Rising Debt and the Great Market Waiting Game

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The Zombie Triumph of 2008…

We’re writing ahead of the close on Monday…stocks are up, but we’ll have to wait to find out how it turns out. We’re writing earlier than usual because we have to head back to France, to a funeral, alas. The burial will take place in Pere Lachaise cemetery…which we’ll tell you about.

In the meantime…

Wait…wait…wait…

That’s probably the hardest part of this business…waiting for something you know SHOULD happen… It can take years.

We remember waiting for the dot.com bubble to pop. People thought we were just “out of it.” We just didn’t “get it,” they said. They said new technology had changed the rules of the game forever. Previously – that is, in the world B.I. (Before Internet), which was to them equivalent to the time when pre-humans walked on four legs – the value of stocks was limited to the value that could be added by PHYSICAL processes. You could build more factories. You could sell more widgets. But you were up against physical limits. There was only so much energy…so much labor…so many trucks…and so many people who wanted to buy your widget. So, you could anticipate growth. But within limits.

If you paid more than 30 times earnings, you’d have to be out of your mind…because, come on, things just don’t grow that fast and the faster they grew the more likely they were to crash into something.

In this new electronic age, the sky was the limit. Because information flew around the Internet at the speed of light – and at practically no cost. There was no limit on how much human life could be improved with this new, free, information…so there was no limit on how much you should pay for one of the companies that was pushing electrons around.

In practice, free information turned out to be worth no more than people paid for it…and the dot.com revolution blew up in January 2000…leaving only a handful of survivors (who have done very well, thank you.) In our view, the stock market has been in a bear trend ever since (even though the Dow rose after the initial downturn, at least in nominal terms, until 2007).

But we waited three years before the blowout…with people laughing at us the whole time. They were getting rich on dot.com stocks…while we didn’t get it. And it looked like we’d never get it.

But then, guess who got it? They did. Good and hard, as we like to point out.

Next, we waited three years – at least – for the housing/consumer credit/derivatives bubble to blow up. We saw it coming. We warned our dear readers. But for what seemed like an eternity, it looked like we were wrong. Houses just kept going up and up and up. Wall Street just kept making more and more money. It looked like it would never end…until 2007, that is.

Waiting is hard.

You begin to have doubts. Maybe you’re wrong. Yes, it OUGHT to happen the way you imagine. But maybe you missed something. Maybe this really is something new and different.

And so we wait again. What for? Three things…

For the next leg down of the bear market…

For the inevitable heavy-handed and disastrous intervention by the authorities…

And for the final collapse of the dollar and the US bond market.

We might also say we’re waiting for the end of the welfare state…for the end of the dollar-based money system…for the end of the American imperium…

But those things may be even farther into the future…

So let’s stick with those things that are closer to hand.

Wait…the markets have closed. The Dow rose 81 points. Oil closed over $77. Bond yields are headed up. Gold was flat.

Hey…the economy doesn’t seem to be sinking towards deflation and a bear market today.

Well, we’ll just wait until tomorrow…

And more thoughts…

Meanwhile, we’ve been tracking the zombification of the US. The zombies are becoming more numerous, more parasitic, and bolder. From food stamps to bank bailouts everybody wants to live at someone else’s expense.

We hadn’t thought of it this way before but the election of Barack Obama to the White House was not exactly what it seemed. It was not a triumph of light over darkness, nor right-thinking over neo-con devilry.

Still, compared to George W. Bush, it seemed like even electing a half- wit would be an improvement. And Barack Obama is no half-wit. He has all his wits about him. Trouble is, he was also the candidate of choice for the zombies. And his election marks a major milestone; the zombies now control the White House and Congress. They control America.

Obama won 28 states. John McCain won 22. The Obama states are full of debt-fattened zombies – with an average per-capita state debt of $1,728. The McCain states are relatively solvent, with an average per- capita debt of only $749.

In the states that went most heavily for Obama – Hawaii, Vermont, New York, Rhode Island, Massachusetts and dear ol’ Maryland – the average state debt per capita was even higher, at $4,606.

We don’t need to make too much of this. It’s pretty obvious what was going on. The zombies saw one of their own. They wanted someone who would give them something for nothing. In Barack Obama, they got it…maybe even more than they bargained for.

Here’s the latest news:


WASHINGTON (AP) – The federal government is on track to record the second-highest deficit of all time with one month left in the budget year.

The Treasury Department says that through August, the deficit totaled $1.26 trillion. That’s down 8.1 percent from the same period in 2009, when the government recorded a record $1.4 trillion deficit. But it is on pace to total $1.3 trillion – the second-largest deficit on record.

Soaring deficits have become a major issue with voters heading into the midterm elections. Republicans have highlighted the deficits to illustrate how government spending is on the rise under Democrats.

So you see. It just proves our whole point. Nature abhors a vacuum and detests a monopoly. After the fall of the Berlin Wall, America had a monopoly on force. No nation…nor even all the world’s other nations put together…posed a serious military threat.

Nature couldn’t stand it. She got to work. If America could not be brought down a peg by other nations, she would have to bring herself down. How? The typical ways…spending too much money…getting into expensive wars with nobodies…wasting her resources overseas while letting the zombies take over at home.

First nature needed a stooge – a willing dupe – to implement the program. George W. Bush was perfect in the role. He never met a spending bill he didn’t want to sign or a war he didn’t want to join.

And then came the decisive election campaign of 2008. Nature must have been worried. What if a real reformer came up? What if he cut the budget, brought home the troops and threw out the zombies? Ron Paul did present himself. And yes, his program would have meant a big reform. But no…the American people – bless their greedy little hearts – wanted nothing to do with it. They had become accustomed to living in a style they couldn’t afford. They wanted more of it.

They turned their back on Ron Paul and voted instead for Barack Obama.

Yes, dear reader, it was the Zombie Triumph of 2008. It kept America on track – on the road to perdition.

Regards,

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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Comments

  1. Reading the property wrap up in todays age I saw this.. A house in Coppin Grove Hawthorn sold for 9 million. The owners rejected an offer of 16 million back in January

    Stillgotshoeson
    September 20, 2010
    Reply
  2. But Shoes, don’t forget the Mantra(s):
    1. “Housing and real-estate are the best investments you can make.” ( sure beats a savings plan)
    2. “My house is my retirement nest egg. I will sell it and move into something less expensive when the time comes.” (Public Retirement Strategy)
    3. “We made a lot of money on the appreciation of our house.” ( Emotional Wealth Effect)
    4. “Money is so cheap my financial advisor advised me to take out an equity loan as wealth ‘extraction’ strategy.” (extraction alright)
    5. “They aren’t making any more land!!” ( if you don’t take on horrendous levels of debt you are going to miss out on the Aussie dream)

    Talk to those owners about their 9 million hit, or so, and see what they say!!

    Reply
  3. 1. “Housing and real-estate are the best investments you can make.”
    Comment: Certainly have been for us! :)
    2. “My house is my retirement nest egg. I will sell it and move into something less expensive when the time comes.”
    Comment: Certainly was for friends of ours, who downsized recently and paid no CGT. :)
    3. “We made a lot of money on the appreciation of our house.”
    Comment: And, again, paid no CGT… . :)
    4. “Money is so cheap my financial advisor advised me to take out an equity loan as wealth ‘extraction’ strategy.”
    Comment: Well, you’re an idiot if you did it. Wondered how you got
    that $30K second-hand sound system, BTW!~ :D
    5. “They aren’t making any more land!!”
    Comment: And they aren’t printing any more money, are they? ;)
    6. Talk to those owners about their 9 million ‘hit’, or so, and see what they say!!
    What did they pay for the house? If they paid $6mil, they’ve made $3mil… and paid no tax. :D

    Reply
  4. No biker you are right life wasn’t meant to be easy,

    It was only meant to be easy for you and everyone who purchased an average house on an average income for 3-4 times their yearly income before around about 2002, 2003

    Reply
  5. “4. Money is so cheap my financial advisor advised me to take out an equity loan as wealth ‘extraction’ strategy.”
    Comment: Well, you’re an idiot if you did it. Wondered how you got
    that $30K second-hand sound system, BTW!~ :D”

    Didn’t expect that confirmation so soon, Bear!~ ;)

    Reply
  6. “…it was only meant to be easy for you and everyone who purchased an average house on an average income for 3-4 times their yearly income before around about 2002, 2003…”

    Buying property since ’71, Steve. And my brother started two years earlier, when he was on $14 per week. He couldn’t make the _first_ monthly payment… and had to sell the block for a 43% profit. :D

    Yeah, I know… your life is _so_ much harder than ours was: Whinge, whine, w*nk… . ;)

    Reply
  7. dribble dribble dribble…..

    Reply
  8. Oh, I see. That was a W(I)NK, you know!~

    Mind you clean up before mum comes in, son.

    Reply
  9. it looks like interest rates will be going up again.
    Good news :)

    Reply
  10. There ya go, Steve. You’ll be able to buy a home on 6th October, mate!

    Y’know these downers don’t do you any good at all.
    The light’s at the end of the tunnel, son.
    A quarter percent rise and those Sydneysiders
    will be _begging_ you to take their homes!

    Great to see that big smile, Steve. :D

    Reply
  11. Once again dribble dribble dribble…. :)

    Reply
  12. You’ll wear that thing out, Steven. :D

    Reply
  13. Never had an equity loan, but my brother loves ’em and could come unstuck.

    Just questioning the Real Estate Orthodoxy. As deflation continues to kick in what you want and own will lose even more value. On top of that what you need and use will suffer an inflation bias. Just look at Electricity hikes as an example. Australians are going to feel the squeeze as the easy credit dries up.

    “The great enemy of the truth is very often not the lie – deliberate, contrived and dishonest – but the myth – persistent, persuasive and unrealistic.” ~ John F. Kennedy, 1962 commencement address at Yale University

    Reply
  14. “Never had an equity loan, but my brother loves ’em and could come unstuck.”

    I’d be amazed if he didn’t.

    I take it he’s not a bear… and you’re not your brother’s keeper(?)

    “Australians are going to feel the squeeze as the easy credit dries up.”

    Only if they’ve accessed equity loans, or wasted tens of thousands of dollars on expensive status symbols. ;)

    Reply
  15. I hope not. I’m the oldest so I’ve definitely said something. Speaking of status symbols, I had a mate once who nailed an old stainless steel wok onto his gable in an effort to keep up with the ‘Dished’ Jones’s. :)
    The problem is not aussie banks but rather the borrowers. Insufficient collateral and qualified borrowers. Something like a 13% deposit now on a $500,000 home. It is getting out of reach on common sense grounds, it must be. As asset prices deflate so does the ability of our banks to lend, and the spiral down starts. I think it already has.

    Reply
  16. “As asset prices deflate so does the ability of our banks to lend, and the spiral down starts. I think it already has.”

    The RBA doesn’t think so, Bear. :D We think that 2011-2012 will surprise all the punters. Good timing for us, as our ability to reduce our CGT through rollovers into Super is diminished by 2013.

    Retirement looks pretty good to us. No need to touch principal… and more cash acce$$ than we’ve had when we were both working.

    Asked my missus how she liked the sound from our $3K sound system.
    Her response? “It’s good!” ;)

    Reply
  17. I am afraid the high interest rates wont work Steve without high unemployment to back them up. The reason the RBA is thinking about increasing rates is because of a combination of low unemployment and consequently higher consumer spending etc etc. Not really a combination leading to lower house prices……

    Reply
  18. Sounds terrific Biker, you have done so well, and helping us guys think straighter as well. I’ve taken your hint and I am much more productive at work, watch my internet usage with a view to practically eliminating non-work related sites soon. I’m replacing it by going to Macca’s with a mate for coffee during breaks every couple of days.
    $3K system probably sounds as good as mine for all intensive purposes too. I’ve got a Sony system in the garage and in some ways it is not as fatiguing as the Plant. I’m a bit of a fanatic when I get the bug for something, lucky I don’t get bitten a lot. I love music and have a piano as well, take lessons and I practise every day. It is a real workout for your mind.
    Are you on TOU electrical metering over there? Just introduced here. I bought some $5 timers from Bunnings and hooked up dishwasher and clothes washer so as to run their cycles off peak. Every bit helps eh? :)

    Reply
  19. We have two alternative systems available here, Bear: SmartPower (supposed to be worthwhile, but even Synergy’s call system advisors are against it!) and A1, which works better with solar electrickery.

    We switch the washing machine on at bedtime. As chief dishwasher, I use minimal power. ;) Our rentals have DWs and A/Cs, but we seem to survive pretty well without… .

    Our solar HWS and woodstove probably halve our power bills. I’ve spent the last week cutting most of next year’s wood up on the hill. The stove heats the house, heats all our hot water (when the solar HWS is less effective) and cooks around half our food. Our most expensive power cost is bottled gas down at the chalet. That’s gotta go. I’m considering a biogas system (methane) instead, but maybe the 5kW SES will be the way-to-go… .

    Stay with the piano. One of our two is pretty good (piano, guitar, sax) and has just finished a sound recording practicum in the US.
    Much, much better musician than his old man ever was… . :D

    Reply
  20. I love that piano!! It is way better than I thought it would be, but also much harder. Your son (?) _sounds_ talented. Pretty good parents you must be as I have _heard_ nothing beats music for brain development. Looks like you have all the bases covered with wood chopping (I cut all our wood too) but my inbuilt doesn’t have a wet-back. I run instantaneous gas water heating. Our family of 5 uses 4 KWh a day. I’m looking at getting an Aussie Green whole house fan to really get on top of summer heat. Have you heard of the concept? Basically forced ventilation of house during cooler hours of early morning so that heat gain starts from a low foundation at the start of each day.

    Reply
  21. “Basically forced ventilation of house during cooler hours of early morning so that heat gain starts from a low foundation at the start of each day.”

    Works very well here. Addition of a solar vent might be worthwhile.
    We also have cross-flow up here in the mezzanine.

    We have 10m ceilings and walls up to 600mm thick so it all works pretty well. Glass two stories high on two elevations was probably a mistake, but awnings in mid-summer keep the heat out.

    I should really fit a water jacket to the chalet stove. It’s the simplest winter solution.

    Yes, the kid is gifted. Must be on his mother’s side… ;)

    Reply
  22. Biker, unfortunately ’tis true. 80% of intelligence comes from Mum but what she doesn’t know can’t hurt you….
    Daamnn!! You are good Biker!!

    Reply
  23. Nah, I’m not kidding. I’m _not_ the main reason we’re ‘comfortable’… .
    Definitely married into a far deeper gene pool… . :D

    Reply
  24. Like Mom, like Son :)

    Reply
  25. An article from the financial review…

    Interest rates are on the way up…. this could be interesting for some.. painfull for others..

    http://afr.com/p/national/economy/record_consumer_debt_may_bring_bankruptcies_0k5DhGK1bWREerT9IwnKWJ

    Stillgotshoeson
    September 23, 2010
    Reply

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