Re: Deficit impacts--a short reply, hopefully somewhat related to the fortunes of QUALCOMM. The current situation has many parallels to the period beginning in 1972 and extending through 1980, a time when excessive debt, created largely by the Vietnam war, resulted in a period of stagflation. To get rid of inflation and rising interest rates, the Federal Reserve tightened the money supply drastically, to the point where interest rates soared into double digits. At one point, about 1983, home mortgage interest exceeded 15 percent.
The result was that, beginning with the recession of 1973, economic growth stagnated, and stock prices reflected a grim outlook for the economy. This was a period when the Dow was well below 1000, and when price-earnings ratios on typical blue chip stocks were around 8 or less. The stock market really didn't begin to recover until the mid to late 1980s, driven by a gradual lowering of interest rates to more normal levels.
Yet during that period, owing to the fact that the U.S. imported far less oil and gas than is the case now, the current account deficit as a percent of GNP/GDP was much smaller. With far more debt in the hands of foreigners how, we face a situation where a lower valued dollar encourages foreigners to buy U.S. assets, as in the case of the sale of the IBM laptop computer division to a Chinese company, and the more recent offer of the Chinese oil company to buy Unocal. Now, the only thing wrong with selling American assets to foreigners is that over the years foreigners will start to earn more money on American assets, and Americans, as a consequence will earn less. We are now seeing the beginning of a long term trend in which the standard of living for lower and middle class groups drops, owing in part to an increase in return on formerly American owned assets to the new owners (together with jobs also owned and controlled by foreigners).
Fortunately, a few companies like QUALCOMM are able to run against this trend because of superior (and patented) technology and low or virtually no debt. Companies with more debt are endangered by the rising interest rates that inevitably occur when current account and budget deficits get out of line, as they are now.
It isn't true that most companies have been reducing their debt. QUALCOMM is the exception, not the rule. Take GM, and you will see how bad the problem is: GM had an underfunded pension plan, which would have drained profits last year if GM had diverted some of its earnings to increase its pension fund assets. Instead, GM issued bonds and used the proceeds to fund its pension plan, thereby, ironically, INCREASING its profits! Many other companies took advantage of low interest rates to borrow to cover their pension obligations and/or finance new acquisitions. QUALCOMM is the big exception, and for that reason is one of the lowest risk growth investments.
The only thing QUALCOMM needs to do to stay ahead of the game, and incidentally to outperform the average growth stock, is to make sure it remains on the cutting edge of wireless technology so that it will ensure a continuing revenue stream from royalties. QUALCOMM wisely invested not only in new technology but in research and development centers in India and China, helping to assure that a means will be found to feed new technolgy to the fastest growing world markets.
To sum up, yes, the economy suffered terribly after Vietnam, and is likely to suffer similarly because of Iraq. But it still isn't too late to avoid such a result.
Art |
