy. The most recent sign is that the state-owned banks are in a rush to raise money to prop up their balance sheets after the government-driven lending boom of the past year. "This week alone," says the FT, "Chinese lenders have announced plans to raise up to £7.2bn through equity and bond sales." Another £14bn-odd is "in the pipeline."
“However, the general consensus remains that China is the future. Most investors seem to be betting that China can 'walk the tightrope' of monetary policy (i.e. keeping inflation under control without crushing growth), despite the fact that no one else seems to be capable of doing it.
“And as you've no doubt noticed, superstar fund manager Anthony Bolton is about to launch an investment trust investing in the country. But I'm not sure that's a good sign. Bolton's past performance rightfully commands respect. But this launch will likely represent a huge influx of private investor money into the Chinese market. And like it or not, history shows that when retail investors are piling into an asset en masse, it's usually on the turn. All the highest-profile tech fund launches came when the tech bubble was topping out. Same with the more recent commercial property bubble.
China may be the next decade’s biggest disappointment
“Chris Rice of Cazenove Capital puts it bluntly. He told Citywire recently that for investors, China will be the biggest disappointment of the next decade. His point – which seems reasonable to me – is that even if all the expectations for China come true, investors are paying too much for exposure to the story. After all, the internet has revolutionised business, much in the way that tech bubble investors envisioned. "The problem was that the amount equity markets paid for the potential profits was too high.”
“ China sceptics are in the minority for now. Most of the fund managers at our latest Roundtable discussion were cautiously upbeat on the country. But a few anecdotes were telling. One of our experts mentioned visiting an upmarket penthouse flat in Shanghai that cost more per square foot than a house in Chelsea.
“To be fair, she believes there's a bubble in property in the major cities. But for me, the story was uncomfortably reminiscent of the old story that the land around the Imperial Palace in Tokyo was at one point worth more than the entire state of California. It just doesn't stand up – particularly when you consider that a house in Chelsea is hardly trading at bargain levels right now itself.
“Of course, being wary of a bubble and knowing when it will burst are two different things. In the meantime, my colleague Merryn Somerset Webb suggests a much safer, cheaper way to get exposure to the China story on our blog page.
John Stepek is the editor of MoneyWeek magazine. Subscribers can read the full Roundtable discussion in this week’s issue.
Get your first three issues of MoneyWeek free here if you’re not already a subscriber. You’ll also receive the MoneyWeek Property Report the banks, government and estate agents DON’T want you to see. Click here. (It could save you £46,000.)
And more thoughts...
*** A year or two ago, we would have thought that you couldn’t increase the monetary base so dramatically without grave inflationary consequences. Inflation – with a lag of about 18 months – was a dead certainty. Now that we’re closer to the situation, we see that inflation may be hard to avoid... but it’s hard to summon up too. Japan couldn’t do it. And now the Bernanke Fed can’t seem to do it either.
Central bankers are talking about increasing their inflation targets from 2% to 4% in order to give themselves more flexibility to deal with situations such as the crisis of the last 2 years. But they are dreaming. They can’t really control inflation that perfectly. In fact, they can’t really control it at all, except in the grossest, clumsiest way. They have tripled the world’s monetary reserves in the last 7 years. Prices for gold and oil have responded more or less in line with the monetary base. But most consumer prices are heavily dependent on capital investment in China... housing prices in the US... and a million other things that the economists at the Fed can’t begin to control.
Of course, in extremis, as Ben Bernanke once told the world, a central bank can always create inflation. They “have a technology known as the printing press,” he said. Crank up the presses... and let people know that you are cranking up the presses... and you’ll have price inflation lickety split.
But the financial and economic costs of cranking up the presses is so great that very rarely is any central bank... and certainly not any major central bank of a civilized nation... reckless or bold enough to do it. It’s the nuclear option of the monetary world. You have to be very desperate to take the nuclear option. We don’t think Bernanke and crew will get there... not for a long time.
That said, there are also conventional weapons... such as those being used now. One in particular... quantitative easing... packs a lot of firepower. It’s not nuclear. But it can still make one helluva mess. Stay tuned.
*** We had a friend in Haiti when the earthquake hit. No one knew what had happened to him. But a few days ago, they found his body. Mutual friend John Mauldin reports:
R.I.P., Walt Ratterman
A few weeks ago I wrote about my friend Walt Ratterman, who was at the Hotel Montana in Haiti when the earthquake hit. Walt’s wife Jeanne received an email only 10 minutes before the quake, which placed him in the courtyard, where he would have been OK. After the quake there was an eerie silence. We all assumed that Walt was helping those injured in the quake and that he and his friends would surface when they got a break. Those who knew Walt understand the passion he brought to many relief operations. Walt was known for sneaking into Myanmar in the bottom of a boat where, if discovered, he would have been summarily executed. Walt was the subject of the documentary Beyond the Call, which showed him braving Afghanistan a month after 9/11, Myanmar, and the most dangerous region of the Philippines.
Walt’s love of helping people who, for no fault of their own, couldn’t help themselves caused him to relocate his family to the West Coast, to be better able to continue his work. Walt traveled the world to help the needy, visiting Asia, Africa, South America, and Central America. Each time he brought food, medical relief, and solar power, and had a sustaining impact on all the lives he touched. Walt was part of a team brought into Haiti by USAID (United States Agency for International Development) to bring solar power to Haiti. Walt was working there on several projects, including a few hospitals where electricity brought them out of the dark ages, allowing them to perform surgeries and other treatments that were unavailable in Haiti previously. Many of the projects were completed prior to the quake and provided much-needed support for the injured, saving countless lives.
The great irony is that Walt almost never stayed in nice hotels. He stayed with those he helped.
The men and women who loved Walt mobilized to raise money and travel to Haiti. My own readers have been very generous. Six teams made their way at various times throughout the search and rescue phase of the operation. Each of those teams brought much-needed food, water, or medical relief. Dr. Sir James Laws hired a bus in the Dominican Republic and loaded it with bottled water that was given to many who were thirsty in Haiti. Sir Edward Artis loaded a 20-foot truck with food and braved the road from the Dominican Republic as well, in spite of reports of looting and hijacking of other vehicles on the road. The first team was given the emotional task of handling the morgue at the Hotel Montana. Without complaining, each member of that team stepped up and did what was asked of them. Each night this team cried themselves to sleep from the emotional toll of dealing with the dead that day. Each of the Knights and friends of Walt reached out to their entire networks and brought awareness to the search for Walt and the hundreds of others trapped in the rubble at the Hotel Montana.
As time wore on it became obvious that a miracle wasn’t meant to be. Hope gave way to preparation for the inevitable. Walt’s backpack and laptop were found a few days before his body was discovered. And then there was a wait for positive identification, before dental records confirmed that Walt was a casualty of the devastating earthquake. He was one of more than two hundred thousand souls separated from their bodies in that quake. No doubt Walt was busy in the spirit world, calming and organizing this mass of men, women, and children for their trek to meet their maker.
Each of us who has been involved in the life of Walt, and now with his untimely death, knows that he lived a life of honor and that he died doing the work that he loved. His death was certain to be a death of honor because of the way he chose to live his life. Each of us has the opportunity to rededicate ourselves to living our lives in a manner more aligned with the values that Walt applied every day he was here. Walt stared death in the face so many times and lived, that we all expected him to be immortal. Each of us has limited time on this planet, and we can use Walt’s example to make that time count.
You, gentle reader, have given generously to make a great deal of difference in Haiti and over the years to Knightsbridge. Would you join me one more time to honor the life and work of our fallen hero Walt Ratterman? The world does not have enough Walts, and he will be sorely missed. Rest in Peace, my friend.
Please make your generous donations today, by sending a check made out to
“Steps for Recovery” but clearly marked “FOR KNIGHTSBRIDGE / HAITI” to:
Steps For Recovery
P.O. Box 67522
Century City, CA 90067
(A California 501(c) 3 Tax Exempt Corporation
Federal ID # 95.4472343)
Or you can make an immediate ONLINE donation via PayPal, by going to the Knightsbridge website, located at: KBI.org and hitting the Donate icon found there.
Until Monday,
Bill Bonner
For The Daily Reckoning
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