The Wile E.Coyote Theory of Economics
Nothing to fear but fear itself! Just don't look down...
"EVERYONE WAS AFRAID the world was going to come to an end a year ago, and it almost did," says Doug Casey, head of Casey Research.
Here in his latest Conversation with Casey, he talks to Louis James, editor of Casey's International Speculator, about how governments all around the world stepped in and printed up trillions of their various currency units – and not just the United States – to keep asset prices from collapsing...for now...
Louis James: But as long as there's confidence, all is well, right?
Doug Casey: It's the Wile E. Coyote theory of economics. As long as you never look down after running off a cliff chasing the roadrunner, you can keep treading air. Unfortunately, although the power of positive thinking may help in many ways, it's of zero use if you continue living above your means and making stupid decisions.
LJ: Insolvency doesn't seem to matter; as long as everyone has confidence that things will keep going, the experts believe they will. But in the real world, you can't remain insolvent for long, even if "you" are the United States as a whole society.
Doug Casey: Exactly. My thinking about the stock market is this. Corporations have done as "well" as they have mainly by cutting expenses – laying people off, that sort of thing. So the bottom lines have not fallen as far as we might expect, but the top line has been hit. Revenues are falling for corporations across the board.
LJ: And the market has to notice this reality sooner or later.
Doug Casey: Yes. The world's financial system has to adjust to a new reality, one with lower levels of consumption and differing types of production. The legions of unemployed are not going to go back to work anytime soon, at least not doing anything like what they were doing before the bubble burst.
The economy is going to continue deleveraging. There's going to be less debt to allow the purchase of all this stuff people have been buying, resulting in lower corporate earnings. So it's hard to see revenues doing anything but continue to spiral downwards for years to come. And then there are financial "accidents" waiting to happen.
LJ: Like the bank failures the government has admitted it expects this year? The FDIC says there will be more bank failures in 2010 than in 2009, with the spin being that 2010 will be the peak of the crisis.
Doug Casey: Sure. But I also expect corporate bond failures. And there are other things out there. As Porter Stansberry (whose style as an analyst I really like) has pointed out, General Electric – which is really just a hedge fund disguised as an industrial concern at this point – is leveraged thirty to one. It's a dead man walking. It's the next AIG. When something like that happens, it really shakes Wall Street to its foundations.
So, I've been bearish on general equities for years, based on fundamentals. Whether they go up is no longer a reflection of prosperity – it's a reflection of how much money the government creates and where it goes. But I am feeling particularly strongly bearish on Wall Street right now. That's my gut. The social mood of the country is going to turn ugly and gloomy; people won't want to call their brokers and "get into the market".
The Greater Depression is going to be really serious. I can't see buying stocks until dividend yields are in the 6-12% range. And people have forgotten the market even exists. Anyway, Baby Boomers, who own most stocks directly and indirectly, are going to be selling them to support themselves in retirement.
LJ: Would you recommend shorting GE?
Doug Casey: It should be an easy bet, but the government is certain to try to prop it up, as it has other dinosaurs pursuing business models that no longer work, like General Motors – although it didn't help their shareholders. "Too big to fail" makes shorting riskier. But GE still has a $179 billion market cap, so it should fall quite a bit from here, if not all the way to zero.
LJ: No way out for the stock market?
Doug Casey: Well, the government has been suppressing interest rates for a long time now, which is exactly the opposite of what they should be doing. These artificially low interest rates discourage people from saving and encourage them to gamble, hoping to outrun inflation. But eventually the market will force interest rates to go higher, and that will kill the stock market, because the stock market does tend to fluctuate inversely with interest rates.
High interest rates almost always mean a low stock market, and low interest rates tend to mean a high stock market. So it seems to me that there simply is no good news on the economic front. Interest rates are headed way up, both out of a need for capital and as a reflection of the high price inflation ahead.
LJ: This doesn't sound like a guru moment – a flash of the famous Casey inspiration. This sounds more like a well-reasoned argument to me.
Doug Casey: Well, when you get a really strong gut feeling, it's usually because you intuit many things that are out there, subconsciously if not analytically. Look, dividends are dropping across the board. Top line earnings are dropping. Where net earnings have been maintained, it's been by expense cutting.
LJ: Even if margins are maintained, the companies are getting smaller, and people are making less money, on the whole.
Doug Casey: Right. And interest rates are at all-time lows. That's the short sale of the decade, if you want to short something. Bet against bonds.
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