Der USA Bären-Thread

By Paul B. Farrell, MarketWatch

This update corrects the stock benchmark referred to in Matt Argersinger's work. It is the Dow Jones Industrial Average.

ARROYO GRANDE, Calif. (MarketWatch) -- Summer of recovery? Dead. How  dead? Remember Genesis? The Seven Lean Years? Add seven years to the  handoff from Bush to Obama in early 2009 and you get no recovery till  2016. Get it? No recovery till the end of Obama's second term, assuming  he's reelected -- a big if.

"The idea behind 'seven lean years' is that it is unrealistic to expect  to overcome the several problems facing most developed countries,  including the U.S., in fewer than several years." That's Jeremy Grantham  talking; he's responsible for investing $100 billion in the next seven  lean years. And like the biblical Joseph, whose life was on the line  while interpreting dreams for the Egyptian pharaoh, Grantham can't  afford mistakes.

In his recent newsletter, "Seven Lean Years Revisited,"  Grantham tells us why expecting a summer of recovery was unrealistic,  why America must prepare for a long recovery. Grantham details 10  reasons: "The negatives that are likely to hamper the global developed  economy." Sorry, but this recovery will take till 2016.

But should you believe Grantham? Yes. First: Like Joseph, Grantham's  earlier forecasts were dead on. About two years before Wall Street's  2008 meltdown Grantham saw: "The First Truly Global Bubble: From Indian  antiquities to modern Chinese art; from land in Panama to Mayfair; from  forestry, infrastructure, and the junkiest bonds to mundane blue chips;  it's bubble time. ... The bursting of the bubble will be across all  countries and all assets ... no similar global event has occurred  before."

Second: The Motley Fools' Matt Argersinger went back to the dot-com  crash of 2000: Grantham "looked out 10 years and predicted the Dow Jones  Industrial Average would underperform cash." Bull's-eye: The Dow peaked  near 14,000 in late 2007; it's now around 10,000. Factor in inflation:  Wall Street's lost 20% of your retirement since 2000. Yes, Wall Street's  a big loser.

Third: What's ahead for the seven lean years? Wall Street will keep  losing. Argersinger: "Grantham predicts below-average economic growth,  anemic corporate-profit margins, and other severe obstacles for the  stock market. Over the next seven years ... U.S. stocks as a group will  deliver annualized real returns between 1.1% and 2.9%. That's less than  you might get putting your money in a CD."

Warning: You'd be a fool to trust your money with Wall Street during the seven lean years till 2016. Another 20% will vanish.

Fourth: Why will Wall Street kill the recovery, keep driving us deeper  into a ditch till 2016? Last year Grantham asked: "Why is it that  several dozen people saw this crisis coming for years? It seemed so  inevitable and so merciless, and yet the bosses of Merrill Lynch and  Citi, even Treasury Secretary [Henry] Paulson and Fed Chairman [Ben]  Bernanke, none of them seemed to see it coming." The Pharaoh listened to  Joseph. Our leaders are deaf.

Another Black Swan will lengthen a seven-lean-years recovery

Grantham says today's leaders "running major-league companies are real  organization-management types who focus on what they are doing this  quarter or this annual budget. They're impatient, focused on the  present."

However, planning for the future "requires more people with a historical  perspective who are more thoughtful and more right-brained, but we end  up with an army of left-brained immediate doers. So it's more or less  guaranteed that every time we get an outlying, obscure event that has  never happened before in history, they are always going to miss it."

Get it? It is guaranteed that our Wall Street and Washington leaders  will miss the next Black Swan catastrophe. No matter how big, how many  warnings. Just like they did in 2008. They are guaranteed to fail.  That's tragic. Not only will America's recovery take at least seven lean  years but when another meltdown does occur our leaders will miss it  again. And another massive meltdown on top of a long seven-lean-years  recovery will likely drag out the recovery past 2020!

So here's my Reader's Digest version of Grantham's 10 handicaps that  will "hamper the global developed economy, drag it out for seven lean  years," forcing Americans into a painfully long, game-changing period of  austerity and civil unrest. You can read his original at GMO.com:

1. Too much consumer debt; increased savings, spending drops

"We've stopped adding consumer debt, but the improvement is minimal. It  would take at least seven years of steady reduction to reach a more  normal level. Anything more rapid than that would make it nearly  impossible for the economy to grow. More stimulus adds government debt,  already a problem. But debt reduction in a fragile economy runs the risk  of causing a severe economic decline. This dilemma may prove to be the  central economic policy choice of our time. Not an easy choice. And no  way that this process will be pleasant or quick."

2. Banks off-loaded trillions of toxic debt, increasing federal debt

"The most frightening aspect of the seven-lean-year scenario is that  dangerously excessive financial system debt was moved across, with  additions, to become dangerously excessive government debt, with levels  of debt-to-GDP not seen outside wartime. The cure seems more like a stay  of execution."

3. Stimulus failing, housing crashed, no appreciation, confidence lost

"The artificial lift to consumers' confidence from steadily rising house  prices is long gone, unlikely to return soon, reducing our confidence  in the nest eggs we thought we could count on for retirement. Further  house-prices declines are more than a 50/50 bet. No more shot in the arm  from construction. Stock prices are stagnant. These changed attitudes  will last for years."

4. Banks undercapitalized, overleveraged; more trouble ahead

"Wall Street may have passed its point of maximum stress, but very bad  things may lie ahead in Europe. Leverage and the chances of further  write-downs leave banks undercapitalized, reluctant to lend. Unhealthy  growth in America's GDP caused by previous rapid increases in the size  of the financial sector has also disappeared, hopefully will stay gone."

5. State/local governments squeezed, tax revenues down 30%

"Runaway costs: average salaries and pensions went far above private  sector in 15 years, now run into the brick wall of reduced taxes. Real  estate taxes are down over 30%, unlikely to bounce back soon. The legal  need to stay balanced means painful cost-cutting, putting pressure on an  economy with few stimulus options left. A double dip would make it  worse."

6. High unemployment; few tricks left to stimulate jobs

"Unemployment is high, suffering from the loss of kickers related to  asset bubbles. The economy appears to have an oddly hard time producing  enough jobs to get ahead of the natural yearly increases in the work  force. Consumer confidence and corporate investing suffer."

7. America's trade imbalances are killing the dollar, our economy

"America must stop running large trade imbalances, they destabilize the  economy. In a world growing nervous about the quality of sovereign debt,  these debt levels have exploded. Adding new foreign debts adds risk and  doubts to the system, threatening the dollar. Just as adding surpluses  threatens the Chinese. The trick, though, is to reduce these imbalances  so that the process does not reduce global growth. Rebalancing will not  be quick, easy, or painless."

8. European governments crashing; incompetent management

"Europe suffers from incompetent management. Spain, Greece, Portugal,  Ireland, and Italy allowed local competitiveness of manufactured goods  to become 20% or more uncompetitive with Germany. The banking crisis was  not the problem, so it'll never be easy to solve with a fixed currency.  Unfortunately, Europe's problems are now part of America's seven lean  years, guaranteeing slower than normal GDP growth and a long workout  period."

9. Global loss of confidence in all currencies, including the dollar

"Rising levels of sovereign debt and problems facing the euro bloc and  Japan are creating a loss of confidence in faith-based currencies. The  world economy is a fragile system that will increasingly limit  governments' choices in dealing with low growth and excessive credit."

10. Aging populations; rising Medicare, Social Security costs

"Possibly most important of all, widespread overcommitments to pensions  and health benefits is a long-term problem overlapping with the  seven-year workout, making the 'seven lean years' even tougher.  Developed nations are aging, need more medical attention. Treatment  costs are increasing, and are hard to limit or ration. No choice, hunker  down, wait for a crisis."

Bottom line: America's facing seven lean years, a long, game-changing,  painful recovery till 2016....