It’s the End of the World—and I Feel Fine

12/01/2007 12:00 am EST

Focus: MARKETS

Bill Bonner

Founder and President, Agora Publishing, Inc.

William Bonner, founder and president, Agora Publishing, Inc. opened the London World Money Show by telling attendees that the day of reckoning has arrived, but it’s not, well, the end of the world.

Watch the complete keynote here…

Bonner told investors that the Great Unwinding has begun. The $20-trillion troubled housing market in America is on the verge of seeing approximately $7 trillion of its wealth wiped out. The root of the problem is the subprime mortgage mess, but Bonner sees this as just the beginning of many downturns that may lead to a series of recessions.

Yet, despite that dire warning, he asserted that his message was one of hope and optimism. Harkening back to his keynote title, Bonner says he feels fine because he’s happy to see nature reasserting itself. Markets and economies are part of nature and so are corrections.

Bonner posed the question, “What would happen if you didn’t have corrections?” His answer was that mistakes would compound and people would hold on to bad investments. And as is often the case, the longer you put off a correction, the worse it is when it does arrive. And he believes that is the situation we are in today.

In fact, Bonner maintains that the current correction is especially important, because the boom we’ve been enjoying is a fake. A real boom takes real money to produce real goods. Our boom is based on phony money in the US and the UK; it is not based on savings. Its origins rest with the Federal Reserve and other central banks that gave people the wrong idea that lowering rates and printing moneyproducing it out of thin aircreated real purchasing power, which it didn’t.

Bonner remarked that fake booms start with phony money, then evolve into a fraud, and then a farce. The largest glaring example is the subprime crisis, which he says is so absurd, it’s almost unbelievable. The crisis was precipitated by lenders handing out too much credit to unworthy borrowers. It was then compounded by financial institutions who packaged these risky loans in pretty wrappings for the secondary mortgage market. And it was enabled by the ratings agencies that were all too willing to go along with the program.

Instead of marking the investments to market, they had to be marked according to the requirements of the complex models that created themmodels that ultimately fell apart.
 
We are now beyond the farce stage, and emerging into disaster. Estimates for the losses sustained by banks, pension funds, and the rest of the financial industry commonly range from $150 to $400 billion. But a new study by Goldman Sachs reports that when losses throughout the system are taken into account, they could add up to a whopping $2 trillion. (That compares with an estimated $9 trillion of market value that evaporated in the 2000-2002 bear marketEditor.)

Until 1980, the debt in America as a percentage of Gross Domestic Product (GDP) was never more than 130%. Now it’s 330%. For that run up, Bonner blames the Reagan Revolution, remarking that the ideological element of that erathat capitalism was so strong that you could make any mistake you wanted and all would be all rightwas a delusion.

And because the Fed cut interest rates to their lowest levels in decades and released a huge load of phony money into the world, consumers did not cut back on spending during the post-9/11 recession. The result was that we effectively delayed the natural big correction, until now.

Now we’re at the disaster stage. Investors can expect that in real terms, housing prices and business profits are going to go down. Consequently, stock pricesnow off about 10%are almost certain to decline, in real terms.

Bonner concluded his remarks by stating that he has confidence only in the escalating price of gold, in real terms, as it serves as an antidote to real and nominal inflation.

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