From Sesame Street to Mainstreet: Everyone Prepares for the Coming Downturn
By Michael Swanson(TimingWallStreet.Com)
This was a tough week for Wall Street bulls who trust in Alan Greenspan and believe that a big boom is going to
appear at the second half of the year to justify current tech stock valuations.
When Nortel blew up Thursday they announced that they see no possibility for a pickup in their business at the end
of the year. Dell also announced Thursday that they could not forecast an improvement in the second half. In fact I
can’t think of any company that has said that the second half is going to be better during their conference calls. What
they have said is that they hope a second half recovery comes. The Wall Street analysts have grasped on to that
hope to justify telling you to buy now. But on Saturday the CEO of Cisco, John Chambers stated that we are in a
recession now and "there is no possibility of a soft landing." As soon as investors connect the dots and figure out that
the fantastic hopes of the analysts aren’t going to happen the tech stocks will hit another liquidation phase.The real
bomb though came Friday morning when the Producer Price Index jumped 1.1% in January, completely blowing
away economist predictions for a .3% rise. This is the largest increase in years and if inflation signs continue to
appear then the Federal Reserve will be seriously hamstrung in cutting rates. If they do cut rates in the face of
inflation they risk creating worse financial problems down the road.
At a conference of G-7 nations, George Bush’s Secretary of the Treasury, William O’Neill, said, "We are not
pursuing, as it is often said, a policy of a strong dollar." The dollar dropped right after his remarks. Hours later
O’Neill’s spokesman said that the Treasury Department will work to maintain the value of the dollar. However,
most currency speculators do not believe that the Bush administration will take steps to shore it up.This is the first
real encounter the Bush administration has had with economic policy and they will have to do better in the future. All
they did was manage to confuse people. Do they really support a strong dollar policy or not? What does this mean
for investors?
A falling dollar will create inflation, because it raises the costs of imports. That would make the Federal Reserve
hesitant to cut interest rates. This is a much more important issue for the economy than Bush’s tax plan and demands
to be managed better than he has been doing. Bush ran his campaign by flip flopping on positions and trying to steal
his opponents issues. He was against campaign finance reform and then for it and now is against it. He was against
government social programs and then became a "reformer with results." This is not an issue which his administration
can afford to vacillate on.At this same G-7 meeting officials of the International Monetary Fund cut their forecasts
for US economic growth for this year from 3.2% to 1.7%.The charts for the stock market are ugly and there are
reasons for this. Thanks to Alan Greenspan the United States economy is at recession levels and thanks to the
imbalances he has created over the years it is in danger of a prolonged economic slump or financial crisis.
As I’ve mentioned in the past, Alan Greenspan created a stock market bubble when he flooded the economy with
money in 1998 to bail out third world loans owed to international bankers and the Long Term Capital Management
Fund. He then jacked up the money supply at the end of 1999 because he feared a Y2K computer crash. The
economy began to overheat and there were a lack of real investment opportunities for that money to go to. When
the money supply hyperinflates the extra money goes into the most speculative of ventures. This is what has
happened in the 1890s with railroad stocks, in the 1920s with radio stocks, and again in 1999 with Internut stocks.
In the first two eras an investment and stock market bubble popped and was followed by a horrendous economic
downturn. During these downturns rapid social and political change took place. New social movements appeared
and the entrances to political offices became revolving doors. The aftermath of the last bubble is only beginning.
Alan Greenspan testified to the Senate two weeks ago and said that the current slowdown in the US economy is an
"inventory correction" that will be adjusted within the next few months. He then went on to say that he thought a
recession could be avoided as long as consumer confidence remained high, although he could not predict whether it
would or not. Yesterday, the University of Michigan's twice-monthly barometer of U.S. consumer sentiment was
released and fell again in February to its lowest level in seven years, indicating that consumer confidence is now
cracking.
Greenspan is playing a dangerous game and is putting the Federal Reserve on a course to make some of the most
desperate gambles it has made in generations. Since the beginning of this year Greenspan has been pumping massive
amounts of money into the financial system through interest rate cuts and changes in the reserve rate in an attempt to
bail out the stock market. The moving average of the M2, money supply indicator, is registering a gain 12% for the
past 13 weeks. This is even more liquidity than he injected into the system in 1998.
Conventional economic thinking suggests that such a move would hyperinflate the currency and put the dollar into a
downward spiral. Inflation is caused by too much money chasing too few goods. Greenspan is hoping that economic
productivity, thanks to technology, can offset these inflationary pressures and keep producer and consumer prices
stable. If this doesn’t happen then companies’ costs will increase and they will either have to raise prices or lay
people off to maintain their profit margins.Some economists and technology gurus, such as George Gilder and
Lawrence Kudlow, have claimed that thanks to the Internet and the computer we are now in a "new economy" in
which technology has created so much productivity that the economy can now grow at rapid rates without creating
inflation. They believe that the business cycle has been abolished. Greenspan is betting that this theory is real.
As I’ve said in the past, this theory is more myth than reality. The low inflation of the 1990s is more a factor of low
commodity prices and a downward pressure on wages thanks to globalization and a weaker organized labor
movement than it is due to some miracle of technology. Just as important is the strong dollar thanks to the slow
growth rates in Asia, Europe, and Latin America, which helped to make imports cheap. In fact several studies done
by the Federal Reserve itself have come to exactly this conclusion.The truth is the past decade wasn’t the economic
boom people thought it was. During the 1990s personal and corporate debt levels grew faster than income. The US
current account deficit, which measures the total balance of payments between the US and the rest of the world,
reached levels never before seen in history. The United States became the world’s largest debtor nation. The GDP
grew by 8 trillion, but personal and corporate debt grew by 10 trillion.
Although the average American spent more, during the 1990s, his wage and income levels stagnated. The place
where wealth really increased was in the stock market. Those who had stocks that rose in value felt as if they were
richer and went out and spent more using loans and credit cards. The dead heads of the 1970s became debt heads.
The stock market became the economy. Another way to put things is that instead of industrial production and
income increases being the yard stick of economic growth paper gains became the impetus for greater consumption
- the surest sign of an economic bubble.
That is why Greenspan panicked in the beginning of the year and cut interest rates on a day in which the Nasdaq
was making new yearly lows and completely melting down. It reached a point in which he felt he had to prop it up.
He is determined to try to keep the stock market afloat no matter what it takes, even though by historical valuation
standards and price to earnings multiples it is overvalued.
He has created a chaotic mess and the stock market is in the process of factoring in a bad ending. Investors have
been buying stocks in the faith that Greenspan will make the market go up. If Greenspan were to fail there could be
a complete collapse in investor sentiment and a horrible deflation in investment spending on the part of corporations.
A prolonged recession would be the result.
From Wall Street to Sesame Street people are already feeling the pain and hunkering down.
Several blocks away from Wall Street sits the CNBC television studios. Mark Haines and Maria Bartiromo, the
CNBC dynamic duo, say that all is going fine. Greenspan will make everything good and the economy will take off
before the year ends and stocks will skyrocket. You are a dummy if you don’t buy now. But as they are saying this
the network has layed off 35 people to cut costs.Over in the suburbs thousands of people are beginning to fall prey
to their personal debt bubble. USA Today ran a story with the headline Debt Smothers America’s Youth last week.
The reporter interviewed Paige Hall, a 34 year old who found herself laid off from her job and now unable to pay
her $18,200 in credit card bills for her wedding and new household furnishings. She thought her stocks would go
up. Kevin Jackson, a software engineer who still has his job along with $8,000 in credit card debt and a $20,000
home equity loan, said "you learn to live with a certain amount of debt. It’s a means to an end."Over on Sesame
Street Big Bird has handed pink slips with the letters FU written on them to 60 of his employees. Sesame Street is
not just a TV show, but a magazine publishing house. In a move to cut costs the CEO of Sesame Street has laid off
people who worked on the magazines titled Sesame Street Parents, Parenting, and Kids City.
These layoffs are no joking manner and are jumping from company to company. Over on Main Street people are
suffering from Greenspan’s mismanagement. 10 miles away from me a Goodyear Tire factory laid off 200 of its
workers. A mobile home manufacturer laid off 1/4 of its workforce and told the rest that they will now only work 4
days a week.The Federal Reserve attempt to keep the stock market afloat and bring back the economic boom has
best been summed up by Robert McTeer, the head of the Dallas Federal Reserve Bank. Speaking on February 2,
2001 McTeer said:
"My term for what happened to the economy as we were gliding in for the proverbial soft landing is that we hit an air
pocket. Fortunately, we were flying high enough so that the sudden decline in growth didn’t cause us to crash-land.
If we all join hands and go buy a new SUV, everything will be all right. Preferably a Navigator.I can explain why the
stock market fell like it did last spring. Wile E. Coyote looked down. You remember that the Road Runner always
managed to stop just before going over the cliff. Wylie couldn’t stop. But he never fell until he looked down.
Somebody looked down and saw all foam and no beer!Looking down will pop a bubble. What I don’t understand
is why bubbles form in the first place—we’re all so smart and all. Today, we realize that there must be some
prospect for some profit, some time for a stock to be worth a good sum of money. Why do we realize that today,
but not yesterday?""No, the New Economy isn’t dead. It may have a hangover. It may even have the blues. I can
understand that. I’m bad to get the blues myself. As Billy Joe Shaver said, I’m "leanin’ t’ward the blues."But my
New Paradigm frog doesn’t get the blues. Frogs don’t get the blues. They get the greens.You may remember the
Far Side frog band that had the greens a few years ago. The greens went something like this:
My baby’s left my lily pad,
My legs were both deep fried,
I eat flies all day, and
when I’m gone,
They’ll stick me in formaldehyde,
Oh, I got the greeeens.
I got the greens real bad!Well, my New Paradigm frog may have the greens, but he’s not ready for the
formaldehyde yet.Just remember, the blues and the greens are contagious.
Don’t get near people with symptoms.Just go out and buy something—maybe a Navigator."In other words just
believe. Ignore the charts and economic data that point down. Have faith that this is a new era that has overturned
the old fashioned rules of economics. Go out and buy something for the good of the system. Buy tech stocks. Use
your credit card if you have to Or take out a loan. The problem is that most Americans now have wild levels of
household debt. It will be hard to get them to go out and buy something when their jobs are in danger and their
stocks, if they own any, are getting creamed. The massive debt levels will make the path to economic recovery a
long one. This is the real legacy of the so called "new economy. |
