Zeev: Interesting Commentary from Dr. Doom:
Saturday 14 November 1998
The end is nigh, and no fun
TIM COLEBATCH
Dr Doom is back. Gloomier than ever. Dr Al Wojnilower, the analyst who
forecast the Wall Street crash in 1987, is making the same forecast now - except
this time, he expects Wall Street to take the world economy down with it.
In Australia to address CS First Boston's annual economics conference yesterday,
Dr Wojnilower said the Wall Street boom of the '90s had been a financial bubble.
We were now past the crest of it, he warned, and the impact of the slide ahead
would put the brakes on US and world growth for the next two years.
''Every period of prolonged easy money produces financial bubbles such as the
present one,'' Dr Wojnilower said. ''They always last longer than you think is
possible, but the end is not so much fun.''
Corporate profits in the US had peaked in the third quarter of 1997, he said, and
had been falling since, despite growth of 3.5per cent.
''If growth falls to more like 1.5per cent, which I think it will - although the risk
is on the down side rather than up - profits will fall more than that,'' he said.
''We have empty buildings in Bangkok and idle factories in Korea. We have both
in Japan. We are starting to have empty factories in the US. US personal savings
were negative in September. Five years ago, it was 5.5 per cent, but the deficit of
the Government has been transferred to the household sector.''
The US merchandise trade deficit was now running at $A35 billion a month, he
said. ''It will have an effect on the profitability of US companies. It will have a
damaging effect on the rest of the world.''
The worst of the crisis would probably be felt in 2000, but the best hope was that
Wall Street might hold out until Japan and Asia had begun to recover.
Dr Wojnilower, senior economic adviser to the private investment firm
Monitor-Clipper Partners and vice-chairman of Craig Drill Capital, is used to
being a lone voice.
''I have solid credentials as an alarmist on these matters,'' he said. ''I think all
human beings have a narcotic attraction to gambling, and those who have that
attraction and want to be reasonably respectable do it on financial markets.
''I may sound facetious, but I don't think you can understand financial markets
unless you understand that that is their structure. They are casinos.''
Dr Wojnilower blamed the chairman of the Federal Reserve, Dr Alan Greenspan,
for not bursting the bubble by raising rates in 1996 and 1997, before it was too
late. He said the Fed had been sidetracked by a single-minded focus on inflation
in the real economy, failing to recognise the dangers of asset price inflation. Even
now, he said, ''US monetary policy is trying to perpetuate the bubble''.
By contrast, he praised Australia's performance in the crisis. ''Through a
combination of luck and good management, you really have dealt with it
exceptionally well. You have a Reserve Bank management, which is second to
none in the world, in my opinion.''
But Dr Doom, as Wall Street christened him for his gloomy predictions, said
Japanese monetary policy had contributed to the problem by cutting rates as low
as 0.5per cent, which then allowed the hedge funds and mainstream financial
institutions to snap up cheap money to invest in the US.
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