What happened on Friday? A “moment of truth” arrived for Europe. But what is the truth? We’ll have to wait to find out.
The Dow rose 259 points. Gold was up $28.
But who cares? Up, down…up, down… Every day brings more ‘truth.’ But what we want is a truth with legs. We’re not day traders. Not week traders. Not even year traders. We want a long, sure…mega trend. We want the Dow at 900 in 1983. Or gold at 260 in 1998.
What is there today that is equivalent? How about 10-year US bonds at 2.20% yield? For upside, we can’t think of a single other thing. US bonds have been in a long, long uptrend — basically — since they’ve existed. From 1791 to the present, they’ve gone up. Of course, there have been some major problems along the way, notably in the ’70s when it looked like the Fed had lost control of inflation. Otherwise, bond yields have gone down as prices have gone up.
Is it time for a turnaround? Maybe not just yet. We’re still in a Great Correction. Bonds should continue to go up — for a while. But just wait…this is a truth that won’t go away: US debt is expanding…as its ability to pay declines.
Meanwhile, the big trend for the US stock market is probably down too. Just a guess, mind you. Why? We’ve given you the reasons…but since you seem to have forgotten, we’ll give them to you again:
..After 60 years of credit expansion, credit is contracting. That means less household spending, which means lower sales and fewer profits
..A bear market began in January 2000. It never reached its rendezvous with a real bottom. Ergo, the ultimate bottom still lies ahead…
..Stocks rose since 1982…since 2000, they’ve been going nowhere. Now, it’s time for them to go down.
..Most of the ‘growth’ in the last 20 years has come from more and more debt at the household level. Now that debt is shrinking…growth should shrink too…
..There are 70 million baby boomers who desperately need to save money for their retirements. They used to borrow and spend…now, they will have to pay back and save.
..As credit grew, it took more and more credit to produce an extra unit of output. Adding more credit now will not help the real economy expand…
..The feds can’t engineer a recovery, because unlike a recession, the problem is not that debt is too expensive, but that they have too much of it already…
..As the economy softens, the feds take more and more of it into custody. The feds invest badly, leading to less real output…which must supports more and more zombies…
..The European economy is sliding towards another recession; this will hurt the US economy too…
..The whole world economy is weakening; it could drop into a worldwide depression…
..Higher, persistent unemployment undermines consumer spending…
..House prices are still falling, which will further reduce household net worth and reduce both spending and risk-taking…
..Energy use in the US is falling…more inputs of energy do not produce enough extra output to pay for themselves…
..But energy use in the emerging markets is increasing, supporting energy prices and putting more pressure on US household budgets…
..What else? Want more reasons? Stay tuned…
“I don’t have to spend money.”
Damien, our gardener, invited us for dinner on Saturday. We drove over, under a full moon. The little village only has about a dozen houses, all built of stone. It once was the site of a relay station, where travelers could stop, get fresh horses, or spend the night. Now, there are only houses, gardens, and a little stream.
Damien’s house was warm…a pleasure to come in from the cold night air. The fire in the fireplace, contained in a steel firebox, heats the entire house.
We were admiring the fire.
“I don’t spend any money because I heat with wood, which I cut myself. There’s nothing better than wood heat. And I eat things that I grow in my garden…and meat that I get by trading with local farmers. Tomorrow, I’m going to slaughter a pig. I cut up a side of beef a few days ago.”
“Do you have room in your freezer for all that meat?”
“Oh yes…no problem. I’ve got two of them, anyway. All I spend money on is my truck…and electricity. But even on them, I don’t spend very much. You really don’t have to spend a lot of money, if you don’t want to.”
Damien did not mention the alcohol. He also has a vineyard. He uses it to make wine and alcohol…which he concocts into local aperitifs, “Puces d’epines” and “Pineau.” Both begin as grape juice, reinforced with alcohol — typically, from distilled grape juice — with local flavoring added, such as the early flowers of the hawthorne bushes that grow alongside the roads and fields.
“Damien…what did the doctor say?”
“He said it wasn’t cancer. That was the good news. They’re going to do an operation in February. They say I eat too much rich food and drink too much.”
“You probably do.”
“Well, maybe…but in my family, the men always die young. It’s hereditary. Nothing I can do about it.”
“Maybe the men in your family always eat and drink too much.”
“No…I don’t eat and drink any more than everyone else…”
A knock at the door. Mickey…pronounced Mee Kay…came in, wearing a jacket with Mickey Mouse on it. Mickey, a slight man of 58 with a very narrow jawbone, explained why France is in financial trouble.
“I’m the reason France is going broke. I worked for the Post Office. I’ve been retired for 3 years. It doesn’t really make any sense. I earn almost as much as I did when I was working. Statistically, I’ll live for another 25 or 30 years. They’re going to pay me all that time for doing nothing. At least, that’s the idea. But they’ll go broke long before that.
“These retirement systems were set up a long time ago. The unions fought for more and more benefits — earlier retirement was a main one. They won. They wanted better and better retirements. And now the people coming along after me will be lucky if they get any retirement at all.
“You know why Bismarck invented the public pension system? He needed to get elected. And he wanted to take votes away from the Socialist candidate. So, he came up with the pension system. You call it ‘Social Security’ in your country.
“But he set the retirement age at 77, I think. And then, the average worker only lived to be about 65. So, you understand…it was designed only to support the very few old people who lived long enough to get it. But, of course, the politicians found they could get votes by making it better and better. And now it’s so good they can’t afford it. They’ve already begun to change the terms in France. I probably got out just at the right time. I could retire at 55…and live for another 30 years at public expense. What a deal!”
Mickey doesn’t look French. We asked him where his people came from.
“Oh…you’re right. My mother is French. She’s still alive. But my father was a refugee during the war. He came from the Ukraine. My family name is Zacycincaz. Nobody knows how to pronounce it. Or, when I’m on the phone, I always have to spell it out. I like spelling it out. It makes me feel different.
“My father died a year after I was born. I don’t know anything about his family. I probably have relatives in the Ukraine. But I don’t know how to find them.”
“Just go on the Internet,” said Damien. “You can find anything on the Internet.’
“I’m not going on the Internet. I’m an ex-post office guy. A letter carrier. I’m not going on the Internet. It would be disloyal.”
“Then, you’re not going to find your family.”
“I don’t know if I want to find them anyway… Hear that? ”
Damien opened the door.
“Ludovic…come in!” he yelled. “I’ve got Mickey and Mr. Bonner here. Come in and play for us.”
“A boy of about 15 came in. He looked at Mickey. He smiled. He shook our hands…but didn’t look directly at your editor. His mother and father came in after him. Sturdy people. The father had a stiff brush of black hair, with tips of gray…and a large mustache. He was short and jolly. The mother had a finer face…a little on the plump side. Attractive. Friendly. Both were dressed simply. Without pretension. They could have been farmers. Truck drivers. Or, perhaps, school teachers.
“Play something for us…”
The boy began to play. It was the music of rural France — La Musette. Gay. Charming. His first song sounded almost Irish.
He concentrated. His fingers worked the keys on one said…and the buttons on the other. He sang happily. He was a musician at heart…connected with the music in some deep way. He did not have to think about it… He just kept himself in that unique space that all good musicians inhabit, where some inner spirit guides the fingers and the voice.
We clapped and cheered when he finished.
Then, he began a series of songs. One was a lament…like a sad waltz; but it was the waltz of short, country people in farm outfits, not the waltz of tall Viennese noblesse. Lugubrious. Almost whining. And then, perhaps to please us, he played “When the Saints Go Marching In” and “She’ll Be Comin’ Round the Mountain.”
He seemed to have a large stock of songs. We all listened with pleasure and watched in admiration.
Finally, he stopped, bowed to us all as we applauded…and began to take his leave.
“He’s a gifted musician,” we said to his mother.
“Yes…but I don’t want him to go into music professionally. It’s too hard to earn your living as a musician. I told him to train as a pastry cook…or a farmer…and play music for fun. That’s what everybody does around here.”
When the musician had left, we returned to our meal…
..terrine of deer meat…with two glasses of Pineau… to start…
..then, a fish dish (we didn’t understand what it was) with a white sauce…with a bottle of white wine.
..then, rabbit in a mustard sauce and string beans in olive oil…for the main course, with two bottles of red wine.
..then, came the cheese…local….undefinable…with more red wine….
..a dessert of clafouti…made of prunes in a custard, on a light, flakey crust…with a sweet wine the color of amber…
..and finally, coffee.
When we had finished we had pushed our chairs away from the table and were leaning back, not sure if we could get up.
“How about a drink…eau de vie or whiskey… as a digestif,” asked Damien?
for The Daily Reckoning