The "Dis-Savings" Glut

This morning the price of oil rose over $79. Gold is trading at $1,051…about one-tenth the price of the Dow.

The Dow fell 67 points on Friday. Investors began to wonder if the news coming from the banks was as good as the first reports indicated.

For example, the Bank of America reported losing a billion dollars on its consumer accounts. It is all very well for JPMorgan and Goldman to make money. They’re investment banks. And they’re making money thanks to the US government’s generous bailouts. They pay almost nothing for borrowed funds…in dollars, of course. And then they take the money and bet against the dollar. So far, those bets are doing pretty well.

Meanwhile, the Bank of America is a real bank. With real mom and pop customers. And the poor moms and the poor pops are going bust. They can’t pay their bills. Or, at least so many of them can’t pay their bills that it cost BoA $1 billion in loans write-offs.

The LA Times reports that “California job losses keep climbing.” The unemployment in LA county has reached 12.7%.

Also, from LA comes news that millions of square feet of office space remain vacant. Between LA county, Orange county, and the Inland Empire, there are some 51 million square feet of empty offices.

We don’t know who owns all this vacant space. But we can imagine who lent the money to build it – the big banks.

But lending money to customers is a tough way to earn a living. The more you lend, the more you make…until you lend too much. Then, you don’t make anything.

Of course, speculating is a tough business too. But it’s a lot easier when you can borrow from the feds at practically zero interest and the government also guarantees your debts. How can you lose?

Don’t worry, dear reader. Bankers will find a way. They always do. Want an investment strategy that really works? Just figure out what the big banks are doing and do the opposite.

What are the big banks doing now? Mortgage lending? Nope. Credit cards? Nope. Business expansion? Are you kidding? How about mergers & acquisitions? Not really.

According to the news reports, the banks are making money by “trading.” Trading what? Trading the dollar for things that are going up.

Look at the price of oil – over $79. And the price of gold – over $1050. Compared to each other – oil and gold – prices are stable. But against the dollar both are rising. In other words, people with dollars are trading them for oil and gold.

And not just oil and gold. While US stocks have gone up 50% or so in the last 7 months, emerging markets are up twice as much. Argentine stocks – who would have believed it? – have doubled. Indian stocks are up about 80%.

Well, let’s see… If the big banks are getting rid of dollars… Hmmmm… Do we want to get rid of dollars, too? Maybe not quite yet. When speculators unwind all these short dollar/long oil, gold, stocks positions it will send the dollar flying.

Could the dollar surprise the speculators? Yes it could. This weekend Tim Geithner told the world that the “US must live within its means.” There was no word on how his audience reacted. Surely some of his listeners must have giggled. Maybe at least one guffawed. A few must have rolled their eyes. Here was the man in charge of the Treasury of the world’s biggest spendthrift. The papers announced this weekend that his deficit had reached a new record, over $1.4 trillion.

In other words, no nation ever lived as far beyond its means as the US.

In the 10 years, ’97 to ‘07, consumers lived beyond their means. Then, suddenly, the shock of ’07-’08 brought consumers to their senses. Now, they’re saving…now it’s the government that is living beyond its means.

The New York Times tells us that the turnaround in household accounts has been breathtaking. This year, the average household is expected to SAVE $4,643.

As usual, the NYT misses the point all together. It asks whether this is good for the economy and comes to the predictable conclusion that it is not. If consumers don’t spend, the consumer economy won’t grow.

At least you know, dear reader, what nonsense this is. An economy only appears to grow from consumer spending. When consumers spend money – especially when it’s money they never earned – it triggers a phony boom. The economy gears up to produce more stuff. Then, when consumers have to repay their debts, the economy shrinks again. That is the story of the US economy 2001-2009.

A real boom, on the other hand, is one that results from increased earnings, not from debt. When people earn more they can spend more – without going further into debt and without having to stop in order to pay back the money they borrowed. But you don’t get that kind of boom from consumer spending. You get it from saving money…which is then invested in new tools that increase output.

More output = more earnings = more spending power = real economic growth.

Simple enough, right?

But getting back to those savings…

If the average household saves $4,643 this year…that’s about $500 billion savings for the entire nation. Yet, the US government is running a budget deficit of 3 times that amount.

Are we missing something or is that net dis-saving of about $1 trillion? In other words, the US is going deeper and deeper into debt. Whee!

Wait a minute. Didn’t professors Reinhart and Rogoff just study nations that went too far into debt? And didn’t it show that once you take on too much debt it is impossible to escape trouble? Don’t governments always go broke when they borrow too much? And doesn’t it always lead to crises – banking crises, credit crises, currency crises and political crises?

Yep.

Well, shouldn’t we be running for shelter?

Yep.

Then, shouldn’t we be dumping the dollar?

Yep.

But…it’s not that simple. Markets always try to sucker in as much money as possible. Right now, people are afraid of the dollar. Just this weekend, the nations of Latin America began an initiative to create their own regional currency – the sucre – to compete with the dollar. And with gold and oil rising, many investors – especially the big banks – are betting heavily against the greenback.

Wouldn’t it be just like Mr. Market to engineer a dollar rally…BEFORE we have a dollar collapse?

Yep.

*** Foreclosures are up 5% from the summer to the fall. Poor Donald Trump. Buyers of his condos in Miami are suing him. Prices have plummeted. Buyers think The Donald is at fault.

*** And poor Ted Turner is in the news too. He’s down on his luck…and down to his last $2 billion. Jane is gone. So is CNN. He’s struggling to “stay relevant,” by working on women’s rights issues and fighting global warming. And he’s getting in tune with the times by downsizing:

“I’ve had the experience of being on top and riding the roller coaster down again, nearly to the bottom. You know, if you economize and don’t buy new airplanes or long-range jets, or that sort of thing, you can get by on a billion or two.”

*** This weekend we went to look at a friend’s house out in the country. He had built it himself …with help from his sons. It was a beautiful stone cottage, perfectly proportioned with French-style windows, shutters, and a clay tile roof. On the inside, was a terra cotta floor, exposed beams, and a wood stove.

“Yes, we just built it ourselves. You know, nowadays you can’t do this. You certainly can’t do this in England. I’m sure you can’t do it in America either. But we just didn’t say anything about. And we did it all ourselves so not many people knew about it.”

The house was hidden from the road by a dense hedge.

“And cheap? The whole house barely cost anything. We got a few truck loads of stone delivered. Then, I just bought mortar – one bag at a time – as I needed it. We recycled the floor tile. And the roof tile too. And we made the wood beams ourselves. We just cut down a couple trees and then cut them to the sizes we wanted. It took a little time. But we just did it on weekends and vacations. One of my nephews came to help too. It was fun.

“The only things that really cost money were the roof tiles, which we had to buy…and the doors and windows, which we had made by a local woodworker. Everything else was very cheap or we found it or recycled it ourselves. So, in the end, we have a nice house with no mortgage.”

*** And here’s something interesting. Harrods is selling gold bars:

“From this morning, Harrods will start selling gold bullion and coins over the counter. In a sign that the credit crisis has left his gilded customer base largely untouched, Harrods owner Mohamed Fayed has teamed up with Produits Artistiques Métaux Précieux (PAMP), the Swiss refiner, to sell gold in the store. Aimed at private investors, the gold will be sold at the Harrods Bank branch on the lower ground floor of the West London store.”

Until tomorrow,

Bill Bonner

The Daily Reckoning