Another GUDD
(Gold went Up, the Dow went Down)
day on Wall Street !
Bill Bonner
It was another GUDD day on Wall Street. Gold went Up, the Dow went Down. The Trade of the Decade - sell stocks, buy gold - still looks good.
Ben Bernanke is back in the news. You remember him. He's the Fed governor who warned foreigner investors: "we have...a printing press". The euro and gold both soared when the foreigners realized what Bernanke was saying - that the Fed was ready to ruin the dollar rather than allow consumer prices to fall.
Bernanke now says the U.S. economy is in good shape and that the recovery will be increasingly robust in the months ahead. Businesses are not doing well, he notes, but the household sector is stronger than it was a year ago, thanks to widespread mortgage refinancing.
True, consumers are more deeply in debt, but 90% of the household debt added last year was mortgage debt, he continued, and much of it was used to pay down other, higher interest, debt.
Of course, a lot of the cash-out refinancing booty was also used to pay for new decks, TVs and vacations; this was the spending that kept the economy out of recession.
And now consumers are going broke at a record rate...and businesses are defaulting on their loans at a record level, too (Eric has more details below). State governments face their biggest deficits since WWII...and oil prices are rising...
But don't worry about any of that, say Bernanke and the Wall Street shills. Once we get this war behind us, the economy and the stock market will both be fine, just like they were after the last war against Iraq.
Just one problem...
In 1991, the U.S. economy was about to enter the final and most gratifying stage of a 50-year post-WWII consumer-led boom. Today, we are in the 4th year of a major bear market...and possibly on the downhill slope of that half- century expansion. Instead of boosting up the markets, war could have the opposite effect - accelerating the decline.
But here's Eric with the latest news:
Eric Fry, reporting from New York...
- Well, it looks like the short-sellers aren't panicking just yet. To the contrary, they continue feasting on the vanquished bull market like lions around a wildebeest. Most investors, meanwhile, are cowering in the shadows like scrawny hyenas.
- The Dow slumped 160 points yesterday to 7,858, while the Nasdaq dropped about 2% to 1,322. The stock market's losses accelerated during the afternoon, following reports that Saddam Hussein had challenged President Bush to a live debate. Saddam also flatly denied that his "Al Samoud 2" missiles violate U.N. restrictions and said he had no plans to destroy them any time soon.
- The Iraqi leader's newly expressed defiance sent investors scurrying once again into the sanctuary of gold, oil and government bonds. Gold for April delivery jumped $4.60 to close at $356.40, while oil surged 90 cents to $36.48, a new multi-year high. The jump in crude oil was nothing compared to the blast-off in natural gas, which rocketed 38% to $9.137 per million BTUs. Suddenly, America's cheap energy has become very, very expensive.
- Low and falling long-term interest rates might help the economy somewhat. But not nearly as much as high and rising energy prices will hurt. The soaring prices of crude oil and natural gas are sure to take a big bite out of the consumer's depleted pocketbook.
- Already, evidence abounds of a nationwide consumer retrenchment. Federated Department Stores, which operates Macy's and Bloomingdale's, said it expects February same- store sales to decline by as much as 7.5% to 8.5%, compared with an earlier forecast of a 4% to 5% fall. Numerous other retailers reported terrible same-store sales for February.
- Meanwhile, the news on Main Street goes from bad to worse. Personal bankruptcies soared to a record 1.51 million households in 2002 - 5.7% more than in '01. The good news - we always look on the bright side here at the Daily Reckoning - is that 105.6 million households did NOT declare bankruptcy. And there's more good news: the solvent 98.6% of American households are saving more money than they used to.
- The personal-savings rate jumped from a low of 2.3% in calendar year 2001 to 4.3% by the end of last year. Saving money, while prudent for each individual saver, is not so great for the economy at large...at least not over the short term. If consumers don't consume, corporations don't produce profits. And if corporations don't produce profits, they reduce capital spending. After a while, all of this non-spending adds up...and what it adds up to is a vicious cycle of slowing economic activity. Where it ends, no one knows. But if it doesn't end soon, today's record corporate defaults will become even more record-setting.
- Fitch Ratings reports that the U.S. junk bond default rate soared to a record 16.4% in 2002. Default rates among investment-grade borrowers also jumped last year. Incredibly, based on dollar value, more defaults occurred over the past two years than over the previous two decades. Default rates will likely remain high in 2003, says Fitch, ending the year between 7% and 8%. For perspective, between 1980 and 2001, the average annual default rate was about 3.4%.
- "Meanwhile, businesses are finding that various costs have been stubbornly rising," observes Andrew Kashdan of Apogee Research. "Richard Berner and Shital Patel, of Morgan Stanley, note that corporate America is experiencing a 'perfect storm' with regard to cost pressures. While wages, which make up the majority of costs, have remained relatively flat over the last few years, costs have accelerated for health and pension benefits, insurance, worker's compensation, security services, materials and energy.
- "For example," Kashdan continues, "health care insurance premiums for large-cap companies are rising at a 13% rate this year, wholesale energy prices are up 75% from a year ago, and pension contributions, says Berner, will eat up about $20 billion of operating profits in 2003. Our expert grasp of accounting (profits equal revenue minus costs) tells us that a problem could be brewing."
- Perfect storm indeed...If only it were possible to stay out of the water for a while.
Bill Bonner
26 February 2003
Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter publishing companies, and the author of the free daily e-mail, The Daily Reckoning ( www.dailyreckoning.com ).
Mr. Bonner's newest book "The Soft Depression of the 21st Century: How to Survive the Crisis of Degenerate, Mass Capitalism," (working title), co-authored with fellow Daily Reckoneer Addison Wiggin, will be published by Wily & Sons in September.
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