*** Europe growing...America Shrinking: What happened to
the U.S. miracle economy?
*** Will the U.S. lead the next phase of the world's
technological evolution? Maybe not...
*** Internets up...Amazon stretches out creditors...GE
down...Too big to save?
*** The big news today is that Europe is now growing faster
than the U.S. European growth is estimated to be about 3%
in 2001. Even with the flattering light of hedonic
measures, and the extensive cosmetic surgery done on
American income statements, the U.S. doesn't look so good.
Byron Wien, chief economic strategist at Morgan Stanley
believes the U.S. economy will shrink 1.25% annualized in
the first half of the year.
*** And Barron's reports that consensus earnings for U.S.
corporations for this year are below those of the year just
past.
*** Is it any wonder the euro has gained 12% against the
dollar since the end of November? The European currency
fell back a little yesterday, but still closed just below
$.95 - way above the 83 cents of last autumn.
*** All of a sudden, it looks like the dollar has
competition. And so does America. Unemployment in Euroland
is coming down. It dropped 2.35% last year - the biggest
decline in 35 years. Incomes are up. Savings are strong.
Debt levels are low.
*** Nor is Europe particularly concerned about a slowdown
in the U.S. Despite the massive trade deficit in the U.S.,
exports to the U.S. make up only between 2% and 3% of
Europe's GDP.
*** America led the most recent phase of the world's
technological evolution. Thanks to companies such as
Microsoft and Intel, almost every desk in the world has a
computer on it. But now it appears that the world is 'spent
out' on computers. And profit margins are falling too - as
the whole industry becomes more competitive and components
become commoditized.
*** What will be the next stage? Will America dominate it
too? Not necessarily, says Bloomberg columnist Matthew
Lynn. The next big boom could be in pharmaceuticals or
genetics - where the Europeans are as strong as anyone.
Europe is leading the way on the next generation of mobile
phones, too. And the European manufacturer, Airbus, not
Boeing, is developing the huge new Airbus 380 plane -
capable of making up to 500 passengers miserable on a single
flight.
*** The Dow dropped 48 points yesterday. The Nasdaq gained
45. Again, breadth was good. 1622 stocks rose on the NYSE;
1285 declined. There were 165 new highs; but only 14 new
lows.
*** Why the good breadth? Leading techs disappoint
investors and get marked down. But people - especially new
investors with no experience of bear markets - still
believe in 'stocks for the long run.' So they move their
money to other stocks. A headline in the Atlanta JC tells
the story: "401(k) Investors Still Aggressive."
*** "The greater fool market is still working feebly,"
writes the Fleet Street Letter's Lynn Carpenter. "There are
still hopefuls out there who will buy a good story and
don't know how to pick stocks. If you want to make money on
your riskier stocks, do it now. Sell your growth stocks
unless they are very high-quality, profitable businesses.
Unload your doubtful techs if you have any. Take profits on
stocks that have grown overvalued. Today there are buyers,
maybe. Tomorrow there won't be." (see: 7 Ways To Beat
The
Market - Again - In 2001)
*** Internets were the big winners yesterday - with
TheStreet's index up 8.6%. Amazon was a winner too - plus
10%. But diving into the murky waters of the Amazon.com's
income and balance sheet statement, a researcher from
Grant's found that the company was taking longer to pay its
bills.
*** The rise of the euro is a much under-appreciated event.
It means, for example, that the Fed will pay a heavy price
for lowering interest rates. Foreign investors look first
and foremost at currency trends before making an
investment. How could it make sense to buy a T-bond with a
yield below 5% - when you lose 12% on the falling dollar?
*** And how does it make sense to buy dollar-based stocks
that are losing 10% - 50% of their value in the course of
the year? It doesn't. And a few basis points won't change
the logic. (see: 50 Basis Points To Sustain
The
Unsustainable)
*** When foreign investors lose money on their U.S.
investments, they can be expected to do the logical thing -
sell. This selling pressure drives down asset prices even
further.
*** "Analysts Wonder," says a headline from the Kansas City
Star, "Whether Fed's Rate Cut Will Be Enough To Loosen
Tight Lending Market" Well, they might wonder. But the
current malaise is a product of rates that have been too
low for too long - not that have been too high. More
below...
*** GE fell another 2% yesterday. The company has big
exposure to derivative positions...plus it owns so many
different companies in so many different industries - it
can't help but be hurt by a business slowdown.
*** FDIC said that net charge-offs are up 16% from the 3rd
quarter of 1999. A third of these bad loans were made to
business borrowers.
*** And this from a DR reader who has found a star (or two)
to steer by:
As a business astrologer, I looked at Pacific Gas and
Electric's astrological cycles today (Friday, Jan. 5th). If
they have a zillion fairy godmothers, maybe they could
prevent bankruptcy, and I'm not even sure that would help
their situation. It looks like they will be sold
off in pieces shortly after they go bankrupt VERY soon
(days).
Bank of America is also in trouble (stopped trading!), but
astrologically it looks like they will manage to escape
bankruptcy."
*** My source then offers an interesting reflection: "I
only know that a year ago I read an article about the mega-
banks, of which Bank of America is one. It used to be the
big banks were considered to be 'too big to fail', so they
were merged with other larger banks whenever this occurred.
Now the mega-banks are so big, they can't be saved..."
*** Securitization, Derivatization, Globalization. Remember
these words. You will be able to use them to pass an
American history test in the year 2100.
Starting in 1994, $1,000 invested in every one of these
modest recommendations - far away from the "must own"
stocks of Wall Street - could have returned you $794,815.
After the first few winners, you could have been
investing with 'just profits' from previous winners...
and if you had upped your investment to $5,000 each from
the winners pool, you would have made millions of dollars.
Click here for...
"Why will DaimlerChrysler want to add significant new
manufacturing capacity in 2001 - no matter how low rates
go," asks Christopher Byron in an MSNBC article, "in the
face of having just announced that the company plans to cut
auto production by 25% in the year ahead?"
Byron wonders, along with many others, how a rate cut from
the Fed stimulates demand. After a man has stuffed himself
with foie gras and canard a l'orange, for example, a
restaurant is not likely to entice him to spend more by
lowering its price on poulette fermiere. All it might do is
to draw in new customers - those who could not afford the
previous prices - who are still hungry: that is, customers
it may not really want.
"Adverse selection" it is called - when policies designed
to encourage one group end up stimulating another,
unintended - and perhaps less suitable - group. It is just
one part of a whole group of perverse phenomena - all of
which seem to find expression in Greenspan's rate cut. In
an attempt to avoid the consequences of too much credit
over too long a period, the Fed chairman is offering the
market what it needs least: more credit.
Lower interest rates are intended to induce qualified
borrowers to take up loans and use them to good purpose.
But who would borrow when asset prices are falling, shelves
are clogged with inventory, and borrowers already have
borrowed too much? Any sane man knows what to do when he
has over-eaten...it is time to push back from the table,
light up a cigar, and have a drink!
But the latest figures show that people are still borrowing
- despite the most ravenous gorging on debt in all history.
Consumer debt rose $12.9 billion in November - a 10.29%
rate, annualized. This follows an increase of $17.3 billion
in October.
Countrywide Home Loans, a California lender, says
refinancing requests rose 30% since the Fed's rate cut
announcement. And credit card debt rose $4.8 billion in
November, after going up 7.9% in October.
Who are these borrowers? And why are they borrowing?
Greenspan made a critical mistake on Jan. 3. He lowered
rates - between FOMC meetings... and by 50 basis points.
These two features signaled to the markets that the problem
was large...and urgent. Large problems are not solved by a
single rate cut. In every case, it has taken a series of
rate cuts over many months to cure a declining economy.
Thus, more rate cuts are almost guaranteed.
"Anyone who had been planning to make a discretionary
purchase expensive enough to require a loan or mortgage,"
continues Byron, "now has a powerful reason to stop, lean
back and simply wait, secure in the knowledge that loan
rates will be lower 6 or 9 months from now."
This is the law of perverse outcomes at work. Greenspan's
action has the effect of discouraging borrowing - at least
by those who are creditworthy.
But it may accelerate borrowing by those who are not - and
make the resulting credit collapse worse. Xerox borrowed $7
billion from banks before its lines of credit were
exhausted. Now it is forced to sell assets under the worst
conditions - when it has to do so to raise operating cash.
A similar phenomenon of adverse selection may be occurring
among retail borrowers. Caught in a squeeze of lower stock
values, higher debt servicing costs, and stagnant incomes -
they may need the money to meet operating expenses.
This is a problem that could get much worse. The total of
outstanding credit card debt is less than $500 billion.
But, thanks to aggressive credit card marketing, there is
$2.4 trillion of unused lines of credit available to credit
card customers. How much of that will get used up - like
the loans to Xerox - just to meet cash-flow obligations?
If only Alan Greenspan were really at the controls of some
vast machine! He might twist a knob...he might push a
lever...and the machine would do as he wanted.
Instead, Greenspan's lever sends the machine going in an
unexpected direction: "History shows us," writes Charles
Peabody optimistically, "that such injections of liquidity
(while they can arrest the deflation process of a
particular asset) rarely seek out the devaluing asset, but
instead seek out the inflating assets."
Rate cuts do not restore things to the way they were before
the downturn, in other words, they create a new bubble
somewhere else! Alas, life is such a tangle....such a
jungle of mixed and contradictory motivations...with such
dense underbrush that you can scarcely see where you are
going.
In every respect, Greenspan's rate cut seems doomed. It
causes qualified borrowers to hesitate...while inviting
unqualified ones to go more deeply into debt. And it
produces a new round of inflation in an unintended sector.
Or, it does nothing at all!
"Today's economy is far more responsive to movements in
stock prices than it is to short term interest rates," says
Ray Dalio of Bridgewater Associates. As long as stock
prices are going down, rate cuts are not likely to have
much effect. In Japan, the central bank reduced rates
following its bubble deflation of 1990. Rates went all the
way to zero - with no effect on either the Japanese economy
or Japanese stock prices. Instead...the liquidity in Japan
flowed all the way across the Pacific...and lifted the
yachts of tech entrepreneurs on Puget Sound and
stockbrokers and analysts on Long Island.
Your correspondent....
Bill Bonner
About
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Last modified: April 01, 2001
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