7 More Years Until We're Out of the Woods

Friday was the final day of the Agora Financial Investment Symposium in Vancouver, British Columbia, put on by the folks at the Daily Reckoning newsletter. The final speech was delivered by Bill Bonner, founder and president of Agora Financial, and truly one of the best financial writers of our day. He's a "literary economist," as he likes to say. Below is a partial transcript of Bonner's speech, edited for clarity.

On where we are: I think that we obviously and inevitably are in a period of debt deleveraging. That's a very important thing to understand. Most leading economists don't get it. But it's right there. It is unavoidable.

So everyone is doing what they ought to be doing: They're saving money. The savings rate is currently going up. That scares the neo-Keynesians to death, but it's what we've got. And what's happening with these savings? It's all going into Treasuries. People are fundamentally more frightened about losing money than they are excited about making money. What's the result? It's a market that's weak. It's a market that's vulnerable.

On the rest of the world: I was in Asia not too long ago. I looked around and I saw all these young, hardworking people, and I'm thinking, "These people are going to be very hard to compete with." And they are. My businesses in India are growing faster than any other of my businesses. I'm not making predictions. I'm just looking at what's going on right now. And I don't see any reason why they'll stop.

Here's a good story about global competitiveness. A lady just bought a company in France for 1 euro. And what did she get for this 1 euro? A company that has no debt and 10 million euros in the bank. How can that be? Who would sell that business for just 1 euro? Well, here's the thing: In France, it costs about 100,000 euros to lay someone off, because of unemployment benefits and whatnot. Think about that ... 100,000 euros! Just to let someone go! And this business, coincidentally, needs to let go of about 100 workers. So there's your 10 million euros. It's already gone. It's very hard for a country like that to compete on a global scale. You know how much money I've made on my businesses in France? Not one dollar.

On financial tinkering: Think about oil wells. These are complex engineering things. But it's a science. Energy engineers do make mistakes, of course. They drill 1,000 wells a year and maybe have one major accident. It's really nothing.

But then there are financial engineers, like the Fed. Financial engineering is not a science. It's an experiment. I mean, what are these guys doing? What is their plan? What are their tools? What is their success record? It's a joke. It's an absolute joke. None of what they are doing has ever been tested. All their theories are just that: theories. And they're bad theories. These people have never built a bridge that didn't fall down. Yet they are embarking on an experimental project that has already cost the world $20 trillion in lost wealth. That's nothing compared to what BP's (NYSE: BP  ) engineering mistakes have cost the world. It's a fraction.

On how much longer until we're out of the woods: In the past 100-some-odd years, markets have peaked three times: in 1929, in 1966, and in 1999. The length between each new high is usually about the same -- 35 years. Why? Because that's the length of a generation. It's the amount of time it takes people to forget what happened last time around.

What we're seeing now is an orderly -- and I stress orderly -- destruction of debt. It's a correction. And consumers are paying off debt so quickly. Faster than the government is creating new debt, in fact. Looking at the latest figures, it's about a $500 billion net payoff per quarter. That's $2 trillion of debt that's being paid off each year. So let's do the math. If we were at 300% total credit market debt to GDP, and a comfortable average is 150%, then we need to pay down, let's say, about $20 trillion. So that's 10 years at current rates.

I like that: 10 years. It's a nice round number. It's also what history shows: These things typically take about 10 years to pull out of. This correction started in 2007, so it will probably last until around 2017. So seven more years to go. And that's only if everything goes according to plan, of course. Things could change at any moment.

My comments (Morgan here): I like Bonner. He's a rational pessimist, which is an entirely different species than most doomers. His calculation of needing another seven years to bring debt down to sensible levels struck home with me. This idea, that the world isn't about to end, but the next several years will be lethargic at best, is echoed by Bill Gross of PIMCO (the "new normal"). It really makes a lot of sense.

The most reasonable way to invest in this world, I think, is to focus on high-quality dividend stocks. If economic growth is mild, you can kiss capital appreciation goodbye. As long as that's the case, companies with durable franchises and histories of maintaining and increasing dividend payouts should outperform. Three in particular that I like are Verizon (NYSE: VZ  ) , Altria Group (NYSE: MO  ) , and Johnson & Johnson (NYSE: JNJ  ) . These are world-class companies with dividend yields superior to 10-year Treasuries. They are as close to no-brainers as it comes, in my opinion. To learn more, check out "5 Dividend Monsters to Buy After the Crash."

Fool contributor Morgan Housel owns shares of Verizon, Altria, and Johnson & Johnson. Johnson & Johnson is a Motley Fool Income Investor pick. Motley Fool Options has recommended buying calls on Johnson & Johnson. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


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  • Report this Comment On July 27, 2010, at 6:22 PM, mtracy9 wrote:

    "The length between each new high is usually about the same -- 35 years. Why? Because that's the length of a generation. It's the amount of time it takes people to forget what happened last time around."

    This statement by the author proves that the author does not have it all figured out. In fact the length of a generation is usually considered to be 25 years. Moreover, the crackpot author says that the Fed provoked this crisis, but does not tell us how.

  • Report this Comment On July 27, 2010, at 6:38 PM, mountain8 wrote:

    I've read that next year, dividend income will be taxed at 39% rather than 15%. So what's the advantage in dividend stock? Or have I read wrong?

  • Report this Comment On July 27, 2010, at 8:11 PM, Pr0metheus wrote:

    Mr. Housel,

    First off, a big thank you for covering this symposium. It has made for a very interesting read, and warrants looking into. Now, on to my actual comment. I have seen you reference the writings of Anthony Mirhaydari a few times in the past. Have you read his recent article "Why are CEOs so cocky these days?"?

    http://articles.moneycentral.msn.com/Investing/MutualFunds/w...

    Suggesting that we are at the "beginning of a long and prosperous economic expansion", Mirhaydari's outlook stands in direct contrast to the pessimism presented at the Agora Financial Investment Symposium. His evidence is compelling, and I must say I was upbeat after reading the article. . .

    . . . until I read your coverage of this symposium. The arguments Bonner and the others have presented are also compelling. Reconciling these two opposing view points is going to be a tough one; so far I can't make heads or tails of it. Any thoughts?

    -Bob

  • Report this Comment On July 27, 2010, at 8:36 PM, zymok wrote:

    Mountain8,

    What you've heard is close. From 2003-2010, dividends are taxed at a maximum 15% rate. Beginning next year (unless Congress changes the law), the so-called "Bush tax cuts" will expire, and dividends will be taxed at the same rate as regular income, so the max rate will be 39.6%. The actual rate depends on your taxable income.

  • Report this Comment On July 27, 2010, at 9:23 PM, pinestholdings wrote:

    Thats not exactly correct zymok. Its only taxed as ordinary income for the first three years you hold the corporation. Then it becomes a capital gain (assuming there is no amendment). So, people who have held dividend stocks for three years or more will see no change. Those just getting in will feel pain.

  • Report this Comment On July 28, 2010, at 2:20 PM, mountain8 wrote:

    thx

  • Report this Comment On July 28, 2010, at 3:16 PM, Glycomix wrote:

    Thank you pinestholdings.

    It looks like the current crop of politicians want to drive the country into a ditch and hold your head under water in case you survive by investing in the Stock Market.

    The problem with a three-year investment is economic uncertainty. Do you want to pay more or do you want to survive?

    I've been writing my congressman for two years about Fannie Mae and Freddie Mac's problems without reply. He is apparently new and doesn't want to rock the boat.

    The problem is that the boat will sink if we don't find a better heading.

  • Report this Comment On July 28, 2010, at 3:30 PM, ChrisBern wrote:

    Thanks for covering this all week Morgan...excellent stuff. I also like Bonner and find him to be just as you say, a rational pessimist. And he has an entertaining writing style.

  • Report this Comment On July 28, 2010, at 5:09 PM, xp308 wrote:

    Thank you for your insight. I appreciate seeing rational thinking folks posting comments to this board. I totally agree with your comment about investing in durable franchises that pay dividends.

    MO is a great company that takes care of shareholders along with JNJ too.

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