Cheap and Proud of It


Blood ran in the streets again yesterday. The Dow fell another 258 points. A few more days like that and the index will be below 10,000.

That ought to make an impression. Among other things, it should help people realize that there has been no recovery…not even a weak one. And there won’t be a recovery, ever. Not of this economy.

Today, a chorus of indicators chants a warning.

The copper market — down 23% in September — tells us recession is coming.

Falling demand for gasoline hints at the same message.

Oil — under $80 a barrel — heralds recession.

The 10-year US note, yielding all of 1.7%, also screams ‘recession.’

And so do the ‘junk’ bond market and the financial sector — both of which are acting like it was ’07-’09 all over again.

And here’s why. From Bloomberg:

Ninety-one percent of people in the US labor force have a job. That may be the extent of the good news for these Americans, whose incomes tell a darker story.

Take-home pay, adjusted for prices, fell 0.3 percent in August, the third decrease in five months, and personal income dropped for the first time in two years, the Commerce Department reported last week. The declines followed news from the Census Bureau that median household income in 2010 fell to $49,445, the lowest in more than a decade, and the poverty rate jumped to 15.1 percent, a 17-year high.

Salary and benefit growth “has been going nowhere,” said Mark Zandi, chief economist at Moody’s Analytics Inc. in West Chester, Pennsylvania. “One of the key reasons the recovery has stalled is that real incomes have fallen.”

What happens to a consumer economy when consumers don’t have any money? The economy shrinks.

But wait, there’s something else going on. This is an economy that depends on MORE — more credit, more sales, more income, more people…more of everything. But now it faces LESS. Consumers have less money. They spend less. They drive less. They borrow less. Less is becoming fashionable, chic, trendy. People now brag about how little they spend…and about what cheapskates they are. They proudly show off their imitation watches…and invite friends to their simple digs. McMansion is giving way to McModest.

And it looks to us as though the feds can’t turn this around. Every time, since WWII, when consumers slowed down, the feds intervened. They got the economy revved up by giving it more. This time they can’t do it. Because more no longer works. It no longer pays. Give the consumer more credit? The Fed’s key rate has been at zero for three years already. What else can it do?

Further inputs of energy or investment won’t pay off either. Because the innovations that led to such spectacular growth over the last 2 centuries have been fully implemented. Who doesn’t have an automobile? What farm lacks a tractor? Yes, they can be refined and improved…but the era of 5% growth is over — in the developed world.

Trouble is, the economies of the developed countries — and their governments — evolved in an era of growth. They depend on it. Without it, they die.

And what can we do? We have to wipe away our tears, turn our backs, and move on. We have to say ‘adieu’…and turn the page.

And you know what soft-hearted diehards we are here at The Daily Reckoning. Typically, we stand behind lost causes and underdogs to the finish.

But we’re not standing behind this bubble-crazed, credit addicted economy. We’ll let Bernanke, Geithner, and Summers do that. The poor thing is ailing, it’s true. It needs life support, no doubt about it. But we’d put a plastic bag over its head and be done with it. It’s not worth saving. It’s a fraud and a cad.

That’s true of the governments of the developed countries too. They’re growth governments. They can’t survive in a no-growth world.

Give them the coup de grace too. More thoughts below, after today’s column…

You know the old expression, attributed to a Rothschild, “buy when blood is running in the streets.”

Is it time to buy now?

Well, it is certainly true that there are some bargains. Especially in the emerging markets. Our Family Office chief financial strategist, Rob Marstrand, is recommending a stock whose P/E ratio is now below one. You could buy the whole company for what the company will earn in profits between now and next June. It’s a food company that is priced for what Rob calls “vegetable Armageddon.” There’s so much blood in the streets around company headquarters that the cabbages have turned red.

Does that mean it is time to buy? Maybe.

But the broad market probably has a ways to go…a long ways. Maybe another 3,000 points down. And maybe it will take another 10 years to get there.

Stay tuned…

*** You think you have problems? Check this out, from The Wall Street Journal:

LEHIGH CRES, Fla. — Joseph Reilly lost his vacation home here last year when he was out of work and stopped paying his mortgage. The bank took the house and sold it. Mr. Reilly thought that was the end of it.

In June, he learned otherwise. A phone call informed him of a court judgment against him for $192,576.71.

It turned out that at a foreclosure sale, his former house fetched less than a quarter of what Mr. Reilly owed on it. His bank sued him for the rest.

The result was a foreclosure hangover that homeowners rarely anticipate but increasingly face: a “deficiency judgment.”

“Now there are foreclosures that leave banks holding the bag on more than $100,000 in debt,” says Michael Cramer, president and chief executive of Dyck O’Neal Inc., an Arlington, Texas, firm that invests in debt. “Before, it didn’t make sense [for banks] to expend the resources to go after borrowers; now it doesn’t make sense not to.”

Indeed, $100,000 was roughly the average amount by which foreclosure sales fell short of loan balances in hundreds of foreclosures in seven states reviewed by The Wall Street Journal. And 64% of the 4.5 million foreclosures since the start of 2007 have taken place in states that allow deficiency judgments.


Bill Bonner,
for The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Bill Bonner

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5 Comments on "Cheap and Proud of It"

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5 years 16 days ago

The excert from WSJ paints a frightening picture of the dark side of leveraged personal debt.

5 years 16 days ago

How can someone owe $192,576.71 on his holiday home in LEHIGH CRES, Fla? I thought home lending in America was non-recourse, that is, you left your keys behind and did a bunk.

5 years 16 days ago


Some US states allow recourse loans. Also, refinanced loans (including additional property purchases as in this case?) fall under a different definition which allows the lender to write it up as a recourse loan.

5 years 16 days ago

The bank sold the property for a quarter of its value, really?.If I was Mr Reilly, I would like to know to whom, and who they work for.

5 years 3 days ago
An excellent article Bill, It is exactly what is happening. Nobody has enough money to buy anything at the prices they’re selling it for. The prices were fine when the economy was floating on a balloon of debt, but not now, so nobody buys anything until the prices come back down. As you correctly point out, everyone has a car. Farms have tractors. It is common to use robots in manufacturing now. We have the internet – the ultimate information tool, even though it didn’t quite give us the boom we expected back in 2000. But what is the next… Read more »
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