Mr. Market’s Next Attack

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Whew!

What a week. Traders must be reeling. The rest of us are staggering.

And nobody knows anything.

Is this market going up or down? We don’t know. But wherever it is going, it seems to be in a hurry to get there.

It collapsed on Monday, soared on Tuesday, collapsed again on Wednesday and soared again on Thursday. The Netscape News report:

The Dow Jones industrial average soared 423 points. It had already fallen 634 points Monday, risen 429 Tuesday and fallen 519 Wednesday. Never before has the Dow had four 400-point swings in a row.

The pieces of news that sent Wall Street rocketing higher were not exactly blockbusters: Cisco Systems said its profit was better than expected, the job market got a little better, and France tried to raise confidence in its shaken banking system.

But this is a week in which any move by the market — higher or lower — seems to touch off an investor stampede. So it was on Thursday, when stocks shot higher at the opening bell and never turned around.

So, nobody knows why the stock market went up yesterday. Of course, they don’t know why it went down the day before either.

That’s why a lot of old market hands get tired of wondering about it. “Just show me the chart,” they say. They don’t believe it’s worth trying to figure out the why…they just look at the pattern.

But when we’ve looked at the charts we still don’t know anything. Maybe the seasoned pros can see things we don’t. To us, they’re just as confusing as everything else.

Mr. Market is a cagey fellow, no doubt about it. And if he has a story to tell, he keeps it to himself. That said, he’s only natural. And there are certain natural laws that even he has to obey.

For example, he can’t allow debt to build up forever. There always comes a moment of awful recognition, when lenders realize they’ve been idiots…when they see that they won’t get their money back. Savvy speculators try to sell the debt short before lenders catch on.

Nor can asset prices run too far ahead of real values for too long. Sooner or later comes a moment of reckoning, when asset values and asset prices converge. Savvy speculators bet on convergence. They buy when a stock is far below its real value…and sell when it is far above.

But Mr. Market is a fooler. He doesn’t make it easy.

All over the world stocks are down about 20% from their recent peaks and about 5% to 10% for the year. But they’re far from cheap. Shiller’s normalized earnings put the P/E on US stocks today at about 20. Major bear market bottoms come with the P/E down at 6 to 8. The typical bottom, according to Shiller, comes at about 13.

So, if this were a bear market (we don’t know)…and if it were a typical bear market (we don’t know that either)…it would bottom out at about 8,000 on the Dow (now, 11,143).

If this were a major bear market, we’d look for a bottom in the 4,000 to 6,000 range.

We don’t know what game Mr. Market has in mind. But we know he can play a cruel hand. It’s not that he has no sense of pity. He just wants to teach a lesson that investors won’t soon forget. Here’s what we think he’s up to:

First, he will dally around a bit. Let investors recover their breath and their nerve. Then, he’ll move prices back up….this would draw more money into the stock market.

When most of the seats in the theater are full look for a furry creature sneaking around with a can of gasoline in one hand and a pack of matches in the other. He’ll set fire to it. Stocks will go down…stabilize…then go down again. Then, Warren Buffett will announce that he is buying. The Fed will announce another QE program…perhaps with a different twist.

What ho! Stocks will soar…and then fall again. Down, down, down…they’ll drop to their level of March ’09…and keep falling until they have finally found their bottom — maybe 3…maybe 5…maybe 10 years from now.

The bear in the stock market will send investors fleeing to the shelter of the bond market. In a stagnant, Japan-like economy, even with trillion-dollar deficits, bond yields will stay low. Investors will get 2% on 10 year T-notes. “Better than losing money in the stock market,” they’ll say.

Households will put their savings into US Treasury debt — something they can count on. Businesses will store their cash in US Treasury debt, after all…no point in investing in new plant and equipment. Financial institutions, too, will seek out US Treasury bonds as the only place where they can still place money safely. Ben Bernanke has pledged to keep the key lending rate near zero. Bankers now know they will be given free money for the next two years. All they have to do is take it…and lend it back to the US government!

And then, when the bond market is fat and happy…and the nation’s savings have been transferred to the government and consumed by it, Mr. Market will creep up again — like a thief in the night — and give it a wallop.

Just in the last few weeks, stock market investors lost about $3 trillion of wealth — on paper. How they will look back on these days with pleasant nostalgia! Mr. Market’s next attack on stocks will wipe out $10 trillion. And when he whacks the bond market, he’ll take out another $10 trillion.

And this time, it won’t be just ‘paper’ wealth. It will be real wealth…the savings built up over millions of lifetimes of hard work.

And more thoughts…

Have the riots reached New York or Boston yet?

As Dear Readers know, we have wondered what this Great Correction really intends to correct. At a minimum, it seems destined to correct the 50+ year build-up of debt. But maybe it will destroy modern social-welfare governments too.

The model is simple enough: citizens give up a portion of their freedom and a portion of their money. In return they get safety…protection…and something for nothing. The typical voter believes he will get more than he paid for…he counts on his government to rob those richer than he is and transfer the loot to him.

The system works — for a while. But as these governments mature they become more expensive, rigid, and zombified. More and more people find ways to get something for nothing. More and more join the underclass, because it is easier to live at someone else’s expense, even if you can’t live very well. Pretty soon, there are zombies all over the place.

The Cameron government in the UK — like almost all social welfare governments — spends more than it can afford. It realized it had to stop feeding the zombies so much. It announced cut backs. This week, the zombies counterattacked.

‘They don’t treat me right,’ said one zombie quoted in the International Herald Tribune. ‘They just give me enough money to eat and watch TV.’

When they are not eating at taxpayer expense…or watching TV at taxpayer expense…in an apartment paid for at taxpayer expense…wearing clothes furnished at taxpayer expense, they are likely communicating by cellphone or Blackberry or I-phone, also provided at taxpayer expense. This week, the zombies got in touch with one another and decided to upgrade their lifestyles by breaking into shops and stealing things. That too, was at taxpayer expense. But it wasn’t an expense authorized by the peoples’ representatives in Parliament. The zombies had declared war.

The British feds were outraged. They had spent so much money on these people. Why were they biting the hands that fed them? Ah…you know the answer, Dear Reader. Because the system had turned almost a whole generation of people into zombies. Zombies are used to getting something for nothing. If they get it from the feds… or take it directly, what is the difference? And what else do they have to do? Watching TV all day is boring. For a brief time this week, zombies were on the march.

It probably won’t be the last time. The Zombie Wars have begun.

Regards,

Bill Bonner
For 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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Comments

  1. Bill Bonner, you simply lack the intellectual ability to analyze or even identify the socioeconomic principals behind contemporary events as demonstrated in your above article ‘Mr. Market’s Next Attack’. May I infer this to be the case for having (I’m sure) employees who constantly flatter you on how good you look, how smart you are and a number of other exemplary traits you simply do not possess.

    You must enjoy using this medium as a platform for launching attacks on these ‘Zombies’, as well as the governments economic interventionism to keep these ‘zombies’ off the streets.

    Starting here, (I will attempt to put this in layman’s terms so you can understand):

    You said: “More and more people find ways to get something for nothing.”

    Now I’m sure you could tell us about that, being the owner of a business you are constantly getting something for nothing (which is the value created by your employees/workers in excess of their own labour-cost also known as gross profit)

    Allow me to elaborate, economics 101 – if you will:

    You have a worker who is hired for an hour and paid $10. Once in your employ, you have him operate a boot-making machine using which the worker produces $10 worth of work every fifteen minutes. Every hour, you (the business owner) receives $40 worth of work and only pays the worker $10, capturing the remaining $30 which is named surplus value. After deduction of costs (the leather, depreciation of the machine, etc.), the residual constitutes profit.

    And here we come back to you (a business owner) who has the audacity to complain about the underclass getting ‘something for nothing’

    YOU also said “More and more join the underclass, because it is easier to live at someone else’s expense, even if you can’t live very well.”

    Of course – why didn’t I see this before? People choose to be unemployed because it’s easier.. I can’t wait for your next article where you say that people in Somalia are CHOOSING to starve to death or some other grossly reprehensible statement.

    In summary this is simply a hate speech on the underprivileged of the UK by one Bill Bonner (millionaire), no words of mine can justify the disgust I have for you in having the audacity to maintain such a position.

    Reply
  2. Bill. I respect your hard niosed approach to econimics and the financial consequences, and I agree we have voted ourselves more benefits than we can actually afford, but please don’t go blaming everything on the welfare state.

    The most egregious debtor nation in the world is the free enterprise, capitalist, corporate nation known as the USA. It has voted itself vastly more wealth than it can produce and is now screwed for paying the piper. Its not the political system so much as the reality that people push every system till it breaks.

    As for “The typical voter believes he will get more than he paid for…he counts on his government to rob those richer than he is and transfer the loot to him.”. Substitute “corporation” or “bidness” for “voter” and you have the perfect description of the final flowering of free market capitalism.

    Reply
  3. Bill,
    I must say that you are good at Economics and Finance but not good at Sociology and Social Phenomina (wrong spelling-hope everyone can understand the word). But, I still admire at your intelligence.

    Reply
  4. So now people like Evan are trying to reinvent economics that has been the ‘natural’ outcome of thousands of years of experimentaion. Has Evan ever been to an African or Indian village market.? These markets have been using the same principles of economics that you will recogonise as capitalism. Unfortunately for Evan and his cronies there is no government official here in these markets to regulate them or impose price controls. The markets in these villages operate efficiently day in and day out and cater to the entire demand of the local economy.

    And one more thing, these markets also employ a huge amount of labour (for physical work, by the businesses owned/managed by the so called tribal/rural merchants. And the merchants make more money than the people they employ. I am surprised that nature working in these villages for thousands of years could not come out with a more efficient method of employing people or remunerating them.

    Ah but the other oh so efficient workable method that Evan dosen’t mention have all been tried and have failed. One of them obviously being communism … come on Evan even the Chinese have forgetten Mao…

    People like Evan have a secret desire… They want to become like Bill. But since they can’t do it the right and legal way they want to try other means like the Russians and the Chinese tried in the 20th century and failed miserably…..

    Maybe Evan has a more dirtier desire…. He wants to take away Bill’s wealth….

    Reply
  5. This may be as futile as responding to a theological article from a scientific perspective and having to deal with christian or Islamic fundamentalists responding with their dumb assertions.

    Gul, I won’t waste my time responding to your crudely formed opinion. I would suggest you read into some kind of socioeconomic analysis or critique of capitalism instead of being an apologist due to it not suiting your careerist ambitions or narrow-mindedness.

    I’ve lost inclination.

    P.S I don’t advocate -isms.

    Reply
  6. .. and we could call it Capitalism.

    The business owner would look for increasingly lower manufacturing costs including wages, and look for increasingly higher margins to create increasingly higher profits. We could call this growth.

    Slaves would be used at first, and then when the morally righteous deems them illegal, we “enslave” other countries to make our goods for us. Then we will buy our own goods back from these countries because they aren’t really slaves, just really, really cheap labour.

    The domestic worker would receive (relatively) less and less in wages, because now whenever they buy anything, a percentage of their wages is going overseas to pay for the labour, the remaining going into the business owners’ pockets.

    Barely noticable at first, but after a few decades it becomes glaringly obvious who holds the money and who doesn’t.

    In desperation, developed nations will borrow their own money back from the manufacturing nations, only to continue to spend it in the manufacturing nations. There just isn’t any other choice where to spend it because nothing tangible is produced domestically any more.

    Once the money is spent, the debt collectors begin knocking. But there is nothing left with which to repay the debt, just piles of IOUs being pushed around between everyone. These IOUs are somehow called assets, but really they are debts that need to be repaid plus interest.

    Once the last dollar of debt money is spent, there is no money left to pay domestic wages with. There is no money left to continue to spend. Nobody has the capacity to borrow any more either because they’re too busy trying to find out how they’re going to pay their existing debts with no income.

    … we could call it the Pickle of the greater Western World.

    The masked man
    August 16, 2011
    Reply

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