Recently by Bill Bonner: Were It Not for Dumb Money…
Yesterday, we promised to tell you more about our L-shaped non-recovery. Its already lasted 5 years since subprime cracked up It could last another 5 10 20 or even 100 years.
Okay, 100 is probably an exaggeration, but who knows?
An About-Face for Investors, says The Wall Street Journal.
As predicted in this space, the Facebook debacle turns high hopes into potentially mood-souring skepticism.
Retreat from the stock market continues, reports The New York Times:
Im just extremely skeptical about the ability of a retail purchaser to be able to play on a level field in the market, said [Alex] Tsesis, who is 45 and lives in Chicago. Im just trying to get out of stocks.
Investors had a chance to think over the long weekend. When the markets opened on Tuesday morning, they were ready to act. The Dow rose 125 points. Gold dropped $20. They dumped Facebook.
But it hardly matters. Up one day. Down the next. Who cares? The big trend is what matters. And the big trend now, we believe, is down. Down for stocks. Down for the economy.
When this happens, it can last a very long time. For evidence, we give you exhibit #1 Japan!
Yesterday, The Financial Times reported that a thousand yen invested in stocks in 1985, even including dividends and inflation has made exactly nothing.
Colleague Justice Litle elaborates:
Stocks for the long run is a mantra of conventional investors everywhere. It is also the name of a book by Wharton finance professor (and babbling permabull) Jeremy Siegel.
Whenever the market outlook grows cloudy, or even downright bleak, we are urged to remember: Its the long run that counts.
And yet, hows this for long run: A yen-denominated investment in Japanese stocks, made in 1985, has been dead money for 27 years.
Japans dead presidents have gone nowhere and made nothing for investors. They have been dead dead dead for an entire generation.
If it can happen to Japanese stocks, asks Justice, could it happen to American ones?
Certainly there is no real reason why not.
America has already turned Japanese in respect to perpetual ZIRP (zero interest rate monetary policy). Structural unemployment issues, and the utter failure of stimulus programs so much for shovel ready! resemble the Japanese experience. Like their Japanese counterparts, American policy makers have no new ideas only tired old bad ones.
Back in the USA, investors are leaving the stock market. Mutual fund outflows continue at a rate of about $3 billion a month. The Dow is almost back to where it began the year. Trading volume is subdued.
Facebooks banged-up share price and the technical snarls that bollixed up the stocks first day of trading on the Nasdaq have left some small investors even more glum
Theyre probably not nearly as glum now as they will be later. The Dow is still above 12,000; stocks may not be at their peak, but they are far from their bottom. Youll know it when you get to a real bottom. Investors are so glum you have to hide their guns. Thats when you get P/E ratios of 5 and dividend yields of 5%. Thats when you get bargains. Someday, unless this really is a new era, they will be real bargains. This day they are not.
The WSJ is wrong or perhaps premature. Investors have not done an about face. Not yet. Theyve wheeled around a few degrees from their comfortable bullish trajectory of a few months ago. But they will have to keep turning in order to change course by a full 180 degrees. Then, watch out below!
What could make investors spin further against stocks? Two things:
First, Europe could blow up much worse than people expect. The eurozone has been on the brink of disaster for so long, most people think it will stay on the brink forever as if there were an invisible barrier that keeps them from going over the edge.
We are connoisseurs of disaster here at The Daily Reckoning. Not that we like them; we just appreciate them. They clear away a lot of dead wood. And, yes, dead presidents. People invest badly. They spend unwisely. All is well til the disaster hits. Then, the dead presidents disappear.
One thing weve noticed is that disasters seem to take longer than you expect to start and then they move faster than you anticipated. Remember the dot.com blow-up? You could see it coming for years. Then, when it happened it blew up fast. Poof hundreds of billions in dead presidents gone!
So too the collapse of the housing industry particularly those low-docs, cash back, subprime mortgages was visible long before it happened. We waited. We waited. And we waited some more. And then, when the catastrophe began, things happened so fast we couldnt keep up with them.
The breakdown in Europe could happen fast too.
I dont know about you, said a hedge fund manager we talked to last weekend, but if I were in Greece, Id be looking for a way to get my money out of the country. Theres a very good chance the Greeks will convert euro deposits to drachma. They will probably close the banks. The Greeks will probably riot and burn banks if not bankers.
So, what would you do if you were in Spain or Italy? Wouldnt you be trying to read the handwriting on the wall too? And wouldnt you want to get your money out too?
Of course you would. Thats why the Swiss are talking about imposing negative interest rates, to try to discourage other Europeans from exchanging their euros from Swiss francs.
You dont have to look very far ahead to see what would happen. Just wait til people start lining up in front of the banks to get their money out. If you were in Athens and you saw people lining up to get their money out of the banks wouldnt you get in line too? Most people would. And the banks dont have enough money to honor all those depositors claims. So the banks have to go broke and the whole thing falls down hard.
According to the news media, everyone is making plans for when Greece says auf wiedersehen to the euro. But even an orderly exit of Greece from the euro is estimated to cost $1 trillion. And there isnt enough money in all the banks in Euroland to pay for a disorderly exit.
Which is one reason were keeping our Crash Alert flag flying.
The other major reason for guarding against a crash is this: all the worlds major economies are approaching recession.
Old friend Marc Faber says he expects a global recession either in the last quarter of this year or early in 2013. Asked about the odds, Faber put them at 100%.
One hundred percent does not sound like odds to us. It sounds like certainty. We doubt anything in economics is that sure. But lets say the odds of a synchronized worldwide recession are only 50%. That still puts a lot of empty space between todays stock prices and a recession-inspired bottom. We wouldnt want to be standing in that space, lest the market crash down upon our heads.
You know, dear reader, that it is futile to make predications, especially about the future, as Yogi Berra would say. But heck, well take a guess. The euro zone wont fall apart at least, not completely. The Germans will give way. It wont be pretty. No elegant solution will be found. Instead, an awkward, ugly even grotesque combination of concessions, compromise, and craven corruption will keep the European project together. In fact, it will be more together than ever. Francois Hollande and Angela Merkel will find a way to preserve the union. Most likely, the Europeans will learn from the US. They will write a huge check to member states to cover or partially cover the debts of the past. The union will be responsible for the debts of, say, Greece or Ireland. It will be a scheme vaguely reminiscent of the Brady Bonds, or Alexander Hamiltons takeover of state debt after the American Revolution, with new debt backed by the EU of extremely long duration (long enough to allow inflation to cut down the real value of the bonds.) The debts of the future, on the other hand, will be the responsibility of member states (lenders beware!). Everyone can save face. Lenders (banks) will get their money (more or less). Borrowers can avoid disorderly defaults and bankruptcy (more or less). And Germany and France can hold onto their beloved European Union (more or less) and still not be on the hook for Greek behavior going forward.
But as to the second danger that of a global recession and bear market investors wont be so lucky. The odds may not be 100%, but they are high enough so that a wise investor will take cover.
Beware the disappearance of dead presidents in a crash. Then, beware again: the dead presidents could stay dead for a long, long time.
Bill Bonner is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century and The New Empire of Debt: The Rise Of An Epic Financial Crisis and the co-author with Lila Rajiva of Mobs, Messiahs and Markets (Wiley, 2007). His latest book is Dice Have No Memory. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning.