- Two global trends worth watching… the rise of Africa and the fall of the ultra rich
- Byron King explains how recovery will begin in the U.S.
- Why Bill Bonner is lowering his “crash alert” flag… for now
- A chart you’ve got to see… could the S&P have another 50% to fall?
- Greenspan says don’t blame me for housing bust… what (and who) Mr. Bubble blames for this mess
Today we begin with a “megatrend” no silly Great Depression 2.0 will arrest.
Over the next 40 years, the global population will rise 32%, to 9 billion people, says a study released by the U.N. yesterday. Nothing too shocking about that number… except that the majority of new humans will begin life in what the U.N. report refers to as “the developing world,” most notably Africa and South America.
Europe’s share of the world pie will drop by almost half… Asia and North America will remain relatively constant.
According to the U.N., population in the world’s 49 least developed nations will double by 2050, to 1.7 billion.
If the global financial system were intact, this trend might mean more infrastructure spending and consumption of resources, bigger markets for consumer goods, maybe an expansion of health care and other related services. However, the way things are going… it looks more like an aggressive expansion of hungry and restless people.
In a chapter on demographics we’re now updating in our 10th anniversary edition of Financial Reckoning Day, we note that massive shifts in population often lead to revolution. New, young and restless bodies simply overwhelm the existing political structure. It happened in 1789 in France and again in 1917 in Russia.
The same case can be made for the rapid aging of the West. Too many people aging too fast will require massive “change” to the way we organize society… and soon. More on these thoughts as we work our way through the update.
The world’s balance of wealth is changing, too. Rather, it’s evaporating.
Forbes published its list of “world’s richest” today. Of course, the Gates versus Buffett celebrity wealth death match remains at the top of the list. Gates took World’s Richest Man this year, thanks to a crumbling Berkshire Hathaway stock price.
In fact, the entire population of billionaires in the world plummeted this year, from 1,125 to 793… down 29.5%. Millionaires were similarly impacted. Seven-figure families in the U.S. fell 27% last year, to a measly 6.7 million.
Major stock indexes in the U.S. managed to hold onto Tuesday’s big surge in yestserday’s session. Despite the typical litany of lousy news, the Dow finished unchanged. The S&P 500 and Nasdaq each edged higher.
This morning, GE, the mother of all Dow components, finally got its credit straightened out; it was downgraded. Last week, the downgrade would have sent the stock into the abyss, but traders are sluffing it off today. The market opened unchanged from yesterday and GE is up 10% as we write.
“We’re going to take our Crash Alert flag down for a while,” Bill Bonner announced this week. “Finally, the Dow shows signs of life. We won’t know for a few days… but we’ll take a guess: The rally will continue.
“Stocks in the United States have lost $11 trillion in value — more than cut in half — without a single major bounce. We expected one after Obama was elected. All we got was a 15% ricochet. Then, after he announced his major stimulus/bailout/boondoggle program… we thought, surely, stocks would rally then. Nope. Instead, globally, stocks are down 20% since Obama took office.
“But a rally in a bear market is one of the surest phenomena investors can count on. After so many years of rising prices — the bull market began in August 1982 — investors have learned to ‘buy the dips.’ Now they’re looking at a Grand Canyon of a dip; many can’t help themselves. All they need is a little encouragement.”
But the Grand Canyon has a few more years of erosion before it starts to silt back up. Robert Shiller’s chart of cyclically adjusted price-to-earnings ratios shows why:
Shiller determines the S&P 500 P/E ratio by taking 10–year averages of earnings instead of year-by-year. According to the Yale professor, it tames the effect of business cycles and provides a more objective view. If he is correct, we still have a long way down — about 55% more. Based on his calculations, the S&P 500 is currently producing a P/E ratio of 12. Historic bottoms usually don’t appear until prices drop to 5-8 times earnings.
Since earnings aren’t likely to tick up anytime soon, prices will have to go down.
Freddie Mac asked its sponsors, the U.S. government, for an additional $30 billion today after announcing its sixth-straight quarterly loss. The company lost $23 billion in the last few months of 2008 — and over $50 billion for the whole year. That’s despite a $14 billion line of credit Hank Paulson tossed the company back in July.
“The economy won’t begin to recover in the U.S.,” says Byron King, “until Big Government and Big Money get together and address the obvious insolvency of most U.S. banks. This goes for foreign governments dealing with non-U.S. banks, too.
“Banking and finance are the new Rust Belt. By comparison, back in the late 1970s and early 1980s, there were too many old mills and factories that had outlived their usefulness. Today, there are too many banks (and bankers) and finance houses (and financiers) that have no reason or means to carry on. These firms need to liquidate, or at the very least undergo significant restructuring in bankruptcy court. A lot of debt simply needs to be discharged, because it certainly will never be repaid. The books need to clear.
“Meanwhile, without a working system for moving capital, entrepreneurs for the industries of the future cannot make plans, because they can’t get money from banks. Lack of movement is not progress. An ever-meddling government has become the great enabler. The economy needs to get past the roadblock of governments offering false hopes to doomed firms.
“Eventually, something has to give. Any seismologist can tell you that when things don’t move past each other, stress just builds up for an even larger earthquake later.”
Amid the storm, the U.S. government budget deficit has reached a nauseating $765 billion over the last five months. Since the start of the fiscal year, October 2008, Presidents Bush and Obama have staged a stunning tag team battle against the future. According to a Treasury report yesterday, the two administrations have managed to smash last year’s entire deficit of $454 billion. Hell… in less than a month, they’ll have doubled it.
Mr. Obama has indeed brought some change to Washington. At $192 billion in February, he has now presided over the largest increase in deficit spending a single month, ever.
“Be thankful,” writes our friend Frank Holmes, “your portfolio isn’t performing like that of the federal government in its role as investor of last resort. The Government Relief Index, created by the Nasdaq OMX to measure the performance of the 21 stocks that received at least $1 billion in emergency government funding, is down 60%. And that’s just since Jan. 5, when the index started.
“The Government Relief Index (QGRI), started with a value of 1,000 and sank as low as 400. It opened today at 529.
“By comparison, the S&P 500 index is down 25.9% over the same 60 days, the Dow Jones industrial average 25.4% and the Nasdaq 20.4%. Granted, the QGRI has a bit of a disadvantage compared to the other measures — it’s loaded with shares of banks, insurance companies and General Motors.”
Frank’s presentation at our annual Symposium in Vancouver is always a big hit, and we expect no less from him this year. To learn more about our event — celebrating its 10th anniversary this summer — click here. Early-bird discounts are still available.
Elsewhere in the market today, the biotech merging spree continues. Just a few days after Merck’s $41 billion merger with Schering-Plough, Roche sealed a $46 billion deal with Genentech today.
Oil’s price plunged yesterday after an Energy Dept. report showed crude reserves increased by 700,000 barrels last week. The number came in slightly above expectations, and since crude was already dwelling near credit crisis highs, traders had the excuse they needed… the front-month contract fell nearly $7 from Monday’s high, to $42 a barrel.
Gold found good support around $900 this week. After bouncing off the psychological mark a few times yesterday, it’s back up to $920 as we write.
The dollar’s kept to a pretty tight range over the last few days. The dollar index has been bouncing around the 88 level since its hefty fall Monday.
Last, for the “ha-ha” file this morning: “The Fed didn’t cause the housing bubble,” former Fed Chairman Alan Greenspan wrote in an Op-Ed for The Wall Street Journal yesterday. Expanding on similar ideas he expressed to us when we interviewed him for the film, he continued: “The interest rate that mattered was not the federal funds rate, but the rate on long-term, fixed-rate mortgages. U.S. mortgage rates’ linkage to short-term U.S. rates had been close for decades. Between 1971-2002, the fed funds rate and the mortgage rate moved in lock step. The correlation between them was a tight 0.85. Between 2002-2005, however, the correlation diminished to insignificance.”
So who, or what does Greenspan blame for the mess we’re in? A “decline in long-term interest rates across a wide spectrum of countries statistically explains, and is the most likely major cause of, real estate capitalization rates that declined and converged across the globe, resulting in the global housing price bubble.”
Translation: Growth around the world, mostly in emerging markets, led to a growth in export revenue and savings. Nations like China and Japan started to invest those savings in the debt of the developed U.S. and Europe. That demand pinned down long-term interest rates, which kept mortgage rates low too. Et volia, housing bubble.
Of course, his encouraging people to go out and buy adjustable-rate mortgages and bamboozling Congress during every testimony didn’t have any affect on public psyche or government oversight.
“Excessive incendiary language does not serve your readership,” warns a reader. “You wrote that ‘Congress managed to write itself a check for $410 billion’ to fund a ‘governmental orgy.’ Hey!
“The $410 billion Bush-created budget primarily funds basic government operations from the FBI to the CIA to military defense to Social Security to road construction. That predominantly goes to our needs as a country or to senior citizens, etc.
“Let’s say the $8 billion dollar earmarks are about 50% wasted garbage, since some of them have actual merit. This means that $4 billion, or 1%, of the budget is pork fat. This is not good, and I am not justifying it — but your remarks are more careless hyperbole than good analysis and do not serve your readership that well.”
The 5: Oh, I see. Congress has scared the bejesus out of the public with prophecies of “Armageddon” and run up the deficit twofold in five months… and we’re engaging in “careless hyperbole.” If you think “governmental orgy” is “excessive” and “incendiary,” wait until the deficit hits a trillion and we break out the ALL CAPS and drop an “F-bomb” or two.
Thanks for reading,
The 5 Min. Forecast
P.S. Many incendiary things have been written and spoken about the shift in policy toward stem cell research last week. Most of the garbage you hear in the news is just that. Our John Wilkinson conducted a quick-and-dirty interview with science nut Patrick Cox to help clear up the myths and mystique. Warning: Patrick is convinced we’ll have functional immortality within a few years… and keeps sending me notes saying, roughly, "You think the economics of entitlement spending are a mess now… wait until people live until they’re 120-130 years old." If anything else, Patrick gives a riveting interview. Listen here.