Falling retail sales could spell recession
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Bill Bonner Guest blogger
Stocks down another 104 points yesterday鈥easured by the Dow.
What鈥檚 going on鈥�? What鈥檚 going on?
That was a song by Marvin Gaye. It was also the question the interviewer asked. Followed by, what鈥檚 going to happen next?
But those are questions no one can answer. All we can do is guess鈥peculate鈥nd wonder.
鈥淒eflation now. Inflation later鈥� is what we鈥檝e been saying for the last 4 years.
The interviewer seemed happy with the answer. And the elaboration:
鈥�Japan now鈥ut don鈥檛 be surprised when we end up in Argentina.鈥�
What do Japan鈥rgentina鈥nd the US all have in common? They can print money. And when their backs are to the wall, that is what they will do.
But that鈥檚 later, remember. Right now, investors are lending money to governments at the lowest rates in history. They do not ask anything more than to get the money back. Eventually. And since the US and Japan can print, they are confident that they鈥檒l paid.
But what about Argentina? Turns out, Argentina borrowed in dollars too鈥nd pledges to repay, in dollars. So, you might think you鈥檇 get the same interest yield in an Argentine bond as an American one.
But what鈥檚 this? The yield on the 鈥楤oden,鈥� which is what they call Argentina鈥檚 dollar bonds, is over 17% 鈥� which is more than 10 times what you get from a 10-year US note. What gives? Simple. Argentina can print pesos. It can鈥檛 print dollars. So investors are afraid that when time comes for repayment, the Argentines won鈥檛 have enough dollars on hand.
No such problem in the US. And as long as this recession or 鈥榗ontained depression鈥� continues鈥nvestors will probably continue to treat US debt like a mattress. You put your money in. You can get it out when you want. You don鈥檛 make anything. But you don鈥檛 lose anything either.
But how long will this Japan-like slowdown continue, our interviewer wanted to know?
鈥淗ard to say,鈥� was the reply. In terms of private sector debt, the downturn is taking out an amount equal to about 10% of GDP every year. But there鈥檚 still the equivalent of 100% of GDP of excess debt left to go before we鈥檙e down to 鈥�70s levels.
If that鈥檚 where it is going, we鈥檝e got another 10 years of travel 鈥� at this rate.
Meanwhile, in the near term, it looks like the US economy is headed into another recession. That鈥檚 what usually happens when retail sales go down for 3 months in a row.
Seventy percent of the US economy is consumption. So, when the consumers stop buying, the economy goes down. Lakshman Achuthan, who runs Economic Cycle Research Institution, says he thinks a recession has already begun.
And when the economy goes down, generally, stocks go down. The little sell-off we鈥檝e seen so far is nothing. The Dow hit 13,000 in 1999. It has gone nowhere since. And now, it should begin to sink.
As mentioned, retail sales are falling鈥�
聽Corporate profit estimates are going down鈥�
聽The Chinese growth rate has dropped 6 quarters in a row鈥�
聽America鈥檚 corn and soybean crops have failed鈥�
聽Family income is in decline; never before has it gone down over such a long period (12 years)鈥�
聽US bond yields are at their lowest ever, with the 10-year at 1.39%.
Came the question: 鈥淲ell, what should our viewers do?鈥�
鈥淪ell stocks,鈥� was the answer.
Regards,
Bill Bonner
听蹿辞谤 The Daily Reckoning
