A large headline in the Financial Times proclaims: “Global economy heads towards a soft landing.”
It is a marvelous line, made unwittingly more poignant for being placed over a photo of an addled-looking Noel Forgeard and an Airbus 320. Neither Airbus nor Forgeard managed a soft landing last week. Both crashed…the former because it couldn’t deliver the planes it promised and the latter because he sold shares in advance of a profit warning that sent the aforementioned stock down like a kamikaze pilot. Five billion dollars was wiped off of Airbuses’ capitalization. Good timing on Forgeard’s part.
What the article itself was concerned with was not the sudden crash of Airbus, but the gentle descent of the entire world economy. How do we know it will land softly? Two hundred and forty economists have said so.
“Economic growth is set to slow this year and next amid rising interest rates, weaker house prices, high commodity and energy prices and fresh geopolitical tensions,” the FT summarizes. “The global liquidity bubble, which propped up global growth for so long, is now being pricked by central banks desperate to stem surging consumer price inflation.”
Here we watch the markets, too, and even more, the market commentary.
Ms. Market, we have found, is like a woman — coy, changeable and contemptuous of our efforts to understand her. Will she be perky and charming today? Or will she be sulky and distant? What is bothering her now? Oh my, my…she seems frisky today, doesn’t she? We will never fathom what moves her; we might as well be a golden retriever trying to decipher the Tokyo train schedules.
But market commentary is another thing altogether. It is more masculine, which is to say it is more logical, more understandable, more reliable, and more thoroughly imbecilic. Just read the papers. You will find analyses there that even a 10-year-old could grasp. Are they correct? No more correct than a man trying to dope out his mistress’s moods. Are they useful? Yes, of course. Mainly because they are almost always wrong.
Commentators, it seems, are from Mars. Markets are from Venus.
And like Mars and Venus, they move in separate orbits.
We say that, mind you, in earnest admiration. Not of the financial media nor of the pundits, but of the elegant way in which the world is designed to deceive the mass of men. In order for the markets to function as they do, most investors must be wrong most of the time. Otherwise, they would look ahead and thwart the trend. A developing bull market requires that most people distrust it. Otherwise, they would jump in right away and bring the whole thing to a premature conclusion. Likewise, a market peak needs a preponderance of bullish investors at the very moment when bullishness is the most unprofitable sentiment one could have.
The financial media, amplifying popular sentiments rather than filtering them, helps investors arrive where they shouldn’t be exactly when they most shouldn’t be there.
As near as we can tell, the league of extraordinary economists is right so far. They have only to look out the window; the sky is so dark with inflation hawks, it looks like a scene out of “The Birds.” German producer prices are rising at the fastest rate in 24 years, we learn from yesterday’s press. The European Central Bank is tightening up to fight it. In Japan, the ZIRP — or zero interest rate policy — is set to end “without delay,” says the country’s top central banker. China, meanwhile, has begun taking liquidity out of the market as quickly as its own central bankers can manage. And, in America, a further rate increase next week is said to be a “done deal,” with another one now expected in August.
“By curtailing the rate of growth of liquidity and making it more expensive for companies or individuals to borrow,” the FT continues, “central banks are hitting share prices, bond markets, commodity and precious metal prices as well as the international housing market.”
Again, we see nothing to argue with. We have seen what has happened in the financial markets. Houses are not marked to market the way copper and Airbus shares are. If they were, we suspect we’d see a decline there, too.
No, it is not the landing we doubt. That is a known and well-reported fact. It’s the qualifier “soft” that we wonder about. How do 240 economists know we will have a landing that is soft rather than hard? How do they know what mood Ms. Market will be in tomorrow or the day after? How does a Martian understand what a Venusian is up to?
They don’t. They have no more idea than we do. But their unanimity gives us a clue about where the money will be made. With so many people betting on a soft landing, the long odds on a hard one are bound to be attractive.
u2022 Financial crises often destroy the middle and lower classes. The rich figure out what is going on. They find ways to protect themselves. After all, how did they get to be rich in the first place?
On the other hand, America’s middle classes have no idea what is happening to them. They do not understand the Fed, credit bubbles, debt, or paper currencies. And why should they? They have public officials, and elected representatives, who are supposed to watch over those details for them!
But their public servants lie to them…and set them up, leaving them unprepared for what could turn out to be one of the worst financial catastrophes in history. Didn’t Mr. Greenspan himself tell them that it was safe to put money in mutual funds in the late ’90s, because “once or twice in a century [comes] a phenomenon that will carry productivity trends national and globally to a new, higher track”? And didn’t this same bureaucrat urge them to take advantage of adjustable rate mortgages in the heyday of the real estate boom? And now, they are told that jobs are plentiful and their incomes are rising. “Keep on borrowing,” is the sotto voce message.
Mr. Bush thinks he should get more credit for creating so many jobs and so much prosperity. He is puzzled by why Americans are not more grateful. Here, we rush to explain:
Jobs are plentiful, that much is true. But they are jobs that don’t pay very well. And while average incomes are going up, incomes for most people are not. In fact, there are more and more people earning less and less. Average wages are rising, because pay levels at the top are soaring. Goldman Sachs employees, for one, have never had it so good. But for most people, wages are going down. Weekly wages fell 0.7% last month. They’re down 0.2% for the year. Half the months from ’01 through ’04 saw no wage gains. And for 90% of workers, those earning less than $184,800 per year, median incomes fell 0.5% during the period ’01—’04.
These are the same people who don’t pay cash for their houses, who depend on jobs for their livings, and who, especially lower down the income ladder, have no savings and owe large amounts on small houses, which they service out of small incomes. Now, their ARMs are being reset higher, even as their house values and incomes drift lower.
The feds spared the nation a serious correction in 2001. But they did it at the expense of America’s working classes, who were lured deep into debt in order to keep spending. Now that rates are rising, they find it impossible to continue. And they are left in a position you might wish upon your enemies, but not your friends. They are not only relatively poorer than they were — compared to the rich in America as well as the poor in Asia, whose incomes have been racing ahead — they are poorer in absolute terms, too. Their net assets are few. Their debts are many. And their incomes are lower than they were five years ago.
When middle and lower classes finally figure out what has happened to them, they are not going to be very happy about it.
u2022 “Enjoy the party,” said our friend Tim Price late last year, “but make sure you dance near the door.” You can do that in the financial markets…by buying put options, setting tight stop losses, or using a form of portfolio insurance. But what can you do in the housing market? There, by the time you realize the party is over, the doorway is already jammed with people trying to find their car keys. For Sale signs go up quickly. Before you know it, the buyers disappear. As soon as they sense falling prices, they wait…hoping to get the property they want at a lower price.
u2022 Another reader writes:
“Sign of the Times? Here’s a message I received today on our local-community e-mail list.
“‘Gas siphoners have been hitting our neighborhood regularly in the middle of the night and they break the gas caps as well. Apparently they are in a red truck. We are across the street from Schallenberger Elementary School. They hit numerous houses in the area frequently.’
“Where do we live?
“In an upscale area in the heart of Silicon Valley.”
Bill Bonner [send him mail] is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century and Empire of Debt: The Rise Of An Epic Financial Crisis.