Wall St. Beatings Will Continue
By Pierre Belec Apr 15 12:22pm ET
NEW YORK (Reuters) - The beatings will continue until morale improves! Such is the perverse shape of things on Wall Street these days.
Stocks have been reeling since Federal Reserve Chairman Alan Greenspan promised to keep pounding away with stinging interest-rate increases until the economy and the stock market learn to stay within the Fed's goal lines.
The Nasdaq composite index was in a freefall this week, putting it in bear territory after a stunning drop of more than 34 percent from last month's record high. The Dow Jones industrial average held a moderate loss of 10.4 percent for the year, but that was only due to the fact that it had been turned into a shelter for refugees fleeing the bombed-out Nasdaq market.
The central bank has boosted interest rates five times since last June to slow the economy's growth and another increase is expected next month.
Greenspan has warned that the tight U.S. labor market may have ``serious implications' for the economy by its potential to spark an upsurge in inflation.
But some experts say the Fed chief is all wet. Greenspan is not getting the important message that global U.S. companies are no longer limited in their choice of the labor market. And, in a global economy, the companies are looking at an ocean of workers, not a local pool, they say.
Wall Streeters say that as long as the entire world is the marketplace supplying American companies with labor and materials, then it will be tough for inflation to show a sustained increase.
Globalization and the freest trade policies ever are the roots of the ``new economy.' And, the great news is that there is nothing that could reverse these nearly unstoppable trends.
Even Greenspan has expressed amazement over the terrific economy, which is now in a record 109th month of expansion without having sparked any significant wage inflation.
``The pool of available labor is no backyard pond anymore,' says Greg Smith, chief investment strategist for Prudential Securities.
``During the 1990s as unemployment declined, wage gains did increase. It took a very big drop in employment to get much of a rise in wage growth,' he said.
Now, the companies have alternatives to the U.S. labor market and they can tap into larger and better labor pools beyond their geographic borders. And, they are not shy of using technology as a substitute for labor.
Companies operating with high costs, i.e. exploding health-care benefits, and tight labor markets, which is a big headache in many parts of the United States, are finding themselves at a competitive disadvantage to companies elsewhere in the world with a better labor story.
``By seeking out such regions and setting up shop there, Corporate America can tap into the advantages these locales offer,' Smith said. ``Not only can they find plenty of low-skilled labor in many places, but by virtue of the significant differences in unemployment rates around the world, companies can also tap into pools of highly skilled workers in some countries.'
For many companies, it has become a case of move your operations or become noncompetitive.
``Sure, if John Doe & Sons is facing a tight labor market in the location of its only facility and is unwilling to shift its business elsewhere, that company is almost certainly going to experience cost increases,' Smith said.
``The difference between now and the past is that in the past, every company in two would be in that same boat -- therefore, prices would go up,' he said.
``But that was then, this is now. Without knowing the specifics of John Doe's business, I can almost guarantee you that there is a competitor somewhere -- not necessarily in the same country -- that is not experiencing the same cost problems,' Smith said.
Customers can shop in a global supermarket. And, fierce competition is holding down price increases.
``So when John Doe & Sons raises prices, its customers will have the alternative of dealing with a company that's not forced to raise prices,' Smith said. ``That's the difference between today and 20 or 30 years ago, when the U.S. economy pretty much functioned as a closed system.'
Meanwhile, the Street is betting that a sixth interest-rate increase will come out of the Fed's policy-setting meeting on May 16. Since last June, the central bank has moved rates up a total of 1.25 percentage points.
Analysts say the only thing that could dissuade the Fed from further boosting the cost of things such as mortgage loans and credit card rates, would be if monthly jobs reports showed a lot of people were thrown on the unemployment line. But don't bet on that happening because the economy is still in great shape.
The jobless rate is at a 30-year low of 4.1 percent and Greenspan continues to agonize over the shrinking ``pool of available workers,' worried that eventually the tight labor market will spark a big rise in wages that will fuel the inflationary fires.
Greenspan's campaign to slow the economy by relying on rapid-fire interest-rate increases has so far failed.
The economy barreled ahead at the fastest speed in 16 years in the last quarter of 1999 as the gross domestic product, or GDP, climbed at an annual rate of 7.3 percent.
The three-month average for job growth was 272,000, or 3.3 million jobs annualized, and wages in March rose by a tiny 5 cents, showing the workforce is still not storming the gates, demanding bigger paychecks after two years of tight labor markets.
The Fed has raised interest rates because it just can't explain why the economy can be so good and wages so subdued.
Greenspan swears that before too long, the United States will be out of workers. The traditional central bank's view is that a larger number of unemployed Americans, and by implications, a weak economy, would be good.
What could go wrong? The Fed could raise interest rates too high and slam the economy into recession. And, a severe and extended stock market drop could destroy the nation's wealth that has been built over the last five years.
David Ranson, president of H.C. Wainwright & Co., a Boston-based investment research firm, said the danger is that the reasoning behind Greenspan's interest-rate policy is rarely challenged.
``Fed Chairman Greenspan is lionized by the media and his every utterance is analyzed as closely as that of an ancient Greek oracle,' Ranson said.
``Yet, there is no disciplinary counterbalance to his thoughts and speculations,' he said. ``Indeed any line of reasoning he puts forth -- however eccentric or outmoded -- has automatic credibility in the press in deference to the awesome power that he wields.'
The economy could be the loser if Greenspan is wrong.
``This is way beyond undesirable,' Ranson said. ``The threat that the Fed will use its powers to bring the economy and stock market into 'balance,' whatever that means, is a commitment to bring the astonishing prosperity of the 1990s to an end -- all in the name of perpetuating that same prosperity.'
Indeed, it does sound a little bizarre.
For the week, the Dow Jones industrial average tumbled 804.16 points to 10,307.32. The Nasdaq Composite index slumped 1,125.36 to 3,321.09 and the Standard & Poor's 500 index was off 159.04 at 1,357.31.
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