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Strategies & Market Trends : World Outlook -- Ignore unavailable to you. Want to Upgrade?

To: Les H who wrote (917)	8/5/2002 1:27:13 PM
From: Don Green	Respond to of 49812

Global: The Post-Bubble Business Cycle Stephen Roach (New York) Aug 05, 2002 Morgan Stanley Last week was a defining moment for the US business cycle, in my view. Two revelations jumped off the page: First, a post-bubble US economy has turned out to be far more recession-prone than we had previously been led to believe. Second, like Japan, recovery in the post-bubble US economy is turning out to be fragile, at best; America is now back on the brink of a recessionary relapse -- the so-called double dip. Courtesy of the bubble -- both in the financial markets and the real economy -- there’s never been a business cycle like this in the annals of the modern-day experience of the US economy. It is critical to view the outlook through a new and different lens (see my 12 July dispatch, "A Different Lens"). As a perma-bull on the Chinese economy, I often get criticized for relying on China’s oft-maligned GDP statistics. Yet I am now painfully reminded of an old adage: "Those who live in glass houses shouldn’t throw stones." America’s GDP revisions in the summer of 2002 -- to say nothing of the reworking of US corporate accounting results -- make the Chinese GDP statistics look pristine by comparison. In my some 30 years of experience as an aficionado of the US business cycle, I can remember only one other instance when a statistical revision to the US numbers carried such weight. It was back in 1974, when an annual benchmark revision of the US Department of Commerce belatedly uncovered a massive inventory overhang -- the smoking gun of what turned out to be the deepest recession of the postwar era. My boss at the time -- Fed Chairman Arthur Burns -- was the greatest living expert on the US business cycle. I remember full well his reaction at the revisionist revelation. "If I had only known," he said. Of course, he knew all along -- but that’s a different story altogether. That lesson rings true today. Steeped in denial, few have wanted to face up to how different today’s business cycle is. That’s especially true in Washington. The pre-revision data led politicians and policy makers, alike, to raise doubts as to whether the United States had experienced any type of a recession in 2001. That’s especially true of US Treasury Secretary Paul O’Neill -- the Bush administration’s chief economic spokesman. The politically correct spin coming out of Washington always ends up with the vacuous claim that the "fundamentals of the US economy have never been sounder." Sadly, in a post-bubble era -- replete with excess capacity, low national saving, a huge overhang of debt, and a massive current-account deficit -- nothing could be further from the truth, in my opinion. America’s productivity miracle is the most oft-cited counter to this litany. Yet, don’t kid yourself -- not only do we do a terrible job of measuring productivity but watch out for the coming downward revision of this metric as well (due out Friday, 9 August). Don’t get me wrong -- this is not a "victory lap." I’ve been doing macro for all too long to believe that any one can ever nail a call. Sure, as a card-carrying double-dipper, there is some satisfaction in this recasting of recent US economic history. My guess is that such an event could actually be unfolding at this very moment. This summer’s collapse in confidence, manufacturing activity, and job creation -- to say nothing of faltering signs on the capital spending front -- are highly cyclical signs that have "dip" written all over them. Whether that gets validated in the GDP statistics -- now or in a subsequent revision -- is anyone’s guess. But there’s more to this tale than the best metric our friendly statisticians can come up with. At work could well be a new and lethal strain of economic angst that could well be with us for years to come -- America’s first post-bubble business cycle since the 1930s. The revised numbers speak for themselves. Over the first three quarters of 2001 -- the new designation of our current recessionary period -- business capital spending is now estimated to have declined by $88.2 billion in inflation-adjusted, or real, terms. That amounts to fully 154% of the $57.2 billion decline in real GDP over the same three-quarter interval. That’s right, this recession can be more than accounted for by a collapse in business capital spending. That’s exactly what happens to post-bubble economies. Speculative excesses in asset markets distort decision-making on the supply side of the real economy. The Internet mania of the late 1990s culminated in an indiscriminate binge of spending on information technology. Corporate America became convinced that IT prowess was a sure-fire recipe for a Nasdaq-like re-rating. When the equity bubble popped, the IT bubble was quick to follow. A sharp contraction of IT spending accounted for 69% of the decline in business capital spending over the first three quarter of 2001 -- fully 106% of the decline in overall GDP during that same period. If that’s not a post-bubble recession, I don’t know what is. Unfortunately, there’s more to America’s post-bubble shakeout than just a wrenching adjustment in IT spending. Air has been leaking out of the dollar bubble in the past few months, and I feel there is a good deal more to come on that count. But my biggest concerns are for the bubbles that have yet to pop -- personal consumption and the property markets. Over the three-quarter recession interval, 1Q01 to 3Q01, expenditures on consumer durables and residential construction collectively boosted annualized real GDP growth by 0.7 percentage points. By contrast, in the 28 quarters of the past six recessions, these same sectors lowered GDP growth by 1.2 percentage points. In other words, the sectors that normally knock the US economy into recession have done precisely the opposite this time. By the way, these same two sectors -- consumer durables and homebuilding -- normally power the conventional business cycle to the upside. That’s because when they weaken, a condition of "pent-up demand" is created -- the cars that are not bought and the homes that aren’t built. That pent-up demand then gets unleashed -- once the cycle turns. In today’s post-bubble climate, there is no pent-up demand -- it has been spent. July’s vigorous auto sales are a case in point. As I see it, the popping of consumer and property bubbles still lies ahead as potential milestones in America’s post-bubble shakeout. That tells me this saga might not end with just a mere double dip. As was the case during the triple dips of the mid-1970s and early 1980s -- to say nothing of Japan’s decade of dips -- there could well be more dips to come in America’s post-bubble shakeout. That underscores the biggest risk of all -- the deflationary perils of a post-bubble economy. As I see it, this stands to be the next big issue shaping the macro debate. The problem is compounded by what can be called a vulnerable "starting point." The US began this recession at an exceedingly low inflation rate -- a 2.3% increase in the GDP chain-weighted price index in the four quarters prior to the cyclical peak in 1Q01. By contrast, that’s less that half the 5.1% inflation rate that prevailed, on average, at the onset of the prior six recessions. Recessions are inherently deflationary events. Six quarters after the business cycle peak in the preceding six cycles, inflation receded, on average, by 0.7 percentage point. This recession has been far more deflationary. As of 2Q02 -- fully six quarters after the latest business cycle peak -- the GDP-based inflation y-o-y rate stood at 1.0%; that’s a 1.3 percentage point deceleration from the inflation rate prevailing at the cyclical peak -- about double the disinflationary results of past business cycles. That shouldn’t be so surprising. Supply overhangs in a post-bubble economy invariably sow the seeds for a much more powerful deflationary outcome. Inasmuch as this bubble popped when the US economy was closer to price stability, deflationary perils are all the more acute. In this case, the devil may already be in the detail. Breaking down the GDP by type of product reveals that deflation has already emerged in goods and structures but remains absent in services. That’s right, on a year-over-year basis as of 2Q02, prices were actually down 0.7% in the goods portion of the GDP and off 0.9% for structures -- product groupings that collectively account for 48% of real GDP. Only in services -- where price measurement can often be sheer fantasy (i.e., the service derived from homeownership) -- was inflation holding at a positive 2.3% annual rate in 2Q02. In other words, deflation has already reared its ugly head in a very large portion of the US economy. This mirrors the painfully classic results of a post-bubble economy. Popped asset bubbles are the stuff of an enduring price destruction. This is obviously a tough message. And there’s a part of me that truly wishes it was wrong. We’ve all been taught that business cycle downturns clear the decks for the coming recovery, the next bull market. Now that we finally know America has had a real recession, most are leaning in that direction. Not me. This business cycle has little in common with those of the recent past. Unfortunately, it does have a lot in common with the pre-World War II boom-bust cycles triggered by speculative bubbles in financial markets. History tells us that the 19 peacetime cycles from 1854 to 1945 had recessions with an average duration of 21 months -- essentially double the 11-month duration of post-1945 recessions. Post-bubble shakeouts are long and painful. Why should this one, following on the heels of the mother of all bubbles, be any different?

To: Les H who wrote (917)	8/11/2002 8:59:06 PM
From: Les H	Read Replies (1) \| Respond to of 49812

Topple the house of Saud nationalreview.com Topple the House of Saud Worse than Saddam. he Bush administration once again heard the cold, hard facts about Saudi Arabia's growing threat. And once again, they covered their ears. "Saudi Arabia supports our enemies and attacks our allies," Rand Corporation analyst Laurent Murawiec told the Defense Policy Board last July 10. "The Saudis are active at every level of the terror chain, from planners to financiers, from cadre to foot-soldier, from ideologist to cheerleader," he continued in remarks to this advisory panel of former elected officials and security experts. He blamed Riyadh for "a daily outpouring of virulent hatred against the U.S. from Saudi media, 'educational' institutions, clerics, officials — Saudis tell us one thing in private, do the contrary in reality." Senior administration officials would have none of this. When the Washington Post revealed this briefing on August 6, Secretary of State Colin Powell called Saudi foreign minister Prince Saud Faisal to promise him that it did not reflect U.S. policy. "The Saudis cooperate fully in the global war on terrorism," Pentagon spokesman Victoria Clarke added. True, but on which side? Saudi Arabia routinely targets Americans and Israelis. Behold a sample of its latest misdeeds: Saudi Arabia is the Federal Reserve of terrorism. Israeli soldiers recovered records on the West Bank this spring that show that the Saudi Committee for the Support of the Intifada al-Quds (Jerusalem in Arabic) has paid $5,300 bonuses to the families of at least 102 Palestinian terrorists including eight involved in "suicide operations." Among them, David Tell noted in the May 20 Weekly Standard, were the relatives of Sufian Sabarin who detonated Jerusalem's No. 26 bus on August 21, 1995, killing Joan Devenny, an American citizen and victim of Saudi-funded terrorism. To continue such work, the Committee, controlled by Saudi Interior Minister Prince Nayef bin Abdul Aziz, raised $109.5 million last April in a Jerry Lewis-style telethon for "Palestinian martyrs." Documents indicate that another Saudi "charity," the International Islamic Relief Organization, gave $280,000 to 14 Palestinian groups including "Hamas-identified committees/bodies." Hamas, of course, sponsored the July 31 bombing in the cafeteria of Hebrew University's Frank Sinatra International Student Center in Jerusalem. The blast wounded 86 innocent civilians and murdered seven others, five of them Americans. Here's what news accounts say NATO troops found last October at the Sarajevo office of the Saudi High Commission for Relief: Pre-and-post-attack photos of the World Trade Center, the USS Cole and American embassies in Kenya and Tanzania; maps of federal buildings in Washington; materials for forging State Department badges; and a computer program on how to spread pesticides with crop dusters. Saudi ambassador to Great Britain Ghazi Algosaibi published a poem in the April 13 edition of Al Hayat, a London-based Arabic newspaper. Titled "The Martyrs," it praises Ayat Akhras, a Palestinian woman who exploded herself in a Jerusalem supermarket on March 29. She killed herself and two Israelis and injured 25 others. "Doors of heaven are opened for her," Ambassador Algosaibi's poem says of "Ayat, the bride of loftiness." Akhras "embraced death with a smile while the leaders are running away from death," the poet adds. The ambassador, who has represented Saudi Arabia in London for more than a decade, takes a swing at America: He writes, "We complained to the idols of a White House whose heart is filled with darkness." Top Saudis parrot Der Sturmer editor Julius Streicher, perhaps Hitler's loudest Jew hater. Sheik Abd-al-Rahman Ibn-Abd-al-Aziz al-Sudays, Chief Cleric at Mecca's Grand Mosque, claimed last April 19 that Jews are "the scum of the human race, the rats of the world, the killers of the prophets and the grandsons of monkeys and pigs." In a June 21 sermon broadcast live on government-owned TV1, the imam prayed: "O God, deal with the Jews and Zionists for they are within Your power. O God, scatter their assemblies, make them a lesson for others, and let them and their property be a booty for Muslims." The Saudi Commerce Ministry recently banned spoons, toy guns, candies, and laser discs emblazoned with Stars of David. "The Ministry is investigating the ways why [sic] these products had been brought into the Kingdom," the English-language Riyadh Daily explained June 25. While such Muslim countries as Pakistan and Yemen courageously have permitted U.S. troops to prosecute the war on terror from their soil, Saudi Arabia prohibited American jets from using the Prince Sultan Air Base while America and its allies drove al Qaeda and the Taliban from Afghanistan. Never mind that the base was built with U.S. tax dollars. Just yesterday, the Saudis announced their territory would be off limits in any new U.S. bid to invade Iraq. Soon after the September 11 attacks, orchestrated by 15 Saudis among 19 hijackers, Saudi diplomats whisked several of Osama bin Laden's relatives on a private jet from America to Saudi Arabia and beyond the reach of U.S. investigators. Riyadh subsequently has stymied background checks on Saudi terror suspects and impeded American efforts to block al Qaeda's financial assets. Unlike nearly every other carrier, Saudi Arabian Airlines even refused to give the U.S. Customs Service the identities of passengers on its America-bound flights. As the administration considers invading Iraq, it also should pursue regime change in Saudi Arabia. Saddam Hussein is essentially a better-armed Ferdinand Marcos. He is an egomaniac who craves power and crushes opponents. Hussein, a secular Muslim, professes no concrete ideology beyond his own cult of personality. Yes, he has treated his Kurdish minority to poison gas and likely is building chemical, biological and even atomic weapons of mass murder. Still, Hussein seems more of a regional headache than a worldwide menace. The House of Saud apparently lacks such a weapons program, but it adheres to a globally ambitious, religious-based ideology. Saudi Arabia aims to hijack Islam everywhere — from Medina to Manila to Manhattan's Islamic Cultural Center on East 96th Street — and infect it with that religion's virulent Wahhabi strain. The goal? An energized, anti-Semitic, anti-Western, anti-American faith. Through the charities, religious schools and mosques they finance, Saudi Arabia would employ Wahhabism to build a bridge to the eighth century. America should confront the Saudi dictatorship. For starters, President Bush and Secretary Powell should stop glad-handing Saudi officials. Statecraft may require them to work with Riyadh, but there is no need for Crown Prince Abdullah to hobnob at Bush's Texas ranch. Abundant global oil supplies also would diminish Saudi Arabia's relevance. Thus, Washington should help Russia and West African nations boost their petroleum production. Africa needs the money, and a prosperous, Westward-looking Russia would not likely re-aim its ballistic missiles at America. Topple Saddam Hussein, if we must. But Rand's scholar is right. Team Bush should stop pretending that Saudi Arabia is Holland with sand dunes. — Mr. Murdock is a columnist with the Scripps Howard News Service.