The History Buff's Stalingrad

Studying history doesn't always make you smarter...

IT MUST BE SNOWING all over Europe, writes Bill Bonner in his Daily Reckoning.

Zurich was beautiful in the snow. So is Paris. The snow seems to quiet the place down...and cover over its imperfections. And the cafes and bars...brightly lit, warm and charming...are so inviting you can barely make it home at night.

This morning, it is still snowing. We were tempted by several cafes. But we made it into the office anyway. There's reckoning to be done; someone has to do it.

Everyone is talking about the rise in the Dollar. It's up to $1.43 per Euro...a three-month high. Because "The US economy all of a sudden doesn't look so bad; the rest of the world doesn't look so good," was one explanation given in The Wall Street Journal. Investors are going back to safety, said another report.

We were puzzled as to why stock markets were doing so well. If investors were really fearful, you'd think they'd be pulling their money out of expensive stocks, especially out of the go-go 'emerging' markets. This year, the three leading performers are Brazil, Russia, and Indonesia, up 140%, 129%, and 115% respectively. Even in the US, shares are selling for far more than recent experience would seem to justify.

But maybe the sell-off in the stock market has finally begun. We'll have to wait and see. Meanwhile, over the last couple of weeks, an idea has been taking shape:

The future is like a child. It will grow into an entirely new person. One that has never existed before. But it is a product of the past too. It may have Mom's eyes...or Aunt Lou's quick temper. It lives in a house originally bought by Dad when he was working for IBM in the '80s. And it uses money that is controlled by an organization set up under the Wilson administration.

When we look ahead, we see enough elements of the past to confuse and mislead us. "Those who do not study the past are doomed to repeat it," say the schoolteachers. But what about those who DO study history? At least one of Hitler's top generals, when he was taken prisoner at Stalingrad, had in his pocket a copy of Caulaincourt's recollections of Napoleon's disastrous Russian campaign.

We are supposed to believe that investors can avoid the calamities of the past by studying what happened in previous market cycles. To some extent it is true. You read enough stories of bubbles and you begin to get an instinct for them – at least at the extremes. That is how some of us were able to foresee the dotcom blow-up in '00...and later, the blow-up in the financial sector in '08.

Part of the problem is just filtering out the noise in the system. Probably 99% of what you heard is just noise – distracting information, misunderstood phenomena, and dubious data. When you read the commentariat...the pundits...the newscasters, economists, and analysts who are telling you what is happening and what lies ahead, you have to remember that most of them had no idea what was happening two years ago. Now, they have even less of an idea of what is happening.

We don't have any idea either. Like a newborn babe, this period in our financial history bears some resemblance to past cycles. The most striking resemblance is to the depression period of the '30s in the US...and the long, slow depression in Japan since 1989. But it is different too. As you will see, below, we have far more to reckon with that we did in the '30s.

Of course, those who misunderstood the financial bubble of 2003-07 (Ben Bernanke thought it was a period of "Great Moderation" caused largely by his own superior handling of the Fed) now misunderstand the post- bubble world. They think it is a technical challenge. They imagine that if Bernanke – whose bid for another term cleared the House last week – can just make the right adjustments, everything will be hunky dory.

Alas, Bernanke will do an even worse job than we would do. We have no idea. He has a bad one. Ben Bernanke is Time's "Man of the Year". And reading the commentary, it is clear that the popular press has even less of an idea of what is going on than Bernanke himself.

The more we think about it, the more our jaw drops. In Copenhagen last week, a large group of apparatchiks and hacks got together to discuss a 'climate deal'. There, Hillary Clinton pledged US support to a plan to spend $1 trillion to try to influence the earth's climate. Governments can do many things, but can they really improve the weather? There is no evidence for it. Not even a respectable theory.

In Washington, meanwhile, Ben Bernanke is spending trillions to try to improve the economy. Can he really do that? Again, there's no evidence for it.

The depression continues. Jobless claims went up last week. And Bloomberg reports that the "shadow inventory" of houses is going up with it. In the "shadow inventory" are houses that would be for sale if owners thought they could find a buyer at a decent price. We would add in the houses of people who are about to make "strategic defaults" on their mortgages.

The WSJ reports:

"A growing number of people in Arizona, California, Florida and Nevada, where home prices have plunged, are considering what it known as a 'strategic default,' walking away from their mortgages not out of necessity but because they believe it is in their best financial interests."

Some 5.5 million people have houses that are 20% or more underwater. One of them, spotlighted in the WSJ, had a house worth $230,000 and a mortgage of $318,000.

Here is one way the problem of too much debt is solved...not by paying it off, but by writing it off. The homeowner in this situation can improve his balance sheet – wiping out $88,000 worth of debt – without lifting a finger. Logically, he could go to the lender and cut a deal. But lenders won't want to get their customers started on bad habits. So, he will just cease paying his mortgage. His credit rating will suffer. But what does he care? He's fed up with debt.

The house will be seized by the bank. Then, it will come out of the shadow inventory and into the light of the active housing market – pushing prices down.

The good ol' WSJ has noticed the big shift in attitudes. No longer able to afford spending, Americans are deciding that spending isn't cool.

"We seem to be at a cultural inflection point that we haven't seen since WWII," said one market researcher. "Their value system is shifting from aspiring to material wealth to aspiring to a better life," said another one.

Yes, dear reader, runaway consumerism has run off the road. With 6 billion people now competing for stuff, the whole idea of having a lot of stuff is being called into question. In the first place, there's not enough stuff around to permit everyone to have as much as Americans - at least not without some huge technological breakthroughs. In the second place, Americans have run out of money to buy stuff. In the third place, it takes a lot of energy to make and transport so much stuff; the US no longer has access to cheap energy. And finally, the US economic model – in which growth is a result of stimulating consumers to buy more stuff – no longer works.

What will replace consumerism? Hey...we don't know. We feel pretty proud of ourselves for just figuring out this much.

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