<<The bottom line is this, don't believe everything you read.>>
JDN. My goodness, a lecture from nihil and now one from you. Thank you.<ggggg)
To summarize, your points that I disagree with are ... (1) Business Week is creating a problem that does not exist. (2) You are too busy to respond to their many inaccuracies. (3) You think that the main point in the article was that another market crash and depression vintage 1929 is on the way. (4) We have more knowledge than we did in 1929, and
(5) I believe everything I read.
That is what your post says (to me, at least).
You accuse me of believing everything I read, and yet you either did not read the Business Week article or did not understand it.
.. and so condescending to me .. I am truly intimidated.
Ken Wilson
... hey JDN, here are other recent articles that you probably will not take time to read ... tch tch tch, that news media, such a problem, always making trouble. <ggggg>
(1) posted to Wall Street Journal, on-line February 1, 2000 "A Century of Booms, And How They Ended"
(2) posted to Barron's, on-line February 5, 2000, "Techs Take Off, Nasdaq Rises 9% on the Week"
(3) posted to Barron's, on-line February 5, 2000 "Unintended Consequences - Treasury bond cutbacks bring chaos"
(4) posted to Barron's, on-line February 5, 2000 "Weak January May Be Bad Omen For 2000"
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(1) February 1, 2000 A Century of Booms, And How They Ended By JACOB SCHLESINGER and NICHOLAS KULISH Staff Reportersof THE WALL STREET JOURNAL
The Roaring Twenties crashed to a halt about the time of the stock-market plunge of 1929. The booms of the 1960s and 1980s were crushed by rising inflation and the Federal Reserve's vigorous efforts to tamp it down. Asia's period of long, fast growth ended in the late 1990s with the sudden flight of foreign capital.
What will bring the great turn-of-the-millennium boom -- which Tuesday becomes the longest expansion in U.S. history -- finally to an end? One way to predict the future is to look to the booms of the past.
The usual cause of death has been a particularly vicious strain of macroeconomic disease, like inflation, combined with the ineptness of policy makers treating it. Bad luck -- oil shocks and war -- have also been to blame.
Remarkably, few of these culprits are afoot in America today. One reason: Economists and policy makers have learned from recent history. "When you look at the mistakes of the 1920s and 1930s, they were clearly amateurish," says Harvard economist Greg Mankiw. "It's hard to imagine that happening again -- we understand the business cycle better."
Now, a generation of Americans raised on the belief that the 1950s and the 1960s were an unrecoverable oasis of prosperity has collectively changed its mind. Last month, the Conference Board's consumer-confidence index hit an all-time high, breaking the old record set in October 1968. Most folks, in other words, see nothing but sunny skies well into the future.
In the past, such ebullience was a telltale sign that the end was near. Yale University economist Irving Fisher declared that "stock prices have reached what looks like a permanently high plateau" -- just days before the crash of '29. In 1968, the Commerce Department dropped the title, "Business Cycle Developments" from a monthly publication, concluding that the business cycle was dead.
It wasn't. Although the boom of the 1960s lasted longer than each of the prior expansions since 1854 -- the first year covered by the National Bureau of Economic Research's official business cycle history -- it, too, faded into recession or worse.
Virtually every U.S. expansion since World War II has ended with the same script: Inflation picked up, the Fed cracked down, and the economy fell into recession. The longer growth lasts, the more likely cost pressures build. Falling unemployment forces companies to offer higher wages and pass on costs to customers. Supply shortages may emerge and factories may struggle to keep up with demand, allowing
sellers to hike prices.
At the end of the '60s boom, the consumer-price index was rising at an annual rate of 6.2%. At the end of the '80s boom, inflation crossed 5%.
In 1999, in contrast, the CPI rose a tame 2.7%, as global competition surged and Internet shopping caught on. A recent comparative shopping survey by Lehman Brothers found that a London Fog trench coat costing $225 in a store could be had for just $89.95 online, while a dose of Viagra selling for $57.69 from a conventional pharmacy was selling for $45.60 on the Web. That kind of competitive pricing works to keep inflation down.
Another reason for low inflation -- and the economy's overall good health -- is the 1990s surge in productivity, or output per worker hour. That measure of efficiency determines an economy's long-term sustainable growth rate. Through the 1960s, productivity grew at an annual rate of 3%. From the early 1970s through the mid-1990s, it slumped to about 1.5%. Since 1995, thanks in part to computers and a massive capital-spending boom, many economists believe the growth of productivity has rebounded to near 1960s levels.
The expansion and diversification of financial markets have also extended the boom, by creating trillions of dollars of new wealth and spreading it widely among consumers. And America's growing reliance on capital markets to finance companies has made the allocation of funds more efficient.
The ability of manufacturers to manage inventories more skillfully has made the current expansion more even-keeled. In the past, companies during good times built up huge stockpiles in anticipation of growing demand. If demand fell, production plunged to work off excess inventories, accelerating a downward spiral. Thanks to just-in-time production methods and more sophisticated market-monitoring
techniques, inventories remain slim by historical standards. Last year, the Big Three auto makers kept enough extra cars on lots to meet just 64 days worth of demand -- down from 77 days a decade earlier.
This is also the first major expansion since the '20s driven entirely by private sector spending. The government played a big role in fueling the '60s and '80s booms, but that also spurred inflation and drove interest rates higher. Through the '90s, budget deficits shrank, disappeared and ultimately turned into surpluses. Now, the government is even paying off the old outstanding debts of those earlier,
profligate eras.
"Debt reduction helps everyone by getting the government out of competition for loans, which makes interest rates lower overall," President Clinton crowed last week as he vowed to make the federal government debt-free by 2013 -- for the first time since 1835.
Sudden, unforeseen shocks can always jolt an economy. But the U.S. today seems better able to absorb one blow that has helped to kill previous expansions -- a spike in oil prices. Thanks to greater energy efficiency, and a shift away from energy-intensive industry, spending on oil makes up just 3% of gross domestic product today, down from 8.5% in 1981. Even with the sport-utility-vehicle craze, American
vehicles are, on average, 5% more fuel efficient than a decade ago.
Now for the trouble spots:
Though inflation remains low, labor markets are the tightest they've been in a generation, with the unemployment rate hovering near 4%. Some desperate employers are starting to jack up compensation to keep and retain workers.
The latest Fed survey of regional economic conditions found Iowa fast-food restaurants offering health benefits to part-time workers. Retailers around the country brandished starting bonuses, tuition reimbursements, health clubs and child-care benefits just to keep cash registers manned during the holidays.
Fed Chairman Alan Greenspan fears that those kinds of costly incentives could soon lead to the old wage-price death spiral. That's why the central bank raised interest rates three times last year, is widely expected to do so again Wednesday and possibly several more times by mid-year.
The stock market's surge is another source of concern, with share prices well above what any of the old formulas could justify based upon earnings, dividend payments, interest rates. The Standard & Poor's 500-stock index was trading at 31 times earnings at the end of last year, double the average rate for the past 40 years. Internet superstar Yahoo! hit a whopping price/earnings ratio of 735. The 1920s saw a similar bidding up of shares, particularly in new technologies -- one of the hot themes then was radio.
Then, as now, investors borrowed heavily to buy stocks, and borrowed heavily against their market-driven wealth.
The collapse of the 1920s bubble weakened what turned out to be a fragile economy -- and the heavy amount of debt held by investors magnified the force of the market crash.
A blow today could be more severe. The market is more integrated into the economy than ever before: Nearly half of all households own shares, thanks to the explosion of mutual funds and 401(k) plans. And the proliferation of new financial instruments -- including new flavors of derivatives and asset-backed securities that are untested by a severe downturn -- may magnify the damage in a crash.
Then there's the trade deficit, which hit a record $26.5 billion in November, the most recent month available, fueled by Americans' insatiable demand for foreign goods. Sales of pearls and precious stones from abroad rose 15% over the prior year; imported furniture rose 22%. That's accompanied by a growing dependence on foreign capital to finance American business and American markets. Foreigners
have more than $6 trillion invested in the U.S., while Americans have just over $2.5 trillion invested abroad.
A loss of confidence in the U.S. economy -- triggered say, by a plunge in the value of the dollar -- could touch off a stampede by foreign investors to pull out of American markets. That's what burst Asia's bubble in the late 1990s.
In the past, relatively minor setbacks often became calamities because of policy blunders. The 1929 "great crash"" became the "Great Depression," in part because the Fed kept the money supply tight even as the economy was contracting, and President Herbert Hoover raised taxes to balance the budget. Inflation got out of hand in the '60s and '80s because the Fed had been too loose with money supply, and because Lyndon Johnson and Ronald Reagan spent beyond their administrations' means.
Today, the government looks better poised to handle an incipient downturn. For the first time in modern economic history, fiscal policy is being run the way the textbooks say it should be during good times: The government's big budget surpluses help damp growth and prevent the economy from overheating.
The surpluses also give President Clinton and his successors more room to stimulate the economy with spending increases or tax cuts should conditions soften. "We've reloaded the fiscal cannon," as Treasury Secretary Lawrence Summers puts it.
The Fed, meanwhile, is more vigilant than ever about pre-empting inflation before it gets out of hand, and quicker to ease up when the economy looks weak. That's why Mr. Greenspan is raising interest rates now, and why he was quick to cut rates after the 1987 stock market crash and during the 1998 Asian crisis.
"We can't smooth out every shock, but I feel confident that the Federal Reserve can basically keep us close to a fairly steady path," says Christina Romer, an economic historian at the University of California at Berkeley. "We've entered an era where, if policy makers stick to the consensus among economists, we won't have as many cycles."
Yet for the government to act wisely, it has to be able to forecast accurately, a skill that hasn't yet been perfected. Even Mr. Greenspan has sometimes called things wrong. In October 1990, he told his Fed colleagues that "the economy has not yet slipped into recession" -- even though it was later determined that the downturn had started three months earlier.
Good times tend to breed a cockiness that makes people forget that times can turn sour, and lead to the very excesses that make the economy shaky. Former Treasury Secretary Robert Rubin is often hailed as one of the patron saints of this expansion. When Mr. Rubin was recently introduced at a public appearance, the master of ceremonies said "the debate in Washington is whether Bob Rubin is the best Secretary of the Treasury since Alexander Hamilton, or the best Secretary of the Treasury including Alexander Hamilton."
"You know," Mr. Rubin responded, "they were having that same debate about [then-Treasury Secretary] Andrew Mellon in 1928."
What's a Boom? And Who Decides?
A boom, or expansion, begins at what economists call the "trough" of a recession, the point when growth starts to pick up. It ends at the "peak" of economic activity, the time when growth conclusively slows and the economy shrinks.
There is no precise formula defining these turning points. Some textbooks say that that an expansion ends with two consecutive quarters of negative gross domestic product growth. But most economists and policy makers agree that an expansion begins and ends when seven men on a panel of the National Bureau of Economic Research say so.
According to the independent Cambridge, Mass., think-tank's Business Cycle Dating Committee, "a recession is a recurring period of decline in total output, income, employment, and trade... and marked by widespread contractions in many sectors of the economy." (You can read the whole explanation at www.nber.org/cycles/html).
That definition allows for a lot of discretion, and sometimes disagreements. One of the country's leading business-cycle experts, Victor Zarnowitz, makes the case that the last recession may not have really ended in March 1991.
While production of goods and services was increasing, the economy didn't create any new jobs for months afterwards. In most expansions, "both output and employment increase," says Mr. Zarnowitz, research director of the New York-based Foundation for International Business And Economic Research.
If job creation were required to declare an expansion underway, he adds, the current boom didn't really start until September 1992 -- or a full 18 months after the record books indicate. That would mean this expansion would have to last until August 2002 before claiming to be the longest.
It's important to note than an expansion is not necessarily a boom. Harvard economic historian Claudia Goldin notes that the longest expansion on record before World War II, and the sixth-longest in American history, was the one spanning the 50 months between March 1933 and May 1937. To non-economists it just felt like the Great Depression because that long, steady growth was starting from such a low level.
It also takes a long time after the fact to be certain when a turning point has occurred. The NBER didn't decide until December 1992 that the current expansion had begun the spring of the previous year. The July 1990 onset of the preceding recession wasn't announced until April 1991 -- or a month after it had officially ended.
In fact, today is really too early to declare conclusively that this boom sets the longevity record. Official government data showing whether or not the economy grew in January won't be released until later this month. The NBER says on its Web site that "if the economy continues
to expand past January, then the United States will be in record territory." Data proving that won't come out until March.
In declaring the record, politicians and commentators -- including this newspaper - are relying on the fact that growth was strong through December and that anecdotal evidence shows no signs that business has eased significantly since.
Write to Jacob Schlesinger at jacob.schlesinger@wsj.com and Nicholas Kulish at nicholas.kulish@wsj.com
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(2) from Barron's, February 7, 2000, Techs Take Off, Nasdaq Rises 9% on the Week, By Andrew Bary
Technology stocks once again took center stage last week as the Nasdaq index surged 9.2% in its biggest weekly percentage gain since 1974.
Bolstered by big moves in such key components as Intel, Microsoft, Yahoo, Cisco Systems and Qualcomm, the Nasdaq advanced in each session last week, gaining 357 points to a record 4244. The rise more than offset the prior week's decline of 348 points and left the Nasdaq with a year-to-date rise of 4.3%, way ahead of both the Dow Jones Industrial Average and Standard & Poor's 500 index, which are down 4.6% and 3.1%, respectively.
Both the Dow and S&P advanced last week, but their gains paled beside the surge in the Nasdaq. The Dow rose 225 points, or 2.1%, held back by losses in Procter & Gamble, McDonald's and several industrial issues, including Caterpillar and Minnesota Mining & Manufacturing. The S&P bested the Dow, gaining 4.7% to 1424, helped by its big, 30% weighting in technology stocks.
"Technology is working and little else is," says Byron Wien, chief domestic strategist at Morgan Stanley Dean Witter. "We're picking up where we left off last year."
Wien says it's ironic that the Federal Reserve's efforts to rein in the economy, highlighted by last week's one-quarter percentage point rise in short-term rates, is falling hardest on some of the stock market's most depressed sectors, including industrial, transportation and
financial stocks. The technology sector has been unaffected by the Fed's actions, and indeed may be benefiting as investors seek stocks whose growth prospects appear immune from rate increases. The result is that the valuation gulf between old-economy stocks and new-economy stocks has grown even wider. Vast numbers of stocks now languish at price/earnings multiples of 10 or less, while market
darlings like Cisco, Qualcomm, Oracle and Sun Microsystems trade for 100 times earnings or more.
The strong performance of high-multiple stocks in an environment of rising rates contrasts with the historical experience, when investors used to bash them because higher rates cut the value of their distant earnings. But Tom Galvin, strategist at Donaldson Lufkin & Jenrette,
says investors are being rational about tech stocks.
"Mature industries like housing, airlines and automobiles are being squeezed by the higher cost of labor, capital and materials," he says. "Technology leaders still are generating sufficient revenue and unit growth so that their growth rates should hold at 25%."
In the tech sector last week, Microsoft rose 8 5/16 to 106 9/16; Intel gained 10 3/4 to 104 3/4 ; Yahoo was up 40 to 353 1/2 and Qualcomm added 26 7/8 to 137 7/16.
Cisco surged 17 1/4 to a record close of 121 1/8 ahead of its profit report set for Tuesday. Cisco is expected to report earnings of 23 cents in the quarter ending January 31, up 28% from the 18 cents in the year-earlier period, on revenue growth of 40% or more. Cisco bulls say the
company could beat the consensus by a penny or two, set a 2-for-1 stock split and highlight its growing optical-networking business on its conference call. Cisco now fetches 120 times projected profits in its current fiscal year ending in July, and it has a market value of $423 billion, putting in within striking distance of General Electric, which now ranks No. 2 behind Microsoft in market value.
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articles (3) and (4) will be in my next post |
