As 2004 approaches investors should bear in mind a few salient trends and keep a sharp eye on cracks in the structure of things.
First off, it's human nature for some of us to be optimistic, especially on the eve of a New Year. It's what keeps us going in the face of heavy odds. And so we shall try, while keeping in mind that all the optimism, faith and trust in history that we imagine permeated the inhabitants of Bam, Iran couldn't keep their walls from crashing down. To make a point, it’s easy to see that Bam literally had a structural problem: non reinforced masonry being particularly susceptible to the kinds of swaying movements produced by earthquakes. And yet, Bam had a long historical record on its side, since it was a very ancient city and unlike, say, Pompei, no such disaster had befallen it before.
And so, even as we look ahead, we won’t entirely lose sight of the possible tectonic movements of the vast monetary imbalance we so mundanely term the US current accounts deficit, which today is measured in little more than a gradual shift in dollar value of assets worldwide. No one knows (and I wager that includes Alan Greenspan) whether the daily erosion of $1.5billion mainly to the Far East is little more than a cyclical ebb and flow or whether there are more dire movements brewing in the mindseye of the market gods.
We wonder how a consumer driven economy --nearly 70% of GDP results from consumer activity-- can be sustained as those very same consumers steadily lose decent paying jobs (2.5 million in the last 3 years). Not to worry, say the chattering class," the ingenuity of the American people has never failed before. Jobs get lost and new jobs get invented."
How, we wonder can a debt-ridden public continue to rack up even more debt (per family non-mortgage debt averages nearly $8,000, up 7-fold since 1960) when real wages hold steady or even decline. For George Will on ABC yesterday, there was little to worry about. For George, "losing your job nowadays is just not such a big deal anymore." We have to wonder when George got this insight. It's hard to imagine he's run into any laid-off factory workers as he made the round of Washington cocktail parties this Christmas season, talking points at the ready.
Now, if the consumer weren't such a critical part of the economy; and if, instead, savings were being poured into new plants and equipment in this country (not Asia) then George might be right. But, we're afraid here, that indeed we have become a country of consumers spending dollars we haven't yet earned that flow mainly into the hands of entrepreneurs and poorly paid workers living half way around the world. But, to worry, we will try not.
The dollars, of course, are cheap to print and are backed with nothing more or less than the good faith and credit of the United States of America. Foreigners are welcome to invest those dollars back into our economy and up to now they have continued doing just that even though they could earn more interest –not to mention gains-- if they converted them to say, Euros or the Aussie dollar. In fact rather than earning less than 4.3% on a 10 year T-Bill, in dollars that have lost nearly 40% of their value in the last few years, these same investors might have found better ways to recycle them. But, perhaps they haven’t yet noticed.
We, as Bill Bonner of the Daily Reckoning www.dailyreckoning.com likes to echo Blanche in saying, "are living off the kindness of strangers."
And then, of course, there is that little matter of the domestic deficit. Our government in its own lack of kindness to generations to come, insists on creating more spending programs while collecting fewer taxes, with the neat result that we are running deficits as far as the eye can see of more than a half trillion dollars per year. But, of course, we only pass those down to our children.
And then there is that even littler matter of the reconstruction of Iraq in the face of popular hostility among those who would benefit from our generosity. How much will it really cost us now that we know that there is little chance Iraq's vaunted oil reserves will come back on line any time soon?
But just as the American consumer is undaunted in his never ending quest for more gadgets and SUV's, so too is the American stock market investor in the face of valuations to earnings ratios that are normally only seen at a bubble's peak.
This time it’s different, we are reassured. Not because things are structurally so hot, no one would really argue that.
And so that brings us to our newly invented election year theory. Perhaps the American investor in his great wisdom is betting on the following scenario: with George the Second’s future at stake the Fed will not do anything to raise interest rates even if it means letting the dollar sink to around $1.50 to a Euro. China and Japan will support this by continuing to recycle at a loss because they have everything to lose should the dollar crash (their reserves are in US dollars, not gold) and the Europeans will stand idly by clasping their collective hands in wonderment of how their socialized economies had gotten so rich without having to give up any of their paid holidays or social benefits. Meanwhile, US multinationals will report higher profits as they measure their European business in fattened Euros and that will improve P/E ratios and….. you get it. The bet is that prices will hold still, interest rates will remain low, Americans will continue to run up debt and a lowering dollar won’t rock the boat.
Meanwhile, Saudi Arabia (and the rest of the OPEC) will stand still and keep pricing their oil in sinking dollars because they know first hand what happens when you cross the Bushes. And US manufacturers will finally have a price edge over their ritzy Euro-competition and they’ll finally start hiring American workers at top wages!
Yes, this is an election year, Virginia, and the amount of hyping and huffing and puffing on the sidelines will make the usual legions of Wall Street hypesters seem like a bunch of bookies in the face of the Parimutual. Why just yesterday we heard from Bush’s former chief economic advisor, Larry Lindsey, that "Tax rebates are the antidote to lower wages."
This may indeed be the year in which we turn around, start creating real jobs, bring down the the foreign and domestic deficits and defy the law of gravity when it comes to stock prices.
Our advice: Hold on to your wallet!
rmb