Why the optimists have got it wrong on the US economy
In America, the latest cover story in Barron’s – the leading investment weekly – tells us that the Dow is going to 12,000. That’s what the “portfolio chiefs” say in Barrons’ latest “Big Money Poll”. What a shocker. People who sell shares think they are going up. Have they ever thought they were going down? Not in our memory.
And here in London, columnist Irwin Stelzer hallucinates in The Sunday Times that “the normal nervousness of investors and market watchers has been converted into paranoia”. All the news is good, he says. What are investors worried about?
Uh… hello… is anyone home? We don’t know any more than anyone else what the future will bring. Instead, we look to the present and try to see what it has brought. And what we see is a public with no worries at all. That is precisely why the news is so good. Because consumers are spending their fool heads off. People are still buying houses, Mr. Stelzer points out. GDP is still increasing – but at great cost to the future: debt levels are soaring; bankruptcies are increasing; inventories of unsold houses are mounting. Even the pawnbrokers report that business is picking up.
And we have to wonder whether Mr. Stelzer will turn out to be like the young ship’s officer on the Titanic, after it hit an iceberg, who commented on how nice the music was. He has not bothered to look below decks. The US trade deficit has now reached 7% of GDP. Naturally, the dollar is sinking. But that is just more good news in Mr. Stelzer’s book. It “will correct the imbalances gradually”, he says, as if he knew.
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But as the dollar sinks, the price of oil rises. And so do consumers’ costs. Even at today’s prices, according to The Sunday Times man, gasoline is not as expensive, in real terms, as it was three decades ago. Well, that’s a comfort. The poor homeowner can barely make ends meet as it is. Imagine what a fix he will be in when the price of oil goes higher.
But that’s just what is likely to happen, says James Ferguson in his piece on oil prices. Partly because the world is using more oil, partly because it is also become a riskier place, and partly because the dollar is going down. MoneyWeek said that oil would rise four and a half years ago. Since then, it has gone up 252%. There were pundits pushing complacency back then, too. Pay no attention to them. The sky really is falling on many of the comfortable illusions and conceits of the Greenspan era. Ferguson tells you how to make a profit on it.
By Bill Bonner, editor of The Daily Reckoning and author of US bestseller Empire of Debt.
