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Strategies & Market Trends : Strictly: Drilling II -- Ignore unavailable to you. Want to Upgrade?

To: nspolar who wrote (14902)	6/29/2002 12:47:17 AM
From: nspolar	Read Replies (1) \| Respond to of 36161

[We all know markets go to excess. Unfortunately, economies do as well. That’s been precisely my point in underscoring the post-bubble vulnerabilities of the US economy. America’s massive current-account deficit only compounds the problem insofar as the dollar is concerned. ..... America was tainted and the dollar bore the full wrath of global investors. Hell hath no fury like an asset scorned.] Roach's latest. morganstanley.com Stephen Roach (New York) Enough is enough -- even I have my limits. Sitting on my desk was a note from our own Serhan Cevik, concluding that the Israeli economy was mired in its worst contraction in 50 years (see his 27 June dispatch, "Just Pain, No Gain [for the Time Being]"). No sooner had I put the piece down when, out of the corner of my eye, I saw a rather remarkable headline flash by on Bloomberg -- the Israeli shekel had apparently strengthened to a one-month high against the dollar. The distaste for dollar-denominated assets had clearly taken on a life of its own. We all know markets go to excess. Unfortunately, economies do as well. That’s been precisely my point in underscoring the post-bubble vulnerabilities of the US economy. America’s massive current-account deficit only compounds the problem insofar as the dollar is concerned. In retrospect, it was a classic set-up for the repricing of an over-valued asset. The only thing missing was a loss of confidence in the asset itself. That came rather suddenly. Courtesy of Enron, Tyco, and now WorldCom -- and all too many others in between -- the missing piece had fallen into place in the form of a full-blown corporate governance shock. America was tainted and the dollar bore the full wrath of global investors. Hell hath no fury like an asset scorned. Even the shekel was a winner. Yet America is far from over. To the contrary, I would argue that our free enterprise system has never been more vibrant and effective in taking matters into its own hands. The sad litany of corporate transgressions has been met by a quick and painful response in the marketplace. The destruction of wealth has been astonishing. For just the "gang of five" -- WorldCom, Tyco, Qwest, Enron, and Computer Associates -- there has been a $460 billion loss in market capitalization (estimated by our strategy group as a loss in market cap relative to recent peaks in respective share prices). Need I say more? The Schumpeterian principle of "creative destruction" is alive and well. Once unmasked, dishonest accounting and other forms of corporate chicanery have been dealt with in a brutally expeditious fashion. I know of no other system that renders such painful verdicts so quickly. Nor is America the next Japan. Interestingly enough, of all the questions I got on a recent European tour, the comparison with Japan was easily at the top of the list. The parallels are obvious. They stem mainly from the aftershocks of a popped asset bubble. The charts of the Nikkei post 1989 and Nasdaq post 2000 do, indeed, have an eerie similarity. But the comparisons stop there, in my view. First of all, Japan’s banks are still broken -- America’s are not. As a result, the credit intermediation process works in the US but remains largely dysfunctional in Japan. That gives America traction between its real and financial economies -- a necessary, but not sufficient, condition for any economic recovery. Japan, by contrast, remains mired in a lethal "liquidity trap" -- unable to respond to the zero-interest rate policy of its central bank. Moreover, unlike the United States, the Japanese "convoy system" of corporate survival remains very much intact. Most large Japanese companies are still judged as "too big to fail," and outright bankruptcies are few and far between. Such an approach has "moral hazard" written all over it. The case of Daiei -- a large and heavily indebted Japanese department store that was kept afloat by government intervention this past January -- makes that point crystal clear. The same can be said of Japan’s unwillingness to resort to labor-saving restructuring tactics. The still-sacred institution of lifetime employment prevents Corporate Japan from effectively utilizing market-driven tactics of headcount reductions to improve business efficiencies. A comparable point can also be made with respect to Europe, where institutional rigidities remain the norm -- especially in its labor markets. Yet America does it quite differently on all of these counts. At the heart of the US system is an inherent flexibility that is all but lacking in Japan and present to only a very limited degree in Europe. However brutal, that very flexibility is now hard at work in US financial markets. As Corporate America gets marked to market in this exceedingly difficult climate, business and investor behavior will most assuredly change -- as should the response of Washington’s regulators. There are no guarantees on the outcome -- companies and politicians, alike, often go too far in responding to such serious problems. But that’s the way the American system always seems to work as it seeks a new equilibrium. I have no idea if the worst is behind us. Trevor Harris, our resident accounting guru, believes that Corporate America still has quite a long way to go on the disclosure front -- perhaps as long as another year. The bad news is that it is probably far too early to conclude that the worst of the corporate governance shock is over. The good news is that progress is finally under way. None of this alters my basic conclusion that any recovery in the US economy remains fragile, at best. Nor does it dissuade me from the view that America is in the early stages of a multi-year growth slowdown. In my view, the equity bubble of the late 1990s gave rise to excesses that must now be purged. And that’s exactly what’s now going on. It may well be that the corporate governance shock of 2002 could go down in history as the decisive spark to this purging process. In the end, that could be the real silver lining of the current environment. Just as the wrenching process of creative destruction served a flexible US economy well in times of difficulty in the past, I remain convinced it should do the same going forward. That’s always been at the heart of America’s economic defense.

To: nspolar who wrote (14902)	6/29/2002 1:27:45 AM
From: nspolar	Respond to of 36161

The Fed and Moral Degeneracy More from Dan Denning. Send Greenie to the guillotine ... dailyreckoning.com "...Greenspan's miscalculation is quite possibly the single largest error any central banker has ever made...it has been largely responsible for trillions of dollars in stock market losses, and billions of dollars of capital consumed...and its consequences will weigh on the stock market for years to come..." -------------------------------------------------------------------------------- Daniel Denning The fascinating things about markets is that both mathematical and moral influences guide their course. Modern economists have tried to reduce investing to pure science, and are loath to admit that they must study human action to understand economics. However, at root, economics is the study of human action, of people's choices with money. Analysts don't like this because it takes the field out of the realm of the purely mathematical and into the realm of the social sciences, psychology, ethics, and even religion - which, of course, makes things harder on them. Now, it's not just coldly rational men acting like economic machines you have to understand, but the human heart. And that, of course, can be deceptive. At the recent Foundation for Economic Education conference in Las Vegas, Austrian economist Dr. Roger Garrison's gave a speech on interest rate policy that highlighted a key economic - and I would add moral - element of interest rate discussions. From an economic perspective, it amounts to a basic conceptual error by Alan Greenspan. Yes, productivity did improve in the first quarter by 8.6%. That was the strongest growth since the second quarter of April 1983. But the real engine behind greater productivity growth was layoffs. Unit labor costs fell 5.4% in the first quarter. And that's with compensation costs actually rising 2.7%. Clearly, productivity rose, mostly because employment fell. When you get fewer people to produce as much as a pre-layoff workforce did, you become more productive. Or, formulaically...fewer employees=lower costs...lower costs with production staying the same=higher productivity. In the real world, employees don't actually produce 8.6% more goods and services than they did the quarter before. Productivity can spurt higher for a short while, just like it's possible to saw a log quickly for a couple of minutes. But long-term productivity growth is far more difficult to achieve. In short, the first quarter number looks like a fluke. Incidentally, this little formula is not at all mysterious. Yet, it's precisely the reason Greenspan felt he could lower interest rates without causing inflation. In the late 1990s, Greenspan thought an increase in productivity meant you could increase the money supply without increasing prices. What he failed to realize was the increase in productivity was largely a result of: a) lower capital costs because of the Fed's interest rate policy and b) falling unit labor costs as a result of higher unemployment. This single mistake has been largely responsible for trillions of dollars in stock market losses, and billions of dollars of capital consumed. Greenspan's miscalculation is quite possibly the single largest error any central banker has ever made. And its consequences will weigh on the stock market for years to come. What we have here is a failure of deduction. How can a Randian central banker fail so miserably at simple Aristotelian logic? Say's Law tells us that new wealth is created from the application of technology and ideas to create new goods and services. Production, and not consumption, is the key to new wealth. And new production comes from investment, not consumption. Yet the Fed continues to do what it does best; encourage consumption by making the currency increasingly worthless. What does it really mean, though, to say that the Fed is encouraging consumption? Again, the moral and the economic converge. Delaying consumption is the act of saving for the future. You're willing to have a little less now so that you or your kids might have a little more later on, when you need it. The great Austrian economist Carl Menger pointed out that ascendant economies are always forward looking, planning for the future, storing up savings to invest later in new wealth creation. Only declining economies consume at the expense of future generations. Yet both popular and economic culture encourage consumption. Both encourage instantaneous gratification of the slightest desire. Indulge yourself now is the mantra. Do not plan for the future. It may never come. Live for the now. Live IN the now. At the individual level, I believe this encourages sin, or, if you prefer, unethical behavior. How else to explain the Henry Blodgets of the world? Libertarians love the idea of doing anything you choose, so long as you harm no one. But just because you can do something doesn't mean you ought to. While the State shouldn't have the legal power to prevent you from engaging in any kind of behavior you want that doesn't violate someone else's rights, its absurd to think that people can effectively create their own morality. Its the height of egoism. And what it leads to is morally degenerate behavior, the likes of which are on ready display in Las Vegas. If you do not regulate your own moral behavior by some consideration of future consequences, you become a slave to your appetites. In economics, you can see that the Fed's stimulative behavior has led to degenerate behavior by corporate America and American consumers. By removing market forces from the determination of short-term interest rates, the Fed artificially cheapens the cost of capital and encourages moral hazard and uneconomic investment.