Bill Bonner proven correct as market signals lower stock prices

Posted on 07 July 2010 with 1 comment from readers

The founder of Agora Financial and veteran market commentator Bill Bonner looked a little premature earlier in the year when he ran up a red flag on the top of his London headquarters. But being early in prescience is a virtue for market analysts.

With the Baltic Dry Index down 49 per cent in the past 28 days – the indicator that flashed red in the summer of 2008 – and the Dow Theory indicators now firmly signalling the resumption of a bear market (see this article), Mr Bonner will be able to face his accolytes in Vancouver later this month with the smile of victory on his face.

Bonner right

His latest column sums it all up:

‘No new buyers are coming into the housing market. No new jobs are being created. Consumers are still de-leveraging. Banks are still reluctant to lend. And businesses are still loathe to expand in the face of an economy-wide de-leveraging.

‘Automakers say they see no sign of recovery. Investors are spooked by the thought of a double-dip recession. And 10-year US Treasury notes are selling at the lowest yields in 14 months.

‘To make matters even more unsettling, the world’s governments have pledged to reduce their countercyclical spending. They won’t get an argument from us on that score. They are doing the right thing. But if they follow through, it will result in the private sector and the public sector de-leveraging at the same time. This is highly deflationary.’

Mr Bonner is making his point as an analyst. He is not trying to advise on government policy. He is seeing things as they are and advising on how investors should respond.

Readers of this website will recall how alarmed ArabianMoney was at the mood in England earlier this month. The new government’s enthusiasm for austerity is infectious but very worrying.

Austerity implications

Back to Mr Bonner again:

‘Countercyclical spending cannot stop a correction. But pro-cyclical tightening may be able to trigger a depression (as Treasury secretary Andrew Mellon’s drive to balance the budget did from 1921-1930).

‘Let me put that another way. Governments can’t make bad debt go away. So they can’t prevent a correction and a de-leveraging; they can only delay it. One way or another excess debt needs to be reckoned with. But when the authorities begin to tighten at the same time that the private sector is tightening, the effect will push the world into a sharper, deeper correction…even into a depression.

‘This is a dangerous situation. This period of price deflation and debt destruction could be more dramatic than we expected. Seen through this lens, cash and gold seem preferable to stocks. The goal is not to lose money while waiting for the next great opportunity.’

ArabianMoney would add short ETFs to this market position but otherwise concur with Mr Bonner.