morning all, the section here about the euro has some aggressive comments :
The old will be new
Board of Economist member Reuven Brenner throws out the numbers for a 2001 forecast of falling rates, a rising U.S. dollar, disintegrating investment models and a major transition in the tech sector.
Reuven Brenner
National Post
The best way I found to make forecasts for 2001 was to completely disregard official statistics and instead interpret market signals, combined with the lessons of history, to answer key financial questions about the coming year.
What will the Fed do?
Alan Greenspan reacted to tight liquidity in bond markets only last week. Better later than never. Now he may repeat his September 1998 unprecedented steps of lowering the rates in quick succession, and by mid-year, the rate may drop by 100 to 150 basis points. In contrast to his predecessors, Mr. Greenspan tends to make sharper movements -- up or down -- and do so with relative disregard to official schedules concerning Fed announcements.
However, expectations of further lowering rates delay investments and purchases of durables until the lowered rates come into effect. Because Mr. Greenspan recognizes this, I expect rates to soon drop by another 25 to 50 basis points, perhaps this month.
What will happen to the U.S. dollar relative to the euro?
With Mr. Greenspan's policy change, the euro dropped in a flash -- as one should expect. Nothing fundamental is expected to change in Europe during 2001: The euro is a paper currency not backed by any coordinated fiscal policies (since there is no European government); not backed even by clear rules, Greece's recent acceptance into the Europeanpean Community -- its substandard financial standards notwithstanding -- being the latest example. With the Fed continuing to correct, and with President-elect Bush's emphasis on lowering tax rates, the U.S. dollar will increase relative to the euro and the Canadian dollar. Despite publicity to the contrary, Ottawa has, in fact, increased various premiums paid to the government, leaving take-home pay hardly changed during the next six months.
What will happen to the tech and Internet sectors?
As with railroads, cars, steel, oil, radio, phones -- name it -- these sectors will drastically consolidate, with few survivors. Recall that, following much exuberance in the respective industries, J. P. Morgan consolidated railroads and phones; Andrew Carnegie, the steel business; and John D. Rockefeller, the oil business. Money will not be thrown easily to youngsters with bright ideas but virtually no ability to execute: Finally venture capitalists, too, realize that money thrown at new competitors to incumbents destroys the ability of any of the companies to make money. One lesson from past mistakes: It's time to use these technologies to solve problems and lower costs in "bricks and mortar" businesses rather than guess what delivery service consumers may be willing to pay a premium for. Another lesson: Better-financed incumbents can catch some breath without fear that a VC will finance yet another competitor.
What happens to the duration of the business cycle?
The tech sector's transition won't take as long as transitions did in the past because the technology allows for good management of inventories and talent flows today more rapidly. Thus, expect future business cycles to be shorter than those of the past. Some industries, such as cars and computers, may suffer during 2001. People have a stock of relatively new cars and computers, and no major innovations on the horizon make the older cars or computers suddenly obsolete, bringing the irresistible desire the buy the new, new things.
Will markets be "exuberant" in 2001?
Whenever a new technology requires high fixed costs with no clear idea of what will be sold and when, a financier is needed. Either financial markets, driven occasionally to frenzy, do so voluntarily, or governments, also driven to frenzy, do so by fiat. As bad as the present losses in market values have been, they were borne voluntarily -- something that cannot be said about tax-financed government programs. Prediction: The "frenzy," which led to rapid learning, will benefit various industries as the unemployed move on from the failed dot-coms. As this happens the "old economy" stocks will become the "new economy" ones, and the few remaining dot-coms will do well.
Could future frenzies be diminished without losing financing opportunities?
Yes. The present investment banking business model will disintegrate. Having analysts and underwriters working for the same employer, and having analysts appearing regularly on TV shows without announcing their firms' strategies (whenever Abby Cohen appears, one must wonder what Goldman Sachs' positions are at that moment) contributes to frenzy. So do inexperienced analysts who never saw protracted bear markets. The lack of experience led to the invention of non-market-based indicators -- number of eyeballs, first mover advantage, network externality -- to rationalize selling newly minted paper. The investment banks will more often "outsource" equity and bond research, and investment banks specialized in underwriting and in equity, bond and currency research will emerge. This echoes 1897, when Dow Jones Company started exactly because its founders perceived that sources of financial news were unreliable, despite the presence of competitors.
How will the new leadership in Washington affect markets?
President-elect George W. Bush surrounded himself with very good people holding strong and diverse opinions. These are not "yes-men." This is conducive to good debates, which are the key to good policy. If he did the same at the Fed by filling its three open seats to counterbalance Mr. Greenspan's "master of the universe" image (too much for Mr. Greenspan's own good), the United States would be rapidly back on track. Mr. Greenspan will manage policy during 2001 so as to sustain his image. Mr. Greenspan realizes that he may have up to 24 months as chairman. Mr. Bush will have to appoint someone else at least two years before his 2004 bid.
What about Canada?
In spite of the ridicule that the U.S. elections received, I would have preferred to face that type of problem here, rather than live with our electoral system. It worked well as long as there were two major parties. With five, it does not work. Unless the conservatives unite, the Liberals can be assured to stay in power for quite a while. To bring Canada closer to a more representative democracy, we should allow a second round in each district in which no candidates got more than 50%. The top two would then move to the second round. But of course, the Liberals have no incentive to allow such a change. The Liberals may advocate "democracy" in principle. They don't in practice. The silenced, kept-in-party-line backbenchers don't help. So while the United States will move toward further lowering taxes (the almost 50-50 division in the Senate and the House of Representatives notwithstanding), expect Canada to stay stuck and the Canadian dollar to drop and hover in the 60- to 65-cent range.
Reuven Brenner is on the Faculty of Management, McGill University, an associate at Duxx, Monterrey, Mexico |
