Friday, the Dow rose 302 points. The price of oil fell $5, to $115. After so many weeks of stormy, bearish, depressing news...it was time for a little blue sky and sunlight.
Stock markets all over the world are on the rise. Even financial stocks...and automakers...and airlines - all seem to be recovering.
One major exception - China. The Shanghai index fell more than 4% on Friday...and is still falling this morning.
But outside Shanghai, the word on the street is that "the worst is over." They liken this to the '70s, noting that after inflation peaked out, stocks rose strongly, and gold collapsed. In fact, the period - 1982-2000 - was probably the most agreeable financial period in most peoples' lives. The Dow rose 11 times, while gold fell to less than a third of its peak. Interest rates went down in fits and starts over the entire period, not reaching a bottom until 2003. What could be better? Assets rose in price...while the cost of borrowing fell. This was the era of globablization, free trade agreements, cheap shipping costs, the entry of China and other nations into the world market system, Wal- Mart, technology and just-in-time inventory - all of these things helped to lower the cost of many manufactured goods. What a great time to be an investor!
But Daily Reckoners are warned: the stock market didn't take off until stocks had been beaten down to very low prices - with P/E ratios of 5 to 8 (currently, they're 14-18). Bonds didn't take off until yields had peaked out over 15% (currently the 10-year note yields 3.95%). Which is another way of saying...the cost of borrowing didn't go down until it had become almost impossible to borrow. And inflation rates didn't retreat until they had hit 14% annually.
The moral of this story is simple enough. You have to fall down before you can pick yourself up.
Another big story in the financial press this morning has the dollar as its hero. The greenback rose three full pennies against the euro on Friday. It now stands at $1.50 per euro. Yes, the dollar is coming back too - or so you might think.
As to the dollar/euro exchange rate, we have no prediction to make. It's like a spelling Bee where both contestants are dyslexics. Neither the euro's masters nor Ben Benanke can spell "sound money." The European central bank lends at twice the rate of interest of the Fed. But the Europeans are expanding their money supply faster.
Compared to dollars and euros, gold is a Webster's Unabridged Dictionary. Every word is spelled perfectly. Our guess is that both dollars and euros will lose ground against gold. Here too, many commentators think the top in gold has come and gone. It's down nearly 15% from its near-term peak. But again, it appears to us - and maybe to us alone - that the '70s-style trends have yet to run their course. Stocks still have to be crushed. Inflation still has to reach higher than an official rate of only 5%. Yields have to reach higher than 4%.
And the monetary system rigged-up by the Nixon Administration in '71 still has to fall into ruin.
Bill Bonner
The Daily Reckoning Australia
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About the Author
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.
Comment by Ross on 12 August 2008:
The Shanghai householders that drove up the Shanghai exchange did so on debt and one thing the Chinese government still appears to be able to do is to`control bank lending whenever it chooses. Bank capital controls = flatlining stockmarket. What do global markets look like unleveraged? Thats what we are all about to find out. We are seeing it in commodities as we speak, the first sign of a dip on high cost leveraged gambling sees those in the market running for the door. Fast up and fast down ratcheting around sector after sector until it gets to CDS when it will really hit the fan.
Comment by beyondtool on 13 August 2008:
There was a nice write up in the Sunday Mail this weekend about the credit crisis. It's interesting that Mainstream media is finally explaining the fact that greed got us into this mess and that the worst is not over by a long shot. The impacts are only starting to flow and the housing market in Australia is only starting to slide.