Worse than '29 Ouzilly, FranceMonday, December 29, 2008
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*** 2008 is coming to a close...and investors are looking at a loss of over 40%...
*** After a great bubble of consumer debt comes the crushing burden of having to pay it back...even churches are getting their steeples knocked off...
*** The real damage – and the real pain – is still to come...spending without a safety net...and more!
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Now, the days dwindle down to a precious few. And if some miracle doesn’t happen this will go down as the worst year in Wall Street history.
Worse than ’29? Yes...a lot worse.
1929 had been a big winner for investors before the crash began in the last quarter. When the champagne was finally poured on New Year’s Eve, investors were less than 10% below where they began the year.
This year has been all bad. Investors are looking at a loss over 40%. The typical investor in the stock market has probably lost half his money.
The news continues to confirm that a major correction is underway.
Comes word this morning that Kuwait has cancelled a $9 billion joint venture with Dow Chemical...and that steel production is dropping fast.
Student loans are becoming a “crushing burden,” says the LA Times . When things were moving in the right direction, paying off a student loan seemed like a cinch. But when the only job you can get pays only $20,000 a year...it’s hard to start out life with $50,000 in student loans. At 7% interest, that’s $3,500 a year...plus, if the poor young fellow wants to be debt free in 10 years, he’s got to pay another $5,000 of the principle each year. That will cost him about $700 a month. Let’s hope he doesn’t have to eat...pay the rent...or buy a car.
After a great bubble of consumer debt comes the crushing burden of having to pay it back.
Even churches are getting their steeples knocked off. Poor St. Andrews. The Anglican church of Easton, Maryland, had only 35 members. If you haven’t followed the schism news, we will bring you up-to-date. The Episcopalians have become very hip and trendy; at least, they think they have. They perform gay marriage ceremonies...Christ, they say, is “a way,” not “the way.”
Naturally, many Episcopalians are looking for another way. Some have found the Anglican Church – essentially the same religion, but presided over by different authorities. Thus did a little group of Anglicans in Easton, Maryland, come to need a place to assemble for worship. And thus did they take on $900,000 of loans to buy an unused old church. But unless some among them had deep pockets, the pilgrims were doomed from the beginning. Each of the members had to pay about $2,000 a year just to pay the mortgage. And when the mortgage payments weren’t met, the lenders repossessed the church, leaving the parishioners out in the cold.
*** “Turn the lights out when you leave the room...there’s a worldwide financial meltdown...” we reminded the children yesterday.
“Dad,” Jules took the bait, “you keep talking about this worldwide financial meltdown. But I was just in the U.S. last week. I didn’t notice anything different. There weren’t any soup lines. People didn’t seem to be suffering. And even if there were a worldwide financial meltdown, I don’t see how will it make any difference in my life.”
“Jules, so far, we’ve only seen the very first part of this meltdown. It has only affected investors. And even investors don’t believe it is serious problem. They expect next year to be better.
“What we’ve seen so far is just 1929 – but worse. The real damage...the real pain...is still ahead...those grim years of the ’30s. In 1931, stocks fell another 50%. Then in 1937, they went down about 35%. And unemployment reached 25% – one out of every 4 people couldn’t get a job.
“And back then, people had much more of a margin of safety. Much of the population was still living on farms. They might not have had any money, but they still had their own produce they could eat. They were used to gardening...canning food for the winter and making do without a lot of money. And many of them still heated with wood.
“Now, the typical household needs a job in order to eat. No, they need two jobs. They don’t have gardens. They don’t know how to can food...or how to dress a pig. They have bills to pay – not just food, but mortgages, insurance, student loans, health care, gasoline, car payments. Today, usually, both husband and wife work...and they’ve increased their expenses to the point where if they lose either job they’re soon going to run out of money.
“One thing that is almost sure to happen – the workforce is bound to shrink. People are going to leave the world of employment in order to stay at home, take care of children, cook their own meals, and so forth. They may even put in wood stoves and plant a garden.
“In the ’30s, people still had private safety nets. They had stockpiles of money...food...fuel. They could last at least for a while without jobs. Now, we have public safety nets. People can’t last long without jobs, but we have unemployment insurance...food stamps...and so forth. These public systems cost a lot of money. It will be interesting to see what happens to them when they are put under the strain of a major meltdown. The government will probably end up just sending people checks. It’s the fastest and cheapest way to get money into circulation.
“As for what difference it will make to you...well, when you get out of school in May you’ll probably find it a lot harder to get a job than you would have a year ago...and if you wanted a job on Wall Street, you’d probably be out of luck all together. And if you’re able to get a job, it probably won’t pay as much as you had hoped...and you won’t be able to spend as much money. Or, maybe you won’t get a job at all...and you’ll have to come and live at home with us. That would be nice for your mother and me, but you may not like it so much.”
Until tomorrow,
Bill BonnerThe Daily Reckoning

December 22, 2008
Legitimacy Dwindles

Zounds! Public sentiment toward the accelerating economic fiasco has shifted, seemingly overnight, from a mood of nauseated amazement to one of panicked grievance as the United States moves closer to an apparent comprehensive collapse -- and so ill-timed, wouldn't you know it, to coincide with the annual rigors of Santa Claus. The tipping point seems to be the Bernie Madoff $50 billion Ponzi scandal, which represents the grossest failure of authority and hence legitimacy in finance to date in as much as Mr. Madoff was a former chairman of the NASDAQ, for godsake. It's like discovering that Ben Bernanke is running a meth lab inside the Federal Reserve. And out in the heartland, of course, there is the spectacle of Illinois governor Rod Blagojevich trying to desperately dodge a racketeering rap behind an implausible hairdo.
What seems to spook people now is the possibility that everybody in charge of everything is a fraud or a crook. Legitimacy has left the system. Not even the the legions of Obama are immune as his reliance on Wall Street capos Robert Rubin, Tim Geithner, and Larry Summers seem tainted by the same reckless thinking that brought on the fiasco. His pick last week for chief of the SEC, Mary Shapiro, is already being dissed as a shill for the Big Bank status quo. In a few days we'll discover what kind of bonuses are being ladled out by the remaining Wall Street banks with TARP money and a new chorus of howls will ring out.
This is very dangerous territory. In dollar terms, the numbers being applied to the various problems are so colossal -- trillions! -- that the death of our currency seems assured. And in defiance of congress's express intentions, none of the TARP "money" has been applied to its targeted purpose of buying up "toxic" (i.e. fraudulent) securities hidden in the vaults of banks, pension funds, and municipal portfolios.
George W, Bush's personal bailout of General Motors and Chrysler is designed solely to postpone their bankruptcy and mass job layoffs until after the holidays. Otherwise, the $17.4 billion will probably be used by the companies to underwrite the extensive legal work required for the moment they must declare bankruptcy -- when Mr. Obama is in the White House. Meanwhile, the President-elect has ramped up his job-creation target overnight from two to three million, and some observers are catching a whiff of Soviet-style economic engineering ("...we pretend to work and they pretend to pay us....").
The years since Jimmy Carter have produced an astoundingly flaccid public, sunk in various addictions and distractions, but this is about to change. The darkling mood of political protest and violent activism that saturated my own young adult years is scudding up again on the horizon. Mr. Obama's pick for attorney general, the mild-looking Eric Holder, may be the key figure in the early months of the new government. If he doesn't commence some aggressive investigations and prosecutions -- beginning with Henry Paulson for insider trading when he was in charge of Goldman Sachs and shorting his own company's mortgage-backed securities -- then the whole Obama enterprise could fall under suspicion of illegitimacy. The bums who ran the US banking sector into a ditch have to account for their turpitudes. They can't be allowed to hide under a TARP.
Unfortunately, the legal system, and probably the legislative system, will be so buried in procedural bullshit from the unwind of countless enterprises and institutions, and the sorting out of the remnants, that it remains to be seen whether this generation of people-in-charge can even embark on a fresh start of anything connected to real everyday life in America. All this is starting to alarm the tattered residue of the middle classes, and from here it's a very short path to them being really pissed off.
When legitimacy erodes, anything goes. Nothing is respected including rules and personalities. The center doesn't hold and the new vacuum there is a tumultuous place. The same crisis of authority and legitimacy is spreading from nation to nation now. Soon, China will contend with a discontented army of the unemployed. Greece has been in an uproar for two weeks. Belgium's government just collapsed. Trade barriers are going up. Exports are falling away. The world's energy markets are not immune to these disorders. I would expect problems with the currently seamless supply lines that bring America two-thirds of the oil we use. Even a mild disruption of oil supplies could attach an anvil to the ankle of an economy already falling off a cliff.
Right now, the overwhelming sentiment is to get this country back to where we were, say, ten years ago, when everything was humming nicely: Clinton nostalgia. We're definitely not gong back there, though. It's an idle wish. And any set of policies designed to lead in that direction will prove very disappointing. Our destination is a land of much smaller-scaled local economies. We could retain our federal ties if the federal government can scale back appropriately from the bloated, feckless enterprise it has become. Otherwise, it might only get in the way and make matters worse, and the public in one region or another of North America might reach a decision that they are better off without it. That would be what's called a revolution.
December 15, 2008
Change You Won't Believe

The peak oil story has not been nullified by the scramble to unload every asset for cash -- including whomping gobs of oil contracts -- during this desperate season of bank liquidation. The main implication of the peak oil story is that we won't be able to generate the kind of economic growth that defined our way of life for decades because the primary energy resources needed for it will be contracting.
Just as global oil production peaked, our economy evolved into a morbid hypertrophy, and the chief manifestation of it was the suburban sprawl-building fiesta that has now climaxed in the real estate bust. By the early 21st century, when so much American manufacturing had been swapped out to Asia, there was no business left except sprawl-building -- a manifold tragedy which wrecked the banks that financed it, and left the ordinary people mortgaged to it with ruinous liabilities.
That economy is now in its death throes. The "normality" it represents to so many Americans is gone and can't be brought back, no matter how wistfully we watch it recede. Even so, it was obviously not good for the country. The terrain of North America has been left scarred by unlovable objects and baleful futureless vistas that, from now on, will shed whatever pecuniary value they once had. It represents the physical counterpart to the financial mess that has been left to the young generations to clean up -- and the job will take a very long time.
We have to, so to speak, get to place mentally where we can face the kinds of change that are now necessary and unavoidable. We're not there yet. It's not clear whether the elected new national leadership knows just how severe the required changes will really be. Surely the public would be shocked to grasp what's in store. Probably the worst thing we can do now would be to mount a campaign to stay where we are, lost in raptures of happy motoring and blue-light-special shopping.
The economy we're evolving into will be un-global, necessarily local and regional, and austere. It won't support even our current population. This being the case, the political fallout is also liable to be severe. For one thing, we'll have to put aside our sentimental fantasies about immigration. This is almost impossible to imagine, since that narrative is especially potent among the Democratic Party members who are coming in to run things. A tough immigration policy is exactly the kind of difficult change we have to face. This is no longer the 19th century. The narrative has to change.
The new narrative has to be about a managed contraction -- and by "managed" I mean a way that does not produce civil violence, starvation, and public health disasters. One of the telltale signs to look for will be whether the Obama administration bandies around the word "growth." If you hear them use it, it will indicate that they don't understand the kind of change we face.
It is hugely ironic that the US automobile industry is collapsing at this very moment, and the ongoing debate about whether to "rescue" it or not is an obvious kabuki theater exercise because this industry is hopeless. It is headed into bankruptcy with one hundred percent certainty. The only thing in question is whether the news of its death will spoil the Christmas of those who draw a paycheck from it, or those whose hopes for an easy retirement are vested in it. But American political-economy being very Santa Claus oriented for recent generations, the gesture will be made. A single leaky little lifeboat will be lowered and the chiefs of the Big Three will be invited to go for a brief little row, and then they will sink, glug, glug, glug, while the rusty old Titanic of the car industry slides diagonally into the deep behind them, against a sickening greenish-orange sunset backdrop of the morbid economy.
A key concept of the economy to come is that size matters -- everything organized at the giant scale will suffer dysfunction and failure. Giant companies, giant governments, giant institutions will all get into trouble. This, unfortunately, doesn't bode so well for the Obama team and it is salient reason why they must not mount a campaign to keep things the way they are and support enterprises that have to be let go, including many of the government's own operations. The best thing Mr. Obama can do is act as a wise counselor companion-in-chief to a people who now have to leave a lot behind in order to move forward into a plausible future. He seems well-suited to this task in sensibility and intelligence. The task will surely include a degree of pretense that he is holding some familiar things together and propping up some touchstones of the comfortable life. But the truth is we are all going to the same unfamiliar new territory.
The economy we're moving into will have to be one of real work, producing real things of value, at a scale consistent with energy resource reality. I'm convinced that farming will come much closer to the center of economic life, as the death of petro-agribusiness makes food production a matter of life and death in America -- as opposed to the disaster of metabolic entertainment it is now. Reorganizing the landscape itself for this finer-scaled new type of farming is a task fraught with political peril (land ownership questions being historically one of the main reasons that societies fall into revolution). The public is completely unprepared for this kind of change. We still think that "the path to success" is based on getting a college degree certifying people for a lifetime of sitting in an office cubicle. This is so far from the approaching reality that it will be eventually viewed as a sick joke -- like those old 1912 lithographs of mega-cities with Zeppelins plying the air between Everest-size skyscrapers.
The crucial element in the transformation underway will be emotion. The American experience for a few generations has produced an adult population with very childish instincts, increasingly worse each decade. For instance, the desperate power fantasies among the younger tattooed lumpenproles -- those with next-to-zero real economic power -- suggest a certain unappetizing playing-out of resource competition when the supply of Cheez Doodles and Pepsi starts to dwindle. But even the heretofore gainfully employed middle classes are pretty lost in fantasies at least of comfort an convenience. For years now, I have wondered how their sense of grievance and resentment will be expressed when the supermarket shelves run bare and the cardboard signs get taped over the local gas pump and the cable TV gets cut off for non-payment. You wonder, to put it bluntly, how far gone we really are.

The Classic Post-Bubble Bounce Melbourne, AustraliaMonday, December 8, 2008
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*** Despite the rally, the U.S. economy is still in free-fall – and the worst is yet to come...
*** Stocks could rise above 10,000 on the Dow, and you know what to do if that happens: sell!...Gloom and doom is the fashion...
*** The decline of the great empires...Jethro Tull Mumbai-style...and more!
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“I used to have a 401(k)...now I’ve got a 201(k)...”
“What kind of retraining do they give to former Wall Street employees? Teach them to say: ‘Do you want fries with that?”
And this from AP :
“Record numbers of homeowners are falling behind on mortgage payments and the U.S. economy is losing jobs at an alarming rate with companies big and small slashing their work force.
“A half-million American jobs disappeared month, the worst mass layoffs in more than three decades, as the nation spiraled downward in what could be the hardest hard times since the Great Depression.”
“The economy ‘is in free fall,’ said one analyst.”
Hey...this is no laughing matter. But wait, the worst is still to come.
Yes, dear reader...we think...we hope...that we will enjoy a classic post-bubble bounce. If we’re lucky, it will last for 3-6 months...and give everyone a chance to catch his breath.
Mr. Market is like a cat. He plays with his prey before he finally eats it.
And he’s perfectly capable of giving the whole world the impression that crisis of 21st century capitalism is over.
Friday, stocks rose again – this time the Dow climbed 259 points.
Oil sank even further...falling to just $40. And gold lost $9.80 to settle at $755.
What next? Stocks could rise above 10,000 on the Dow...house prices could stabilize...commodities could rise along with bond yields.
If this happens...you know what to do, dear reader. Sell!
One thing that makes us think there will be a substantial rally is that there’s something phony about the ‘gloom and doom’ you read about in the paper. You can’t exterminate a bubble mentality with a single whack. Instead, it takes a long Guantanamo stay...with several false hopes of release...followed by more torture.
For now, people have lost money...but they are still fascinated by it. They still talk about it. They joke about it. They practically wallow in their losses.
“I’m down 40%,” says one. “You think that’s something...the guys over at XYZ Fund just got wiped out...”
Asked what it was like to work on Wall Street, our contact at Goldman had a one-word reply: “Armageddon.” Another contact at CitiGroup said the bank had become a “zombie” – dead, but still alive.
It’s true all over the world...and in practically every industry. Gloom and doom is the fashion. Apocalypse is the style. Hemlines are set for the end of the world.
But who really believes it? Who really feels that the end is nigh? Don’t we all still hope that Obama will pull off a really big save? Even if we think the bubble has burst...we still feel as though somehow, everything will turn out all right.
People are fascinated by the bust...they look upon it as though it was a horror movie. They see the pretty girl going down in the basement...and they know they’re not going down there. They won’t make that mistake...she might get cut up into little pieces...but not them!
But when the real doom and gloom sets in...they’ll feel as though they are already in the basement. Then, the last thing they want to do then is talk about the horror around them. Instead, they want to forget about it. They won’t want to hear about stocks...or commodity prices...or bankruptcies and bailouts. They’ll be sick to death of the whole thing.
We have a long way to go, dear reader. We will have a rally...then another, worse, drop. People will not suddenly give up hope; it will have to be crushed out of them. And then, instead of enjoying the spectacle of the mighty captains of industry and masters of the universe humbled...the show will take on a tragic theme...with ordinary people hung up on the hooks of debt...stretched out on the rack of joblessness...beaten by losses on their houses, their 401(k)s, and their
Then, the jokes will stop.
*** Colleague Byron King has been following the decline of a great empire – the United States of America.
He sends this from Spengler at the Asia Times ...
“America outspends China on defense by a margin of more than six to one, the Pentagon estimates. In another strategic dimension, though, China already holds a six-to-one advantage over the United States. Thirty-six million Chinese children study piano today, compared to only 6 million in the United States. The numbers understate the difference, for musical study in China is more demanding.
“It must be a conspiracy. Chinese parents are selling plasma-screen TVs to America, and saving their wages to buy their kids pianos – making American kids stupider and Chinese kids smarter. Watch out, Americans – a generation from now, your kid is going to fetch coffee for a Chinese boss. That is a bit of an exaggeration, of course – some of the bosses will be Indian. Americans really, really don’t have a clue what is coming down the pike. The present shift in intellectual capital in favor of the East has no precedent in world history.
“The world’s largest country is well along the way to forming an intellectual elite on a scale that the world has never seen, and against which nothing in today’s world – surely not the inbred products of the Ivy League puppy mills – can compete. Few of its piano students will earn a living at the keyboard, to be sure, but many of the 36 million will become much better scientists, engineers, physicians, businessmen and military officers.”
Byron offers this comment:
“One well-traveled, high-caste Indian doctor of my acquaintance says, ‘Americans think that all Indians or Chinese are very smart and well-educated with great personal drive to succeed. That’s because they deal almost exclusively with the Indian and Chinese emigrant cadre. These are people with the desire to move to a different continent, learn a different language, and adapt to prosper in a different culture. It does not matter if you are dealing with somebody with a PhD in electrical engineering, or the guy who manages the 7-11 or Days Inn down the road. There is a common factor of adaptability and work ethic. So of course you might think that all Indians or Chinese are smart, and make good businessmen. But the truth is that we’ve left a lot of dullards back home in the old country. I assure you that many people back where I come from are as dumb as a box of rocks. And a good proportion of these dummies even go into politics and the government bureaucracy, just like in America.’
“The big-name universities have junked themselves up to get the federal grant money. But that is true for state schools as well as Ivies. Big-name researchers at the U of Michigan, or Penn State, or you-name-it, are all in thrall to Uncle Sam, just like the top tier researchers at Harvard or Cornell.
“So your child can receive just as distant and remote an education at some football factory like the U of Texas or Florida State, let alone East Carolina or Arkansas A&T, as at a snooty locale in Cambridge, Mass. The big ‘personal’ interaction will be with some 25-year old graduate student, or maybe a 30-year old post-Doc.
“That’s not always true though. At Harvard, for example, the Earth Sciences Dept (a.k.a. Geology) is small enough that you almost always deal with a real professor, and by definition a world-class researcher in whatever field you pursue. Same with numerous other departments, from various languages, to classics, to certain realms of the history dept, etc. You have to pick and choose. Rub elbows with care.
“Actually, James Kunstler has it right for the long term. Many of these big schools have grown so big due to cheap money and cheap energy. Now they have to pay for the upkeep in an era of long-term rising costs for energy. Just heating the physical plant at Michigan State of the U of Minnesota at Duluth will eventually become a prohibitive expense. How about salaries for profs who teach just about any course in a field with the word “-Studies” as part of the name? Can you define the concept of “uselessness” in the era that’s coming? At some point, it’s just welfare for PhDs with no other visible means of support. And what will the US economy do with all of the “marketing” majors when the whole concept of globalization begins to crumble. Market what, pray tell? And to whom?
“Everybody is looking at Wall Street and commenting on the great ‘deleveraging’ of our economy. Sure, those Wall Street dudes are a bunch of greedy scum who wrecked the world. Right? And now they deserve their layoffs, and to lose their million dollar office cubicles. Right? No more villas at the Hamptons, or taking the Net-Jet plane down to Wilmington for a weekend at Bald Head. Right? Yeah, all 300,000 of those jerks in and around New York and Connecticut – they ought to suffer. Right? No skin off my nose. Right? I don’t work there. Right? None of my business. Right?
“But as Captain Kirk once said to the Klingons, ‘Hey, excuse me.’ Ummm....it’s the broader society that’s deleveraging as well. It’s not just Wall Street. A lot of things that held U.S. society together – common values and ethics – are now starting to erode with the decline of leverage. Eroding, to include – oh, for a wild example – the idea of the ‘easy life’ in America, the ‘streets paved with gold’ urban myth. As a nation, we’ve spent 75 years spending money we don’t have and will not earn until a couple of generations down the line. But as of September 2008 that modus operandi (for all the classics majors out there) became inoperative. Somebody ought to tell the new economic team of the Obama Administration. (‘If you guys are so smart, how come you ain’t rich any more?’)
“Life in these United States is just are not as pretty and cozy as it used to be. The future is cloudy. And back to the topic, that deleveraging-thing extends down into the classrooms and football stadiums of America as well. When it’s all going down the tubes, it never has an impact on just one segment. Everything is connected to everything else. Right?
“At least the Chinese have some clue about where they want their culture to go. In the U.S., we’re a nation of cultural arsonists. Except its our own house that we’re burning to the ground.”
Still craving more insights from the incomparable Mr. King? Lucky for you, he heads up two newsletters: Outstanding Investments and Energy & Scarcity Investor . Even luckier for you...you can now get both of these newsletters, along with all nine (with three more to come soon) of Agora Financial’s other investment and research services...for life. Find out how here .
*** We are traveling around the world...trying to get a better idea of what is going on.
This weekend was spent in Bombay...or Mumbai, as it is known today. Security is tight...at least for those who aren’t planning on blowing anything up. They search us each time we go into our hotel...just down the street from the Oberoi. Armed police wander the streets...desperately in need of a course on gun safety.
You will hardly believe this, but last night our Indian colleagues invited us to go to see a concert starring Jethro Tull concert...with Anouschka Shankar playing the sitar.
“Is Jethro Tull still alive?” we wondered.
“Yes, the band is celebrating its 40th anniversary. And Anouschka is Ravi’s daughter...very pretty...very talented...with a very California accent (the Beatles made Ravi famous and he moved to LA).”
The Jethro Tull group was amazing...guys over 60...but very dynamic...and very clever musically. You might remember their classic – “Aqualung” – from 1969. The lead riff sticks in your mind long after you wish it would leave.
Until tomorrow,
Bill BonnerThe Daily Reckoning