economic TA: why the Old US Economy is slowing
finally an excellent piece in BusWk from Mellman, a JPMorgan economist... this is substantial and multi-dimensional... unless it is multi-dim, its quality is sadly lacking
EXTERNALLY FINANCED CAPITAL OUTLAYS ARE GROWING STRONGLY, WIHT 17% ANNUAL GROWTH... US CORPORATIONS ARE RUNNING HISTORICALLY HIGH DEBT TO PURCHASE CAPITAL EQUIPMENT... THEY ARE UNFORTUNATELY BECOMING INCREASINGLY UNABLE TO FINANCE THESE EXPENDITURES FROM CASH FLOW
TRIPLE SQUEEZE ON PROFITABILITY:
1) lower unemployment, hefty capital outlay growth, strong dollar have all led to somewhat higher labor costs amidst limited pricing power environment
2) higher interest rates, increased corporate borrowing have led to rising interest expense
3) growing depreciation costs from more rapid capital equipmt cycles require more frequent outlays
FORECAST:
a) capital spending boom is vulnerable to any upcoming slowdown
b) rising debt levels, declining net cash flows will eventually hurt credit quality, dampen capital spending, and thus lead lenders to curb lending
c) expected Return on Investments will drop, leading to reduced planned capital outlays
COMMENTS:
- productivity has offset rising labor and other costs to date, especially recent quarters
- erosion in domestic US earnings has been the case in the last two years
- multi-national corporations have grown increasingly reliant upon foreign operations for growth and earnings
THEREFORE: capital spending will be slowing down in the next several months, possibly dramatically... expect the weak companies to get much weaker, and the strong companies to get much stronger
in 1998, the Federal Reserve attempted a soft landing and ushered in the Asian Meltdown, the Russian default, and the LTCM fiasco... its track record is horrible for controlling the economy in a manner acceptable to its illusive eye
in 2000, the FedReserve is again attempting to slow down torrid growth, and will likely raise rates much more than is necessary... the internal equilibrium forces at already at work... the NAPM just reported that "unusual factors" contributed to such a strong Q4 in GDP, factors which will be lessening in effect
the FedReserve is tightening with intentions of slowing down the technology sector... in the process, it is squeezing the life out of the Old Economy... it will continue until it is clearly too late, as always... check their track record... they use measurement data that monitors the past
I expect Q1 data and individual monthly economic reports to show a gradual relaxation from the torrid pace of growth... the Y2K effect is now not at work like in late 1999... but the Fed will eventually destroy something precious
expect to see the first sign of FedR disaster in the form of ultra-strong US dollar, a US bond market rally commensurate (since foreigners often park in bonds), and solid US stock market rally continuing and perhaps climaxing with a huge runup
this could happen by summertime or this autumn
then about 4-8 months later, expect the US stock market to suffer a serious decline... all the focus on the US climax will be disastrous to the foreign economies and their stock markets
in 1998 the Fed destroyed developing nations' economies via interest rates and an ultra-strong USdollar... this time in 2000 the Fed will precipitate the end of this cycle's expansion by destroying first the foreign economies... this is not the Fed's intentions... it is the result of imposing their own will on free markets
the effect is indirectly caused by the strength of the USdollar... the money in currency markets move fast and furious, the hottest money movement anywhere in the world... mistakes by the Fed are felt first in the currency markets... with too strong a USdollar evident, the world's hotmoney will move into our markets, thus hurting their own foreign markets
I smell a redux of the 1998 Meltdown coming
not for several more months though
last time the Fed messed up the early stages of the business cycle
this time the Fed will mess up the late stages of the cycle
you do NOT want to miss the climax in our stock market
more later, starting to take shape
/ Jim Willie |
