|
You guys are right, the Bush administration sucks! Look at what he's done now. (pg. 6)
|
View this Thread in Original format
| MisterOpus1 |
| As much as I'd like to lay claim to all this previously posted, I can't. I got a great deal of numbers from a local forum post in my hometown. Just thought I'd clear that up - I'm not too much of an economics guru, though I am learning. |
|
|
| occrider |
| quote: | Originally posted by MisterOpus1
As much as I'd like to lay claim to all this previously posted, I can't. I got a great deal of numbers from a local forum post in my hometown. Just thought I'd clear that up - I'm not too much of an economics guru, though I am learning. |
At least you're honest with your sources :)
Ok well here's my justification for the successes of the 2001 tax cuts:
| quote: |
The Economic Surprises after 9/11
In the aftermath of the terror, consumer spending stayed strong, and the recovery may have started right after the attacks
With a full year of reflection, we can at last assess with more clarity the economic impact of the September 11 terrorist attacks. The conclusions we at MMS International, an economic-analysis outfit, can draw now are quite different from the theories that predominated immediately after the tragedy.
What has been most surprising in the post-crisis experience is the extraordinary resilience of the U.S. consumer. Household spending, which accounts for more than two-thirds of the U.S. economy, has grown rapidly. Indeed, it has shown little net reaction beyond September. Though the immediate disruptions -- to business, transportation, and everyday life as news-hungry citizens remained glued to their televisions -- clearly depressed spending in September last year, consumption surged in October.
NO DENT IN SPENDING. Amazingly, that increase enabled the net volume of spending in 2001's second half to come in exactly in line with our pre-September 11 forecasts. Third-quarter consumption growth was depressed -- hitting only 1.5% -- compared to our estimate of 3.5%. But the 6% buying jump in the fourth quarter left spending growth in those three months approximately the same 2% above the 3.5% to 4% trend that started a few months earlier, following the 2001 tax cut.
The implication: Spending in the last three weeks of September was simply pushed back to October -- with no net loss. If any households did restrain their spending, this effect was fully offset by others who reacted positively to lower interest rates -- especially for auto loans -- or spent more recklessly in a suddenly uncertain world.
The savings rate did rise from a level of about 2% prior to the attacks, if we account for distortions from tax rebates, to around 3.5% as of January, suggesting that consumers entered 2002 with marginally more cautious spending plans. But the negative effects of this were completely offset by another round of tax cuts starting in 2002. The result was little discernible slowing in consumer spending despite the slightly higher savings rate.
RAMPING UP PRODUCTION. The second important point is that businesses completely underestimated consumer resilience and massively underproduced in the fourth quarter. They have since been forced to address lean inventories through production increases that have consistently outpaced economists' forecasts. The result: A more abrupt-than-expected reversal in GDP growth through 2002's first three quarters to a rate that we now estimate at 3% to 3.5%.
Indeed, the revised 2001 GDP figures revealed a sizable 2.7% gain in the fourth quarter, despite general downward revisions for the rest of the year. That leads to another surprising conclusion: The recovery may have begun in the immediate aftermath of September 11, rather than in early 2002, despite widespread pessimism at the time and lingering weakness in some production indicators.
One less encouraging trend has emerged in the attacks' aftermath: Business uncertainty and pessimism have continued longer than might seem reasonable given the strong GDP trajectory, though corporate investment on equipment is posting a slow but steady acceleration alongside the inventory rebuilding.
CORPORATE DOUBT. This weakness may reflect the downdraft in stock prices in the wake of the accounting scandals -- with their resulting impact on business managers' decisions -- rather than September 11's influence. But we may never be able to untangle the effects of these two crises on business spending.
As it stands, inventory-to-sales ratios, which gauge how much goods producers have chosen to have on hand to meet expected demand, remain remarkably low despite outright inventory liquidation ending by the second quarter. And commercial construction activity is continuing to fall, alongside the recovery under way in equipment spending. So while consumers remain steadfast in the wake of September 11, the jury is still out on how long business' depressed behavior will continue.
http://www.businessweek.com/investor/content/sep2002/pi20020911_9556.htm
|
I've read numerous articles from BW and the Economist discussing some of the successes of the 2001 tax cut so I'm not completely talking out of my ass (perhaps these economists are but somehow I don't think so :))
Anyway you might want to ask the guy who provided some of those statistics about his sources. I'm a little busy to check right now, but if my memory serves me correctly, the US economy has been in several SERIOUS recessions/stagflations in the 70's, 50's, and late 80's early 90's with unemployment in the double digits from time to time. That would seem to bely the claim that no president in the past has ever had negative job growths.
Anyway, deficit spending is a completely different issue altogether. Are you advocating no deficit spending (no tax cuts OR government spending programs)? If so perhaps we should start a new thread :). I'll just make a minor notation that Hoover's balanced budget doctrine was one of the major contributors towards the depression (or the length of the depression) and on a side note, Sweden was the first country to fully recover from the Great depression after it followed a policy of Keynesian deficit spending.
I agree 100% that the national debt is something that needs to be addressed during times of economic normality and especially during times of economic boom. However in my opinion, maintaining a balanced budget at times of recession will only exacerbate and elongate economic stagnation. What legislatures SHOULD be doing is balancing out the deficit spending during downturns of the business cycle by repaying the expenditures back with gains recieved during economic upswings. Unfortunately Bush has not been placed in such a position to begin balancing the budget (I kind of doubt he would even in such an opportunity though). |
|
|
| Shakka |
Just because I feel like I must get one last utterance out...
There is a large camp of people who hold Greenspan personally responsible for the bubble and it's burst. Also, interest rates are at historic lows and could afford to go up a little bit, though that would likely cut the head right off the housing/refi bubble.
Lastly, interest rates rose during Clinton, they fell under Bush. Giving the lag you cited and how bad high interest rates are, wouldn't that pin a lot of the problems we're facing now on the Clinton administration? Also, despite higher rates under Clinton, they still managed to have surpluses?
I'm too tired for this! |
|
|
| rupert |
The tax cuts wont work and neither will cutting interest rates.
They just wont. It ignores a whole heap of other factors in the economy most importantly declining corporate profit margins, overcapacity, declining US dollar, overvalued equity and housing markets, rising unemployment, spiralling household, municipal and federal debt and a dependancy on foreign investment to maintain the current account deficit and budget deficit.
Cutting taxes only forestalls the inevitable and will make the coming crash even harder. The United States will end up in recession again and there is really no way to stop it. Cutting taxes might work (unlikely) but only if the government also deeply cut spending to balance out the revenue lost from cutting taxes.
It is part and parcel of the investment cycle that when large debt has built up in the system that this has a dragging effect on the economy. Cutting the dividend tax wont improve stock prices and cutting income taxes wont alleviate household debt.
Cutting taxes is by analogy the same as a guy who has maxed out on his credit card and has no money to buy food going to the bank and the bank giving him an extension on the credit card. Sure it puts food on the guys table for a while but it only forstalls the inevitable and the guy will only end up deeper in debt.
I could give a long and detailed explaination as to why the debt built up in the system is potentially disastrous but no one would read it and more to the point no one will believe me.
But if anyone wanted an idea about what is happening I can highly recommend a study called "when bubbles burst" which is on the IMF webpage and for information on economic cycles do a key word search on the word "Kondratieff" a Russian economist who analysed long term economic cycles. What goes up always comes down. |
|
|
| Galapidate |
| This is what I don't get: The U.S. is currently in about $7 trillion of debt. Bush wants the tax cut so that people will hopefully spend more in the economy, yet the U.S. is still borrowing A LOT of money from other nations. Technically, isn't this just a standstill? |
|
|
| occrider |
| quote: | Originally posted by Galapidate
This is what I don't get: The U.S. is currently in about $7 trillion of debt. Bush wants the tax cut so that people will hopefully spend more in the economy, yet the U.S. is still borrowing A LOT of money from other nations. Technically, isn't this just a standstill? |
Rupert ... your predictions of economic doom are fairly surprising since economists on the FED aren't placing priority over the national debt, the council of economic advisors aren't placing priority over tackling the national debt, and foreign economists advising countries who invest in the US don't seem overly concerned about the national debt. I'm just going to use historical data to back up my claim that there is not going to be any sudden "crash". In the 40's, when the economy was galvanized and jump started, the US debt was approximately 132% of GDP. Today, the US debt is approximately 70% of GDP. There will be no sudden run in into a brick wall, yes we will feel the penny pinching of rising debt payments and interest rates, but your doom and gloom predictions remind me of those people saying that the world was going to come to an end in the millenium.
Galapidate: Consider deficit spending as something similar to an IMF loan. The idea is to more or less jump start the economy into normal levels of production whereby surplus is generated. Once the economy is at full employment and production, loans are then repayed to the borrower. |
|
|
| DrummeRaver86 |
| quote: | Originally posted by occrider
Rupert ... your predictions of economic doom are fairly surprising since economists on the FED aren't placing priority over the national debt, the council of economic advisors aren't placing priority over tackling the national debt, and foreign economists advising countries who invest in the US don't seem overly concerned about the national debt. I'm just going to use historical data to back up my claim that there is not going to be any sudden "crash". In the 40's, when the economy was galvanized and jump started, the US debt was approximately 132% of GDP. Today, the US debt is approximately 70% of GDP. There will be no sudden run in into a brick wall, yes we will feel the penny pinching of rising debt payments and interest rates, but your doom and gloom predictions remind me of those people saying that the world was going to come to an end in the millenium.
Galapidate: Consider deficit spending as something similar to an IMF loan. The idea is to more or less jump start the economy into normal levels of production whereby surplus is generated. Once the economy is at full employment and production, loans are then repayed to the borrower. |
Concerning the reply to Galapidate.....and obviouslt that hasn't worked for the last $7 trillion. What if a somewhat modified New Plan (FDR) was instituted? Could that help at all? |
|
|
| Shakka |
you mean New Deal.
If it would work, then by all means, run with it. But you'd probably have to pass a huge tax increase to fund it which would be difficult to do. You'd have to make sure all of the programs were legal too--several of those little projects were deemed unconstitutional by the Supreme Court--I can't remember exactly why though.:) |
|
|
| Galapidate |
| The only time deficit spending really worked was during the Great Depression when everything was already so low. They tried in the 80s with no luck. |
|
|
| DrummeRaver86 |
| New Deal...I was thinking Lenin's New Economic Plan for some reason...oh boy. But yeah, I guess it would be pretty hard to implement, considering the cirumstances under which the ND was made. |
|
|
| rupert |
| quote: | | Rupert ... your predictions of economic doom are fairly surprising since economists on the FED aren't placing priority over the national debt, the council of economic advisors aren't placing priority over tackling the national debt, and foreign economists advising countries who invest in the US don't seem overly concerned about the national debt. |
Its not just the debt, although that is the main thing. The overvalued stock markets, the overvalued housing market. History always repeats itself. The fed would never talk down the economy but I am sure they are secretly worried. But the concerns are real and a lot of people are really worried. Maybe things will turn out all right but that would fly in the face of every other bear market scenario in the last 100 years. Every bubble is followed by an equally long devaluation. And that hasnt happened. Not by a long shot. In fact things are getting worse.
Anyway I happened across this interview with an investment strategist called Marc Faber who happens to share my pessimism (although I dismiss his view on the reintroduction of the Gold Standard) and he isnt the only one Paul Krugman, JK Galbraith, even the IMF hint at what is in store. It is well worth the read (although it is VERY long) but it covers all the key issues.
A New Era, All Right
Kate M Welling
Marc Faber's Dark Vision Of The Economic Fallout From Tech Revolution
Always trenchant, invariably provocative, Dr. Marc Faber publishes The Gloom, Boom & Doom Report from Hong Kong, but his perspective is as global as his much-stamped passport. His economic research and market analysis are absolutely worth the read. But he favored me with a short oral course in the gloom after a boom earlier this week. Enjoy!
I'm sure it's no surprise to you, but you've been telling a story a lot of people really don't want to hear, Marc. No one's tried to shoot the messenger, have they?
No. But the masses of people don't know anything; they just believe what CNBC tells them or they read very superficially, they never think about anything. But that's not surprising. That's a feature of every mania or bubble. Remember, a bubble or mania may be based on a rational development, in other words, on new technologies that may change the world; have large growth potential. What is irrational is the valuation of these assets.
Which were certainly carried to extremes last year.
You can say that the Nasdaq at a $6 trillion market cap, selling at over 200 times earnings, as a percentage of the economy and in terms of earnings prospects, was grossly overpriced. And it's still grossly overpriced, by the way.
Even down 50%. You had a statistic in your latest report that really put the overvaluation -and subsequent losses-into perspective. "down about 50% from its March high…the losses in the Nasdaq alone amount to approximately $3 trillion. This is not an insignificant amount in the context of the US economy, which grows at about $500 billion per annum."
It's especially significant in view of the fact that individuals in the US have drawn down their savings rate to zero, so basically they don't have a cushion. What also is amazing is that in the years '95 to '00, consumer borrowing increased so much. You would assume that if the stock market appreciated by 20% per annum and the Nasdaq in '98-'99 by 100%, that people actually had such huge capital gains that they wouldn't go out and borrow a lot. But quite on the contrary, they increased their borrowings, as did, actually, corporations. So you end up in March 2000 with essentially record corporate and consumer borrowings and no savings.
Which is exactly where you don't want to be at the end of a bubble-even if it's a quite typical place to be.
Yes, ideally, you liquidate everything before the bubble bursts so you're 100% in cash and have no borrowings. Because invariably, when a bubble bursts, whether it is real estate or a commodities bubble, or an asset bubble like coffee or cocoa or gold, or a technology-driven bubble, what follows a bubble is a deflation in that sector of the economy. In other words, the excess capacity that was built during the bubble becomes burdensome because it reaches a peak exactly at the time when demand begins to slow down. In other words, everyone in the world has been gearing up the production of cellular phones and now the demand is slowing down, so what is the result? Weak pricing. This is a very important point: On every new technology that has become successful, whether radio or TV or cellular phones or calculators or cash machines or PCs or cars-eventually prices just fell a lot. These products became commodity cyclicals with low margins for their producers. Take a fax machine. Maybe five years ago, you paid over $1,000 US dollars for one. Now, nobody wants a fax machine and the people who want one, they pay maybe $70 (US). Likewise, I'm sure that eventually Nasdaq will sell at maybe 20-30 times earnings. The only question is, now we have Greenspan's cuts and more cuts will come and tax cuts will come. Maybe, as Barton Biggs says, you'll get a relief rally. Like when oil stocks went down in 1980, there were strong bear market rallies in Japan. The same happened in Asia, we dropped into '98 and then many stocks went up by 4-5 times from the lows. They were still below the highs of '97 and earlier years, but you can get these very strong rallies. And what surprises me on this trip to the US is the still incredibly optimistic mood. One institution has said to me, "We're even gloomier than you are." But except for them, I don't know anyone who believes in my deflationary case. By and large, people think, "Don't worry, Greenspan's rate cuts will stabilize the economy; things never get as bad as people expect" and so forth.
It's hard to argue with experience. All the economists and strategists are looking at what has happened in the markets after previous Fed interest rate cuts-throughout the post-war era. And the evidence is overwhelming that three and six months and especially a year later, the stock market has shown nice gains. It's not easy, either, to argue that this time is different, as your latest letter does. Or, more accurately, that the cause of this crunch, excess capacity, makes it different than any we've seen since WWII. And the Naz, certainly, has been "defrothed."
First let's look at valuations. The market is off, let's say on the Nasdaq, 50% from the high. But it went up 9 times from '95. We're still above the '98 lows, which were just above 1000. So basically, we're still high, from a long-term perspective albeit down 50% from the high. If you argue that a 50% decline is a great buying opportunity, after silver hit $50 in 1980 and then dropped to 25, you would have bought it. And it's now at $4. One has to be careful when one buys a falling market. Secondly, I think what the rate cuts may do is produce another rally in the market. And because many people who are not terribly sophisticated have missed the first big boom, they will come in and buy this rally. So what should the Fed do? The Fed should realize that there has been a bubble, and should discourage people from buying stocks.
Heresy!
No, what the Fed should do, in other words, is try to reduce the wealth dependence of the American public on the ownership of shares. But by cutting rates, they actually encourage the fools to buy again in the markets.
They can't order CNBC off the air-
If you've noticed, CNBC has become much more cautious lately than it used to be.
That's not saying much. But they are in shock-
I think some of the reporters were long shares! Anyway, basically Greenspan wants to lower interest rates. But it's very interesting that on the 50 basis point cut, the bond market hasn't gone up. That is a very relevant fact.
Bonds had already been discounting a cut. But not only has the bond market not gone up, the stock market rally fizzled awfully quickly.
Yes, exactly. Now, I'm not suggesting that an additional three rate cuts will do the trick for shares, but I very much doubt that it will do the trick for bonds. You have to see one thing: following the 50 basis point rate cut, the economy and the markets have come to believe that the Fed will cut at least another 150 basis points. In other words the bonds should have rallied, but they didn't. So I think the bond market is actually not so stupid. It starts to think that if Mr. Greenspan, the Bubble Man, prints money, eases, you will get the bubble somewhere else. Maybe a temporary rally in tech stocks, maybe a rally in the euro, a euro bubble, maybe a rally in basic resources stocks. Who knows? We never know, when a government intervenes in one sector of the economy, where the next volcanic eruption will occur. We bailed out LTCM and created the huge internet bubble while also helping China continue to over-expand-and as a result compete more advantageously with the other Asian countries. Each time there's a bailout, you distort the market.
Beware, the unintended consequences-
Yes. If the market rallies here, you can be sure companies will come in and issue shares like there is no tomorrow because the problem right now is the availability of money. A lot of companies suddenly have difficulties in accessing capital. So let's say these garbage telecommunications and internet stocks rallied 100%-200%. All of them would issue shares and some would try to issue bonds, so the overcapacity problem and misallocation of capital do not go away. In fact, I would argue, everybody focuses on what Greenspan should do with his rate cuts and so forth. But why doesn't any one actually address the truth of the problem: Why the bubble happened? Who was responsible for the bubble, you cannot make foreigners responsible for the bubble, you can't make Mr. Bush responsible for the bubble. The bubble really was created by the American Fed. That's what we have to recognize. And if they created this massive bubble, instead of having great faith, I would be very skeptical of their ability to prevent a downturn.
What? Greenspan's no maestro?
It's amazing that this man has achieved cult status on a worldwide scale. This is a brand name, Greenspan. Everybody knows him around the world, he's as popular as Madonna. But the question is, how will he bend?
What's your bet?
My view is that there are two or three possibilities from here: If he cuts rates, short-term rates will go down, but it doesn't mean that long-term rates decline. On the contrary, they may rise because inflationary expectations could increase and you could see significant dollar weakness. The problem with expecting dollar weakness is dollar weakness against what? Do you think the Thai bhat, the Indian rupee and the Korean won will appreciate against the dollar? I doubt it. Do you think the yen will appreciate against the dollar? I doubt it. So the only currency that's likely to appreciate against the dollar is the euro-for a while. But if the euro goes up say 20%-25%, the Europeans will say, "Oh, our currency is too strong. Because of its negative impact on economic growth, we have to lower rates as well." Then the whole world would be in the mode of just pushing interest rates down to unrealistically low levels. In which case, the questions will be whether bond markets crumble or rise. They will only appreciate, or long rates will only fall, in my opinion, if the economy is extremely weak. If the economy is relatively strong, there will be pressure on something. You know, like we've seen the price of oil triple, maybe other commodities will go up, maybe industrial prices, maybe wages will have a rising tendency, because when people don't make money any longer on their options-
They just might demand to be paid real money.
I suppose so. It could all come to a relatively unpleasant kind of situation, where you have a weak dollar, slightly accelerating inflation, despite a kind of weak economy, where rate cuts don't help very much, except by producing relief rallies that the bond market doesn't follow. And eventually you have to inject that much more liquidity. Now one day, some people will start to have second thoughts about the monetary system. Begin to ask, can we trust central bankers? Then you will see that a cry will arise to reduce the power of central banks, one way or the other. I think it likely will happen that people will call for the reintroduction of some kind of gold standard-
That's just your Swiss upbringing coming through!
Well, maybe the central banks' power will be reduced through other means. Look, Mussolini was very popular, Hitler was very popular, Napolean was very popular. Alexander the Great, Caesar, all these great leaders had very big followings and eventually their followings disappeared. Obviously, the longer success lasts, the more likely it is that one day a mistake will be made. Greenspan's difficulty is, first of all, that ever since the days of Ronald Reagan and Mrs. Thatcher, the prevailing view around the globe has been that governments should get out of the economy. In other words, that the less interference by the government, the less meddling in the economy, the better. Yet ironically in the case of the Fed, people take it for granted that the Fed should make the market go up forever, and that if it should start to go down, it is the Fed's duty to prevent it from going any lower.
You have a problem with casting it as a Super Nanny for investors?
It has become OPEC all in one man, basically.
Okay, but suppose Greenspan gets an assist from fiscal policy? Bush wants to cut taxes.
Well, in order for fiscal policy to have an impact here, given the size of the decline-the losses that have been incurred over the last six to nine months, in the S&P, in Nasdaq, in the junk bond market and everyplace else, I'd estimate at $4.5-$5 trillion, at least- mean you really need a massive injection. One that would make even a $100 billion tax cut look paltry. Let's say you do get a tax cut. When you get a tax refund check, if you have no savings, maybe you decide to repay debt. Maybe you go out and buy another Nokia phone, but that is not guaranteed at all. Especially when I'm telling you that the Nokia phone you're buying today, Singapore Airlines will send it to you free of charge with the next first class ticket you buy. The pricing is so weak on these items -if you'd look at charts of the sharp price deflation trends in new technologies, whether it's a Zip drive or a hard drive or a DRAM, you wouldn't be terribly eager to invest in an industry where prices are collapsing. Now someone may argue, "Look at the great productivity improvements." Well, to that I say, the tractor improved agricultural productivity than just about anything else in the world has improved productivity, because instead of having a thousand people looking after a field, one person can do it with a tractor. But do you think that agriculture became very profitable because of the tractor?
Scarcely!
My point is that the productivity improvements are offset by price declines. What's more, the great innovations occur in economies which are already in a deflationary mode. Let's say, for instance, you're an oil producer. Your incentive, as prices go up, is to explore for new oil fields, so you go and look somewhere in the world for additional oil to produce. Conversely, if oil prices go down say by 5%-10% every year, are you going to look for new oil fields? No, what you will do is try to improve through new technologies, new innovations, new inventions, the productivity of your existing production in order to lower costs. So the great waves of inventions, whether surrounding the canals or the railroad, or automobiles or the technology boom we've experienced from 1980 to today, they have all occurred in disinflationary environments. And they've had a very deflationary influence. This is especially true of the internet because it makes the market transparent. You can check now, the price of anything. So you will eventually see a lot of corporate profits tumble. I mean just consider Hewlett-Packard. They sell printers and computers and servers; on all these items they don't really make any money, the only thing they make money on is the cartridges. Now, if you believe that the Chinese and the Indians and everybody else in the world will pay $30 for a HP cartridge, when the production cost is 50 cents? I'm going to produce them at low prices! Everybody will do the same. Then it will be a commodity. And Ms. Carly Fiorina will, instead of having profits, report huge losses. You'll see in some technologies where they had patents that now are expiring-it'll be just like WalMart. You'll get these non-branded goods on the shelves and sales of the branded items will drop. You can argue that people buy Nike shoes and pay for the brand. But the difference is that Nike shoe, you can show off. I don't understand anyone who wants to show off a Nike shoe, but that's beside the point. A cartridge inside a printer you can't show to anyone.
What are you suggesting? That the Fed should raise interest rates and margin requirements here?
Quite frankly, I take the view that, for example Japan, after the bubble burst in 1989, would have been better off if they had squeezed out the weak players, probably during '91 -'92. Had 10%-20% of the companies gone bankrupt then, like in the S&L crisis in the US, you would have had a market clearing, and the market would have taken care of the restructuring. Instead, by having zero interest rates, the government supported bankrupt companies that have continued to accumulate debt. To the extent that, in the year 2000, the government's debt, as a percentage of GDP had risen to 140% from 40%. So today you have a potentially more explosive situation in Japan than you would have had, if you had taken the pain in 1992. I think the Fed's big mistake was to bailout LTCM, because that created an additional bubble on an already inflated market.
You don't go back to the bailout of Mexico?
Well sure, if Mexico hadn't been bailed out, what would have the consequences been? Some banks would have lost money, but the world would have continued. And those losses would have sent a message to investors that Third World loans and emerging market bonds have a certain risk. Bailing out Mexico produced a huge rally in Brady bonds and Third World debt between 1995 and 1997, including Russian loans they rode from 20 to close to 85. Then came the Asian crisis. But had Mexico not been bailed out, we would have had the recession in 1994-'95 in Asia, but we wouldn't have had the calamity that occurred in '97. Because as a result of the bailout, you had real estate markets in Bangkok, Jakarta, Malasia oversupplied with capital. And people just continued to build because they had access to capital. So the bubble in Asia became that much bigger-and when the downturn came it caused very serious economic harm. Then, when interest rates were lowered in Asia in the '98 crisis, it didn't help the Asian economies dramatically. But it did let foreign investors continue to invest very heavily in China, so that country's capacity has increased. So China has become a very major competitor to all the other economies. As Henry Kaufman always says, when you interfere in the market, the timing is a very difficult thing to judge. When do you do it? Nobody can claim that he can time it properly at all times. So it is probably best to stay out of it.
Isn't that sort of like just standing by and watching the Titanic sink, in slow-mo?
An economic ship sinks, but there's always some air left in the ship. At some stage, it stabilizes and then the market clears because people will come in and buy if the asset prices get low enough. Then there is new ownership and so forth and the economic system is cleansed. By interfering the government assumes the task of cleaning the system. Judges that it knows best how to do it. But that is not what capitalism and the market economy are about.
You're essentially arguing that the hangover from all the excess capacity built up in an asset bubble is a lot worse than the sort of manageable headaches we're used to after standard-issue post-war consumption-led booms?
The problem is that in a capital spending boom, first of all, stocks soar, and the quality of earnings deteriorates. There's this keiretsu phenomenon [corporate incest] in which companies buy each others' shares and then there's zaitech, too, the [financial engineering] phenomenon that in America saw companies buy in their own shares and issue bonds. IBM was a prime example, where net earnings haven't risen in five years, but the earnings per share are up because they have reduced the number of shares outstanding. How long can they do that? Another problem in the aftermath of a capital spending boom is something Bridgewater Associates recently has written about : the front loading of earnings. It arises because the seller in a capital transaction can recognize revenues right away, but the buyer depreciates that asset over 5 or 10 years. As long as the boom continues, that produces a front loading of earnings. But when the boom comes to an end and capital spending slows, a so-called negative accelerator principle comes into play and can lead to sharply lower earnings.
Which creates a minefield for investors.
Well it will be extremely volatile, because nobody knows anything, certainly not the analysts or some of the strategists. I don't know, either what the world will look like in a year's time. You could have a group of Nasdaq stocks suddenly break out on the upside, making everybody turn bullish temporarily. So you could get a rally of maybe 20%-30%, that then fades and goes lower. Alternatively, there might not be a rally and people will just dump stocks, because they panic for whatever reason. I suspect that in this cycle one of the major companies, one that was really admired, will go out of business or have irregularities revealed. There will be a big fraud somewhere or a major bank will get into trouble with their loans or their investments, something bad like Penn Central.
Fearless forecasts. Those things happen in every big downturn.
Absolutely, yes. Just remember, after the Texas oil and real estate boom went bust, it took 5-8 years for the state to recover. So the tech sector is highly vulnerable here. Moreover, I'd say that in the long run, all hardware, whether a refrigerator, a cellular phone, or a computer, will be manufactured in China. And most software will be produced in India. There production costs are very low and their governments can subsidize those industries anyway they want. They can give export credits, devalue the currencies. The Indian rupee is lower today than it was in '98. Now the US could always one day say, "Our trade deficit is so big, we have to do something about it," but then you'll get into the worst kind of situation, namely a reduction of global trade, something which could happen in the next recession, anyway.
You're saying we have the opportunity to repeat all the errors of the 1930s?
I suppose, except that in 1930 the market was selling at maximum of 15 times earnings and the utilities, which were that market's equivalent of the internets today, were selling at 35 times earnings. Then, they went down 95%. The danger today is that both the bond market and the stock market, globally, are disproportionately large percentages of the economy. So you're no longer looking at the real economy and saying what will happen to the stock market, but Greenspan looks at the stock market and says what will happen in the real economy.
Some folks are comforted by the large number of non-tech stocks selling at what are historically reasonable multiples.
What is reasonable is very difficult to say. At the peak of the market in '73 you had a two-tier market. Growth stocks were selling at 50-70 times earnings and the rest of the market was at 10-12 times. But the question was, what would happen to earnings? If earnings go down when interest rates are no longer dropping, given the leverage in the economy, margins would be squeezed. Or if there's a serious recession and commodity prices, having bottomed out, start rising, margins would also be squeezed. My feeling is the market will be extremely volatile and it could be several years before it eventually bottoms out, when people say, "We don't want to hear anymore about this casino!"
I really feel sorry for the people who've worked maybe 20 years to accumulate savings, and have now seen them shrink by 90%, It's a very difficult moral issue: Should you let people participate in this speculative orgy, should you warn them or do something more? We don't let people drive drunk or take drugs, but we let them essentially erase their wealth. Maybe one is better than the other, I don't know.
Does your sympathy extend to professional investors who have felt required to invest in certain ways, to keep their jobs?
This is a very big problem. I'm just rereading philosopher Arthur Schopenhauer, who says most people behave not according to what they really believe in, but in ways that they think will cause other people to perceive them in a favorable light. So, if the market goes up, they cannot get out of it because everybody else will think they're stupid. That's why you have group think and portfolio managers who believe they are no longer paid to make a judgement about the value of the market, they're only paid to make judgements about sectors.
So what's the downside?
The only thing I can say is that usually, the longer a bubble lasts, the greater the excesses and this one lasted, say, from 1995 to 2000. Historically, when you've had this sort of major bubble burst, it's been very common to give back 5 years of capital gains. In other words, we could take the DJIA back to 1995's level, possibly even lower. You could go back, on the S&P to 600-700, and take the Nasdaq down below 1,000. The question is, does that happen more or less immediately, or over 10 years, like in Japan? But either way, it won't be very good. I will say that every bubble market has bottomed out only when its volume has shrunk to a tiny fraction of its peak, off say 80%-90%. And we aren't anywhere near that, so maybe we have to see more bear market rallies and disappointments, until people essentially |
|
|
| occrider |
| quote: | Originally posted by Galapidate
The only time deficit spending really worked was during the Great Depression when everything was already so low. They tried in the 80s with no luck. |
It worked in the late 30's with some of Roosevelt's policies and post WW2. I wouldn't label Reagan's supply side economics as a failure of Keyne's theory of deficit spending so much as it is a failure of Reagonomics.
Rupert: My god it's going to take time to read that beast. |
|
|
|
|
