- Published on Wednesday, 26 September 2012 17:08
- Written by Bill Bonner, Founder and President, Agora Inc.
- Hits: 803
Goodbye, QE boom. We hardly knew ye.
And good riddance! You were never reliable. Never real. Never worth a damn.
The Dow fell 100 points yesterday. Most foreign markets headed down, too -- scarcely a week after the biggest money-printing announcements in history.
Europe's doing it. Japan's doing it. America's doing it. Even Brazil is doing it... sort of. Brazil recently announced "stimulus" measures to help boost growth.
But debt-financed stimulus doesn't work... not in this economy. This is an economy with too much debt already.
Rendezvous With Disaster
And that's why the stock market has had a rendezvous with disaster... ever since the financial crisis began in 2007. This is a Great Correction. And in a real correction, stocks should sell off until they're cheap.
Because that's what happens in a correction. Prices correct. They go down to levels that are so low the mistakes and bad investments are wiped out. At the bottom, the survivors are bargains again.
In the 1930s, for example, U.S. stocks fell below 10 times earnings. And again in the early 1980s, the Dow traded as low as five times earnings.
And in Japan, stocks lost about 75% of their value... and stayed down. They're still down 22 years after the crisis began.
So why haven't U.S. stocks kept their appointment with doom and gloom? Two reasons.
First, because the feds flooded the roads and tunnels leading out of Wall Street. There was so much cash and credit, stocks couldn't get where they were supposed to go.
Second, because the companies used the crisis to cut overheads, staff and expenses -- leaving them with the highest profit margins in over four decades.
A Middle-Class Success Story
We're down in Brazil today, where the economy really has been growing. Economists forecast growth to slow here. But over the last five years, this economy has produced two new jobs for every job the U.S. has lost.
São Paulo is like downtown L.A., but many times larger... busier... more chaotic... faster moving... and growing. There are skyscrapers every direction you look -- hundreds of them. There aren't many construction cranes, but there are plenty of new buildings. And helicopters. You see them overhead all the time.
On the TV is a beauty contest. But this is not the country fair queen they're looking for. Instead, the contestants all wear string bikinis... and the focus is on one part of the anatomy only. It's called the "bum bum beauty contest." The judges use a ruler to measure the girls' charms.
We went over to the gleaming new headquarters of Facebook today. Facebook has 50 million users in Brazil -- one-fourth of the population. And last year, computers surpassed TVs as the No. 1 Christmas gift.
"The story here is a middle-class success story," our local contact explained. "There are millions of people who are entering the middle classes. They've got decent jobs, good wages, rising household incomes, cars... and computers."
That's different from the U.S., where the middle class is shrinking. According to the U.S. Census Bureau, the U.S. median household is 4.8% poorer than it was in 2009. And median incomes are now below 1993 levels. Household net worth has gotten whacked too -- first by the stock market... and then by housing.
The idea of the America dream was that if you got a good education and bought a house, you couldn't miss. But 'tweren't so. Robert Samuelson in The Washington Post explains:
A study from economists at the Kansas City Federal Reserve reports: Fewer than 60% of college freshmen graduate within six years; student debt now totals about $1 trillion; for 25% of borrowers, annual repayments exceed $4,584; default rates are almost 9%. "Defaulted borrowers may be sued, tax refunds may be intercepted, and/or wages may be garnished," the report notes.
The plugging of homeownership -- the quintessential symbol of "making it" -- is another perverse pathway. True, homeownership is a laudable goal; it stabilizes neighborhoods, for example. But the promotion went overboard. Lax lending standards lured people into buying homes they could not afford, contributing to the 2007-2009 financial crisis. Again, victims were the intended beneficiaries; since 2007, at least 5 million Americans have lost homes through foreclosure, reports CoreLogic.
A collapsing middle class and a Great Correction are not good for the stock market. According to fund manager John Hussman, the outlook for stock prices has never been worse. QE doesn't really improve the economy. And real companies depend on the real economy to grow.
Don't expect to make any money on your stocks over the next 10 years, he says.
And this week, fund manager Jeremy Grantham told the world that today's high profit margins are "freakish." Abnormal, in other words. And what we know about abnormally high profit margins is that they soon revert to normal... and then abnormally low.
The combination of a funky, correcting economy, shrinking middle class and mean-reverting profit margins is likely to hit the stock market like an iceberg hitting the Titanic.
Our advice: Stay close to the lifeboats.
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