Financial Reckoning Night


A financial pundit who is always wrong is much more valuable than one who is occasionally right. You need only remember to do the opposite of what he says all the time. That is why our favorite British columnist is Anatole Kaletsky.

Kaletsky is a smart writer and a good thinker, but his wrongness is profound and reliable.

For instance, in 2004, after years of being bullish, he turned to a “much more cautious stance.”

That should have been signal enough — back up the truck, buy U.K. stocks. And, indeed, in the following two years, stocks rose nearly 30%.

But now, the man suggests the storm to have passed. The “dreaded ‘day of reckoning’ for the British economy may be over already, before it even began,” he writes.

We did not merely read that sentence; we stared at it like a child at a jack-in-the-box, willing something to pop out that would make sense. We presume Kaletsky drives a car as safely as anyone else. We suppose he pays his bills and puts his pants on without falling over. But when it comes to economics, he so misunderstands the way the world works, he cannot take a step without falling on his face.

The “day of reckoning” suffered by Britain must have been an odd duck. It neither quacked nor waddled. Nor did it have any feathers. And according to Kaletsky, it died before it was even hatched.

We have yet to read the weather report that tells us of a storm that ended before it began…or the history book that describes wars that never took place.

We imagine a very old man, awaking from a dream:

“Well, hey, this is not bad. I can still watch television. I still have my family. Heaven is not so bad.”

“You haven’t died yet, honey,” his wife reminds him.

Why no “day of reckoning” in Britain…or America? The most likely explanation is that it hasn’t come yet.

American readers can readily draw a picture of Mr. Kaletsky: He is Thomas Friedman with a brain. Just as wrong, but more thoughtful and original.

Exploring Mr. Kaletsky’s world is like entering some magnificent science fiction world. There are the gleaming towers of the future. There are the handsome industries and innovative enterprises. And there are the wizards and wonks — the captains and commanders — who make it all work so well. It is a world with challenges, to be sure, but no challenges so great they can’t be met with courage, intelligence, and a positive attitude. Solving problems, in the Kaletskian world, leads to constant forward motion — progress.

In this strange world, days of reckoning can end before they begin, because there is never really anything to reckon with.

Mind you, it is not a bad place. Indeed, many might prefer it to our own world. And you can see why. In Kaletsky’s world, the pieces fit together. There is action and reaction. Thought, word and deed all work together without sin, without accident, with hardly ever a surprise or a snafu. And, the sun shines all day long, everyday.

Comparing the real world to this wannabe world is like comparing the Amazon jungle to the Baltimore City Zoo. In the zoo, there are wild animals, but apart from taking an arm off an occasional visitor, the zoo critters stay where they’re supposed to stay, and do what they’re supposed to do. Out in the real world, on the other hand, you never know what the animals will do.

Currently, in the NYSE jungle, investors reckon a stock is worth about 17 times what the company behind it earns in an average year. There is no cosmic law that decrees that a stock is worth that much…or even half that much. Nor, is there any God in Heaven that prevents them from changing their minds about it.

Which is just what they do. After a long period of reckoning stock prices up, they begin to feel like they’ve overdone it. They get nervous. Something happens. At 17 times earnings, it takes 17 years before the company makes enough to repay the investment. Investors begin to figure that 17 years is too long to wait and they reckon it’s time to sell.

Then, the long march begins from positive to negative, from bull peak to bear trough — taking about 15 to 20 years, and usually, a gentle, downhill stroll. But, sometimes, it is sudden, precipitous…heart stopping.

And lenders, too, have their moods…of the same sort. Twenty-five years ago, who would lend long term at less than 15%? People judged it too risky. They knew their government was in the hands of mountebanks, and their currency managed by swindlers. If they didn’t get a high return on their lent money, they figured, they might never get it back at all.

Now, lenders will put out perfectly good dollars for 10 years or more and only ask 5% interest. Consumer price inflation, including energy and food, was most recently clocked going almost exactly the same speed — 4.8% annually to be exact. This puts the real return on such lending at nearly zero…before taxes. If the current rate of inflation continues, the real rate of return after tax will be negative. If the rate of inflation rises, the real rate of return even before taxes will be negative.

Reckoning in the bright sun of daylight can be done without alcohol or sleeping pills. But at night, a man’s palms sweat, his breathing turns shallow, he tosses and turns, and wonders if he’s reckoned aright. He’s bet his entire net worth on a couple of houses in the neighborhood; he’s got big mortgages, which keep going up. And now, rumors are beginning to circulate.

The guy down the street put his house on the market a month ago, yet the sign is still up. Now, the papers say the bubble has burst. But what do they know? You can’t go wrong with real estate. Can you? Even if it goes down for a year or two, it always goes back up, right? Oh stop worrying…go back to sleep.

What is it that brings on these mood swings? Is it something in the water? Something in the air? Or is it something deeper…some momentary recognition of the way the world really works…some instinct that hints that for every yin there really is a yang…a boom for every bust…a fit for every start?

Why did the man buy houses he didn’t need? He thought they would go up. Why did he think they would go up? Because that is what they have been doing. Why are they still going up? Because everyone is buying them!

They believed a thing, and made it so. And then, they believed it so much, they made it outrageously so. Investors and speculators drove up prices so much that the average house now sells for more than the average buyer can afford. Rents can’t keep up with expenses. Now, the house has to go up in price just to break even.

Looking around the neighborhood, a man sees nothing has changed: same houses, same cars, same families. But cometh the dark night, he sees visions of Armageddon. What if the houses won’t sell? What if no one puts in a bid? What will his wife say, when she realizes she has married an idiot? Will he have to work a few more years? Will they have to sell the beach house, too?

The poor man is not alone. There are thousands…millions of people all reading the same reports, listening to the same news. They are all reckoning with the same things. If one man decides to sell his properties, so might a million others. And so might the whole mood of the investing public switch over from optimism and sweet anticipation to sour regret and recrimination.

Even Mr. Ben Bernanke has his reckoning to do. He’s like a witchdoctor who hears a volcano rumbling and doesn’t know which virgin to sacrifice — the one that appeases the god of inflation…or the one that placates the deflation deities.

“Don’t take any chances,” he says to himself. “Throw them all in.”

But the gods are not so easily propitiated. Toss in the virgin of higher rates, and deflation is jealous. Push in the damsel of deflation, and the other gets in a huff.

Yes, the poor Fed chief must have his dark and lonely tea times, for the volcano could also erupt no matter what he does, and blow the whole economy to smithereens.

Ah…wouldn’t there be a night of reckoning then?

But Mr. Kaletsky can’t believe it.

Instead he believes two absurd things at once.

The first, that you can have a day of reckoning without ever reckoning with anything. And the second, that if it comes to it, London will save Britain from any reckoning.

As to the first — here’s a simple way to tell if you have had a day of reckoning or not. If the economy is as lopsided and unbalanced at the end of the day as at the beginning, you haven’t.

As to the second — privatization, globalization and market liberalization protect the United Kingdom from a downturn because London has become such an important financial center. We don’t doubt that financial services may remain an important industry in Britain, as they are for New York.

But every industry has its ups and downs. Booms beget busts, and riches beget rags. That’s what days of reckoning are for. The one industry that has most profited from the boom in credit — financial services — will be the one that most feels the bust in credit. When U.S. consumers stop buying what they don’t need with money they don’t have, the whole world economy is going to have excess capacity it doesn’t want.

That is when globalised, liberalised, privatised commerce slows down…and the duck waddles over and bites the financial industry on its fat derriere.

In the real world, every day is a day of reckoning…and any night could be a night of terror.

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.