Don’t Buy, Layaway Returns, Pockets of Strength, Water Crisis and More!

by Addison Wiggin & Ian Mathias

  • Market makes new 12-year lows… Bill Bonner says this is “not a buying opportunity”
  • Crisis begets a blast from retail’s past… Greg Guenthner on the return of layaway
  • The 5 finds three pockets of strength… from BRICs to SWFs to DIYs
  • Byron King on an “abundant” resource that’s not as plentiful as Uncle Sam wants you to think
  • Plus, water crisis strikes California… J.H. Kunstler on the “severe disorder” to come

“This is not a recession… it’s not a buying opportunity,” Bill Bonner begins today. “It’s a depression. And at this stage in a depression, the best thing to do is to sell stocks, not buy them. Because they have further to fall… and because they could take a long, long time to recover.”

For once, Mr. Bonner and Mr. Market strode in lock step yesterday. Plenty of lousy news and an audacious absence of hope pushed the Dow and S&P 500 down to fresh 12-year lows.

By falling over 4%, the Dow sank as low as 6,763.

Think about this. In 1932, the Dow dropped to a low of 41. By October of 2007, it had crested 14,000. In just 16 months, half of that 75-year history has been wiped out.

Looking at this chart above, the hypothetical projection of 3,800 we made in November doesn’t look so far-fetched anymore. A little turmoil in the commercial real estate market or with the state pension systems or with the Alt-A resets which begin in earnest this month, and that’s all she wrote… one or all of these time bombs could tank the market anew.

  “A recession,” continues Bill, “is a pause in an otherwise healthy, growing economy. A depression is when the economy drops dead. And when it drops dead, the assets that people owned — stocks, bonds, houses, derivatives, debt — are called into question. What are they worth now that the economy that created them no longer exists? That’s the big question. The U.S. economy has been expanding for the last 60 years — largely by increasing consumer spending and debt. Now neither consumer spending nor debt is increasing.

“In the last six months, consumers have suddenly reversed their free-spending ways. Borrowers and lenders have repented too. But if it is no longer an economy that grows by increasing consumption and debt… how does it grow at all? And what about all those businesses that are set up to provide products and services to the consumer economy? And what about all the debts and obligations that the consumer economy produced; what are they worth?”

  “We all thought the age of easy credit killed layaway for good late last century,” writes Greg Guenthner. “There simply wasn’t the need to put a new television on layaway for $15 a week when you could just buy now… and pay later. But with credit markets frozen and the average consumer swamped with leftover debt, retailers have grabbed back onto their old layaway strategies.”

Indeed, Kmart and Sears have both relaunched layaway programs. Even Apple Core Hotels, a budget Manhattan chain, has started a “Lay-Away & Stay” program, in which guests pay for their rooms in increments between the time they book and check out.

“We seriously doubt,” continues Greg, “that layaway will ever again become as popular as it once was. Regardless, cheap, payment-oriented retail methods should flourish while the average- and below-average income shopper retreats to survival mode. What the consumer needs now more than ever are options — especially when it comes to the purchase of big-ticket items. That’s why we’re taking a close look at the rent-to-own industry.”

  At least our dollars have respectable purchasing power… for now, anyway. The dollar index peeked above 89 yesterday to its highest level in three years. The euro is just short of a credit crisis low, at $1.26. Ditto with the pound… it fell below $1.40 for the first time in a month.

  But all over the world, there must be a pocket of strength somewhere, right?

“South America’s biggest bank,” begins Jim Nelson, “just released an absolutely mind-boggling earnings report. Uniao Bancos Brasile released its first combined earnings report with its new partner, Banco Itau Holding Financeira, late last week. In the fourth quarter of 2008, the newly merged bank increased loans for vehicles 35%, business loans 41% and even mortgage loans 41%.

“It’s apparent to the bank, as well as us, that the world’s financial media are completely missing the point when it comes to Brazil. The country’s largest lender increased the number and amount of loans it gave out during the quarter, when every other bank is trying to squeeze money out of governments.

“This is truly remarkable. I showed a colleague this statistic and he nearly fell out of his seat. It just doesn’t seem like anyone else is listening. Brazil is supposed to be down in the dumps like everyone else. Instead, its largest bank is booming with new business. People are spending. The economy is growing. And no one is listening but us.

“We are still uncertain about what the new mega bank will decide to do with its dividend policy. We have to wait to find out that one. But the business is solid.”

UBB is one of many pockets of strength Jim has discovered for his Lifetime Income Report readers. If you seek steady payouts in these tumultuous times, he’s your man. Get his latest picks, here.

  Another surprising niche of growth for today: Despite the crash in oil prices and stock markets around the world, global sovereign wealth fund assets grew 18% in 2008. These state-run global powers now push around over $3.8 trillion in assets and, according to International Financial Services London, those assets are on track to double by 2015.

“The losses taken by some sovereign wealth funds in bank investments over the past year,” reads the report from Dow Jones Newswire, “have been more than offset by new fund inflows due to the creation of new sovereign wealth funds and an expansion in foreign exchange reserves.”

IFSL said SWFs hold an additional $5.5 trillion in veichles outside investment funds, like pensions and state-owned businesses.

  And one more surprise winner of this market: AutoZone. Shares of the dusty do-it-yourself car parts store hit a record high today after a blockbuster earnings report. Turns out when times are tough, people get sick of paying $50 for an oil change.

  The Term-Asset-Backed Securities Loan Facility (TALF) officially kicks off today. But both Ben Bernanke and Tim Geithner are testifying on Capitol Hill today as well. Given their track record and the general market mood, another sell-off certainly isn’t out of the question.

And the fundamentals… well… stay the same. A quick trip to the data cupboard today proves as much:

  The ISM’s gauge of American manufacturing improved slightly in February, but is still in a state of serious contraction. Their index inched up two-tenths of a point, to a score of 35.8, That’s still a long, long way away from growth territory above 50, and just a bit above its recent 28-year low of 32.9.

  Pending home sales fell another 7.7% last month, says the National Association of Realtors. Its gauge of such sales fell to 80.4, the lowest since the NAR started keeping track in 2001.

  Commodities are poised for a small comeback today. Crude oil inched up a buck or so this morning, back to $41.

Gold might not be rallying, but at least it appears it’s arrested its fall. After dropping $25 yesterday, the spot price has been holding steady around $925 an ounce.

  “Coal might be a more precious commodity than we think,” Byron King warns us this morning.

“We’ve been hearing that the U.S. has a “250-year supply” of coal since about 1973,” says Byron. “But the U.S. has been mining, burning and exporting coal in immense quantities for all that time. So don’t you think that the reserve estimate might have shrunk down to something like 215 years by now? Nope. That 250-year number seems never to change, kind of like those Saudi oil reserve estimates that stay the same year after year. Despite decades of coal mining, a lot of people still want to believe (and probably want you to believe) that the U.S. has a bottomless pit of coal resources.

“The nation will be fortunate if its coal supplies can stretch for another century. And even if the U.S. continues to use coal at current levels of output — which is unlikely in the face of the looming political controls on carbon — the supply issue will almost surely come to a head in as few as 10–20 years. In the world of long-range energy planning for the U.S. economy, the issue is ripe to address now…

“In the end, we should not be surprised to learn that only a small fraction of previously estimated coal reserves will ever be economically recoverable. But we have to keep the lights on… coal-powered plants are here to stay.”

Shrinking supplies + rising demand = higher prices. Even during the war on carbon, coal will be a good long-term investment.

  California officially entered a state of emergency this week, thanks to the eighth-driest January on record. Now in addition to a fiscal crisis, Californians will have to reduce water consumption by as much as 20%. Gov. Schwarzenegger estimates the drought will cost the CA agriculture industry $2 billion in revenue, as many as 80,000 lost jobs and much lower crop yields.

“The way we produce our food has been organized at a scale that has ruinous consequences,” writes perennial Vancouver favorite James Howard Kunstler, “not least its addiction to capital. Now that banking is in collapse, capital will be extremely scarce. Nobody in the cities reads farm news or listens to farm reports on the radio. Guess what, though: We are entering the planting season. It will be interesting to learn how many farmers ‘out there’ in the Cheez Doodles belt are not able to secure loans for this year’s crop.

"My guess is that the disorder in agriculture will be pretty severe this year, especially since some of the world’s most productive places — California, northern China, Argentina, the Australian grain belt — are caught in extremes of drought on top of capital shortages."

  “I agree that trying to borrow our way out of this mess is pointless and dangerous,” writes a reader, making a point straight out of the documentary, “but I would go further. In my opinion, the whole spectrum of credit problems are a symptom of the real problem, and our focus on it distracts us.

“Forty years ago, if you went into Sears and looked at the label on almost anything, it was made in the U.S. Now if you pick up something in Wal-Mart, it probably says “Made in China” or some other low-wage place. The money we spent in Sears went into the pockets of American workers. Now the money goes into a lot of pockets, most of them overseas.
“As any country or company has to, we must make enough stuff to sell to pay for the stuff we buy, and we’re not making enough stuff. Worse, much of what we do make is intangible stuff such as engineering and financial services, and that is even more easily exported than manufacturing. I just don’t see there being enough American-made stuff of value to the world market to support our buying habits.

“To solve this, we either need to start making more stuff that the rest of the world wants (and can’t make cheaper somewhere else) or start making more of the stuff we use ourselves, so we don’t need to sell as much stuff to other countries. The first of these options, even if we do our best (which we must), is unlikely to even come close to paying for every microwave and laptop we want to buy. The second is, of course, anathema to the free market folks who are running things, and suggests the need for distasteful things like protectionist tariffs and tax incentives that favor domestic manufacturing (and, in my opinion, smaller businesses).

“There is of course a third option: learning to live within our (true) means, which are considerably more meager than most of us realize, perhaps meager enough to result in a nasty social upheaval.”

The 5: A couple of years ago, no one would even dare talk about this. When we interviewed folks for the film, questions about the political consequences of running large budget, savings and trade deficits were often stricken from our hit list. The only guy to go on record was Buffett, who used a euphemism.

“We’re a very rich country,” the Sage said. “We can consume more than we produce for a long time. And we can do it on a large scale. But we can’t do it forever.” And the longer we run trade deficits, the more likely “a demagogue will come along and do some very foolish things.”

Today, those “foolish things” are much closer than anyone suspected they would be… and coming at us faster.


Addison Wiggin
The 5 Min. Forecast

P.S. It still blows me away. The impending premiere back in August forced us to pick a date to end the film, which we did, in the second week of August. At the time, trying to make conservative forecasts so as not to have our argument dismissed, we projected a $10 trillion dollar national debt… by Inauguration Day. Heh. And a whopping annual deficit of $410 billion. Who’d have thought that six months later we’d be nostalgic for those days of sound policy?

Eh, what’s a few trillion anyway? Despite missing our forecast, the film does a good job of spelling out this crisis in a way that even my 5-year-old can understand. There are still a few DVDs left. We recommend you get one for someone you care about who doesn’t have a clue about what’s happening. Get it here.



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