“The Great Depression of Debt” is a hardcover updated edition of “The Second Great Depression, Starting 2007, Ending 2020.” “The Great Depression of Debt” can be purchased at most bookstores or at Amazon.com: http://www.amazon.com/Great-Depression-Debt-Survival-Techniques/dp/0470423714
PROCEDURAL CHANGE This blog is getting too time-consuming; I actually considered shutting it down. But, as an alternative, I decided to try a reduced-interface version. I will still give my updates and readers are still welcome to comment. But I will not be responding to individual comments. Instead, I will read all of them and if the subject of a comment or question seems to have broad interest, I will attempt to incorporate it into my next update. Of course, readers can still be discussing ideas among themselves, as long as the comments are kept civil.
WHAT HAS CHANGED In this update, I am going to discuss what I think has changed, or surprised me, since I wrote my books on the economy.
POWER OF FINANCE In 1961, President Dwight D. Eisenhower, in his Military-Industrial Complex Speech, warned, “In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military industrial complex. The potential for the disastrous rise of misplaced power exists and will persist.” Well, by any measure, the military industrial complex has indeed gotten exceedingly powerful. Why else would we continue fighting unwinnable wars (does anybody even know what the term “win” means in Afghanistan) and our military budget exceed $650 billion?
But equally frightening is the growth of the financial-political complex that is now in place. Recent data shows that 44% of Congress is made up of millionaires, which certainly affects their perspective. President Obama has surrounded himself with graduates from the Wall Street banks. And to solve the problem of toxic investments, the government changed the accounting rules so the big investment firms could claim that their worthless investments were worth something; then the government bought the toxic investments at the inflated values. When investment banks were judged as being “too big to fail,” the solution was to give them taxpayer money and combine them to make even bigger banks. I completely missed seeing this coming. I predicted bank failures and government rescues, but not the massive government response we have seen that only makes sense if you assume that they are protecting their own.
And now I am afraid that the two complexes, the industrial-military and the financial-political, are so in bed with each other that it will make it very difficult for the general populace to pressure the government to do what is required to get our country back on track. As I mentioned in my previous update, in order to get our deficits under control, we must go after the money. And a disproportionate portion of this country’s resources are with the extremely wealthy and in the military’s budget. Going after this money runs smack into these two power complexes.
We will need a leader who will take on these power groups. President Obama came into power with the backing of the ordinary people, but he has yet to show if he has the intestinal fortitude to stand up to these power groups. Unless he makes a remarkable turnaround (and it may be too late because he has lost a lot of his mystique), we will have to see if in 2012 a leader emerges that has the attraction of the masses yet has the power to take on these power groups. Also, we have to see if President Obama will put the required resources and pressure to get clean renewable energy so our country can build good jobs that will eventually help us grow out of the depression.
A lot of commenters seem to worry about hyper-inflation. I worry more about how much turmoil our country will go through once the masses demand their reasonable share of this country’s riches. And the ordinary people WILL eventually demand their share; it is just a matter of when and how it happens. The two complexes, the industrial-military and the financial-political, are going to fight them every step of the way.
FORECLOSURES In my book, I had forecasted the foreclosure issue. But I am beginning to think that this problem may get to be even bigger than what I had forecasted. The 6 to 7 million homes now forecasted to go into foreclosure may be understated, because those estimates are based on how many people are already behind in their home payments and the programmed resets of ARMs. None of these forecasts include the increase in foreclosures likely to come if our unemployment gets up close to 15% (on the media reported number), which I believe is likely.
Even World bank President Robert Zoellick said on November 11, related to the high U.S. unemployment, “You’re going to have problems with delinquencies of credit card loans, consumer loans, people won’t be able to pay their mortgages. Some banks are going to continue to be troubled by bad loans.” He also said that after the government stimulus money runs out, consumer spending must take the baton. “If you’ve got large scale unemployment, if you’ve got consumers rebuilding savings and deleveraging, I don’t think the consumer is going to play that role.”
The recent slowdown in foreclosures is temporary because it is caused by some states requiring mediation before foreclosures and lenders delaying foreclosures as they evaluate which borrowers might qualify for the federal loan modification program. Since relatively few borrowers will qualify, once these delays are passed, increasing foreclosures will resume. Also, although the number of foreclosures are slightly down, it is unlikely that the dollar value has dropped since more foreclosure have now switched to higher priced homes.
MISCELLANEOUS One area I may have misjudged is how long it will take our country to recover from the coming depression. I said 2020, which seems like a long time from now. But looking at what Japan is going through, it could end up being much longer than that.
Another thing I didn’t foresee is the rising bubble in commodities. A few people are going to make a lot of money on this; but most investors will buy near the top and ride it down as the bubble breaks, which all bubbles eventually do.
One last thought for those who still believe that our stock market is now okay. Look at what happened to Japan’s Nikkei 225 Stock Index. In the last 20 years, it has dropped 72%. On its way down, it had three “major” recoveries. But the downward trend always returned. There are a lot of similarities in Japan’s market in the last twenty years and our current stock market.
The stock market is charging ahead despite volumes being down 33% from March. Those who are bullish are obviously willing to pay whatever it takes to buy stocks from others who then in turn buy different stocks from other investors for an even higher price. Perhaps its time to dust off the books from 10 years ago: “DOW 36,000” by Glassman & Hassett, “DOW 40,000” by Elias, or “DOW 100,000” by Kadlec. As ridiculous as those predictions were then, at least they were made in a time of a booming economy, low inflation, rising corporate profits, low unemployment, and, perhaps even more amazing, a U.S. federal budget surplus. Well, we do have low inflation! I guess one-out-of-five isn’t bad!
THE STOCK MARKET
The Price/Dividend (P/D) ratio for the S&P 500 is now 56.5. This can be compared to the historical median P/D of 26 and the 17.2 target I use to get back into the market. At current dividends, the market will have to drop 54% to get down to its median P/D and drop 70% to get to my own entry target P/D.
Do not interpret the P/D ratio as a predictor of the direction of the economy. It is a historical unemotional measure that I believe reflects whether the market is overpriced. The P/D ratio can stay very high for many years with little rationale, as it did in the nineties.
Here is where I get my P/D ratios. http://www.indexarb.com/dividendYieldSortedsp.html. Go to the bottom of the table and read the value opposite “Average Dividend Yield (%) of All S&P 500 Stocks.” Take the inverse of this number X 100 to get the price/dividend.
As always, people should use their own judgment/data to affect their own investment strategies; and they should not blindly use the above information. Intelligent people can, and do, disagree.
Warren