Stock prices still have lower to go
Paris, France 鈥� Not much action in the markets yesterday. The Dow barely budged, but still ended the day in positive territory 鈥� the 7th day in a row of gains. Gold fell $6.
Investors beware!
Why? Because they are trapped. After 12 years without a real gain, they can鈥檛 afford to miss a major rally. So, they鈥檙e inclined to take chances. But is this rally worth betting on?
Nope. Not in our view.
Stocks have gone nowhere in 12 years. But it鈥檚 not 鈥榥owhere鈥� that they need to go. They need to go down. They need to complete their historic rendezvous with the bottom.
Currently, the S&P trades at about 17 times earnings. You buy a share for a dollar. You get a company earning about 5 cents a year per share. But at a real bottom, a dollar鈥檚 worth of stock ought to buy you 20 cents worth of earnings. At one point in the 鈥�30s, there were major companies selling at barely 3 times earnings鈥hat is, a dollar鈥檚 worth of stock earned 33 cents.
We have a long way to go. And it鈥檚 not going to be much fun for those who are holding shares and hoping they will go up. Most likely the bottom won鈥檛 come for a few years. And when it comes, people will be shocked, broke and disappointed.
Most likely, too, US incomes are going down. Much of the economic gains made over the last 20 years were phony. They were based on buying things with money that hadn鈥檛 been earned yet. There were not many people who could afford Americans鈥� standard of living in 2007鈥ot even the Americans themselves.
And of course, businesses and investors made their projections for future earnings based on the same delusions. They built houses counting on rising incomes. They built malls counting on rising spending. They made their own retirement plans based on bubble-era estimates.
鈥淧oor Johnny,鈥� a friend reported the news on another friend. 鈥淗e鈥檚 broke. You know, Johnny鈥� He鈥檚 a developer in Florida. But what is it with those guys? They never take their money off the table. He had made a fortune. But he just kept leveraging up. You know, he鈥檇 use his apartment buildings as collateral to buy more apartment buildings. And towards the end he was buying some pretty expensive property near Miami, secured by his other property, which was valued according to some very optimistic appraisals.
鈥淚 told him he should retire. He was 62. He was on top of the world. What more did he want? Why take chances?
鈥淭hen, when the bottom fell out, the whole thing collapsed. The last thing I heard, he was looking for a job.鈥�
We鈥檝e already seen the peak. What鈥檚 ahead is the valley. For the next few years 鈥� maybe 5鈥aybe 15 鈥� we can expect falling standards of living in the US鈥long with falling stock and real estate prices. Yesterday鈥檚 news, for example, told us that 1 million people are expected to lose their homes to foreclosure this year.
If you wanted more proof that the economy is not recovering, here you are:
鈥淩etail sales fall for second month,鈥� says Bloomberg.
Households are getting rid of debt. They鈥檙e sprucing up their balance sheets by increasing their savings rates. More savings, less debt. We have no quarrel with this process. It鈥檚 the market鈥檚 way of correcting mistakes and putting things back in order.
But it鈥檚 not without its little aches and pains. You鈥檇 expect retail sales to go down, for example.
If this were a recovery, on the other hand, you鈥檇 expect sales to be going up鈥o be recovering, that is. If the economy were retracing its bubble path, sales would go up and up. Instead, they鈥檙e going down and down 鈥� which is why it鈥檚 not a recovery. It鈥檚 a Great Contraction.
How long will it last?
Until it is over.
------------------------------
海角大神 has assembled a diverse group of the best economy-related bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link above.
