Finally, An Obama Bounce
Bill Bonner
December 5, 2008
"Yes, the worst is still ahead. We are only at the beginning of this correction. Stocks and commodities are the cutting edge. And it's fun to watch Wall Street stumble. But now, we get to watch the economy bleed. The scene will turn grim."
"We've seen the bottom for this part of the cycle," said our old friend Issy Bacher. He took out a chart.
"See this…" He pointed to a series of undulations.
"Here's the bottom…at 7,400 on the Dow. I don't have a crystal ball. But the charts are showing that this is the bottom for this cycle. I don't know how far this rally will run, but it could be very impressive and could last for quite a while."
Yesterday, the Dow rose again - up 172 points. Oil remained unchanged at $46 a barrel. The dollar went nowhere…at $1.27 per euro. And bond yields are still exceptionally, remarkably, and probably insanely, low. The U.S. 10-year T-Note yields 2.67%. Even at the lowest yields in history, people buy more of them.
And if you're worried about inflation, you can buy the inflation-adjusted bonds - the TIPS - at an exceptionally low premium. When we looked a week or so ago, the cost of protecting yourself against inflation over the next 10 years was less than 1% per year (the nominal yield you give up in order to get the TIPS rather than a regular 10-year notes). In other words, investors expect inflation to remain below 1% for the next 10 years. How likely is that? We don't know… But inflation protection at 1% sounds like a bargain to us…
But back to our subject…finally, we have an Obama Bounce.
How much? For how long?
We don't know that either. But we are hoping it will retrace about half of the losses from the high. That will put the Dow back over 10,000… The big rally following the '29 crash lasted from November to April '30. It recovered 60% of the losses. Then, the bottom fell out again.
Yes, the worst is still ahead. We are only at the beginning of this correction. Stocks and commodities are the cutting edge. And it's fun to watch Wall Street stumble. But now, we get to watch the economy bleed. The scene will turn grim.
A report from yesterday's news tells us that the private sector hacked off 250,000 jobs in November. At that rate, 3 million jobs would be lost in a year. When people lose their jobs, life gets hard. They turn to savings. But what savings? Few people saved in the Bubble Epoque. Saving for a rainy day just didn't seem necessary - it never rained. Why bother? Besides, in an emergency there was always a job available at McDonalds…and credit cards.
But now the monsoons have come. The drains back up…and even Mickey D is taking down his 'Help Wanted' sign. And credit cards? Who can afford more credit card debt?
"Nobody really likes firing people, but you have to do it," explained a colleague. "It's a little like tossing people out of a crowded lifeboat. If you do, they drown. If you don't, we all drown.
"But firing people now is particularly bad. Because you know there isn't much chance that they'll be rehired anywhere else. Most businesses are firing people as fast as they can. I don't know any that are hiring. So, you have to figure that when you fire someone he's going to be out of work for the duration of the recession…and how long could that be? A year? Two years?"
It might be 10 years, for all we know. These balance sheet recessions take time. Remember, people are getting fired for a very good reason: businesses need to correct their balance sheets…and redress their business models. They have to reduce expenses, because their incomes are falling. Shoppers may still be trampling people to get at half-priced CDs…and toaster ovens at 33% off…but, overall, they're spending less money. That means lower sales…and fewer jobs.
This is just how balance sheet recessions work.
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Editor's Note: Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of the national best sellers Financial Reckoning Day: Surviving the Soft Depression of the 21st Century and Empire of Debt: The Rise of an Epic Financial Crisis.
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