Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : Booms, Busts, and Recoveries -- Ignore unavailable to you. Want to Upgrade?

To: TobagoJack who wrote (22480)	8/10/2002 11:36:19 AM
From: Ilaine	Respond to of 74559

Hi Jay - are you through for now? I clicked on my inbox and saw 13 messages, and wondered what I'd said this time.-g- As I said on FADG, I do not perceive China as the enemy of the United States. I do perceive that China perceives itself to be the enemy of the United States. Also, as you brought up, the enemy of Japan and of India. Lots of friction. Friction isn't good, it wears things out. Very belligerent and touchy. China has yet to take its place as a comfortable member of the international community, where there is give and take and bumping up against one another without so much friction. Think of a great big beautiful white yacht. It's got bumpers all around it to keep the surface from being marred and the martinis from being jolted. That's one thing. Not a problem, from my perspective, unless China decides that the way to handle the frictions in Central Asia is to arm the Islamists whom we are hunting down with surface to air missiles. You are either with us, or against us. And we are not in a very good mood. Nobody wants to splinter your country up or anything like that. I've got a 1:5400000 map of China and a 1:1500000 map of Afghanistan so I can see where the fighting is. There's a big green line on the right hand side of the Afghanistan map and on the other side are big magenta letters saying China and in smaller black letters Uygur Xinjiang Autonomous Region. On the China map it's easier to see that the natural barrier is the mountains. The things that are clearly Chinese seem to peter out at the mountains. Not surprising because the people who live in those mountains are not ethnic Chinese. They are ethnic Caucasian, and for the most part, religiously Moslem. It appears to me that the borders there are rather sketchy. So I would expect some friction there, too. However, here in the West the game we play for the most part is balance of power. You don't kick me because you know I'll kick back, harder. Those "stans" are independent countries now. I hope old Jiang isn't feeling grabby and out of sorts about our cowboys riding around in there, looking for bad guys. Tell him to stay the hell out until we're done, or he'll unleash the whirlwind. Count on it. As for the bit about our not supporting China that the Uygurs are terrorists, maybe you haven't been paying attention. Russia's trying to convince us that the Chechens are terrorists. India is trying to convince us that terrorism is going on in Kashmir. Israel is trying to convince is that the Palestinians are terrorists. Everybody wants carte blanche to take out all these little separatist movements. That's just playing games. Semantic games, diplomacy games. If you want to look at the bigger picture, come on over to FADG.

To: TobagoJack who wrote (22480)	8/10/2002 3:07:40 PM
From: Mark Adams	Read Replies (2) \| Respond to of 74559

Some interesting counter points on the view that debt overhang is strangling the US economy from ML; • In our view, the stock market is braking the economy. But underlying fundamentals are fine and we don’t see any deep-seated imbalances. • If there were any capital spending excesses during the 1990s they have been resolved. The tech capital stock is growing at the slowest ace in 60 years. • Corporate balance sheets are less strained than in earlier cycles. Interest expense as a share of cash flow peaked far below the level of prior cycles. • Households have already raised the savings rate sharply in reaction to equity-market declines. Further increases are likely to be more modest. Fundamentally Sound, Part II When economic growth is below potential, as at present, some set of imbalances must be keeping it so. The difference between our forecast, with a return to trend growth by early next year, and more pessimistic outlooks is a judgment about the severity and the source of the problems currently besetting the U.S. economy. In our view, the stock market itself is the major brake on the economy, but underlying fundamentals are fine. We don’t see any deep-seated structural imbalances. Others take a darker view. They point to a supposedly excessive capital stock that depresses both the current and expected return on investment, and therefore capital spending. They claim that excessive borrowing during the expansion has led to a need for balance sheet repair by both business and consumers that is now restraining demand. In that view, the stock market decline results from those deeper problems. Since corporate earnings are rebounding strongly, with S&P 500 operating EPS up 32% from a year ago in the second quarter and reported earnings up 48%, we don’t believe the equity market is currently reflecting economic fundamentals. But the market’s gyrations do seem to have chilled corporate decision-making and they certainly have led to a significant widening in credit spreads in recent weeks, raising the cost of capital. When combined with the corporate criticism now going on in Washington and the media, the “animal spirits” of business are depressed. Beyond that hopefully temporary set of problems, U.S. economic fundamentals are fine. First of all, if there was excessive investment during the 1990’s expansion—and outside of telecom there is absolutely no evidence for that case—it has long been resolved. As a result of last year’s capital spending collapse, we estimate that the technology capital stock is currently growing at the slowest pace in 60 years. The capital-spending share of GDP fell from a peak of 9.8% in 2000 to 8.1% at present. The share of telecom equipment spending in GDP is close to a 25-year low. In short, there is a growing need for new investment. Tech spending has already started rising. During the first half of 2002, tech spending rose at a 9.4% rate. That is relatively sluggish for tech, but was faster than any other sector of the U.S. economy. Though a good chunk of the telecom services industry is in bankruptcy, even telecom equipment spending grew at a 7% rate during the first half. Furthermore, earnings are rebounding and profit margins are widening. Lack of pricing means that revenue gains are lackluster. But that forces companies to redouble their drive for increased efficiency. While productivity rose at just a 1.1% rate in the second quarter from the first, it as up a powerful 4.7% from a year ago, the best performance in 19 years (cover chart). Third-quarter productivity could rise at a 5% rate. That kind of productivity performance guarantees that profit margins will continue to widen and the earnings recovery remains on track. In short, we reject the idea that an excess capital stock is depressing corporate earnings. But what about the need for balance sheet adjustments? In fact, the need for balance sheet repair is far less pressing in the current cycle than in prior ones. Revised GDP data show that corporate interest payments were higher han earlier reported during 1999-2001. Even so, the ratio of interest payments to cash flow peaked far below the level of prior cycles, at 16.1% (chart, middle page 4). By contrast, that ratio peaked at 21% in 1990 and 19% in 1982. That interest coverage ratio is currently falling, down to 14.6% in the first quarter and headed lower. The first quarter level is actually equal to the average of the past 30 years. Despite sector-specific problems in telecom and energy, the corporate sector as a whole does not appear to have a huge need for fixing up balance sheets. Increased scrutiny in the current hostile environment may lead to more balance sheet adjustments, but that would be driven by appearances not necessity. As for households, the huge equity meltdown has seriously impaired their net worth. Even so, the ratio of net worth to income still equals the average of the past 50 years. A strong case can be made that households will want to start saving more out of current income. But they already are. The savings rate has risen from a cycle low of 0.8% to 4%. We think it's headed for 5%. We don’t see the need for an abrupt upward adjustment to savings nor do consumers seem to be acting that way. Worries about consumer indebtedness are overdone. Consumer delinquency rates are actually lower now than in the last stages of the expansion, inconsistent with the idea that consumers are overly leveraged. The ratio of debt service to income peaked at 14.3% last year, matching the 1986 record. But the huge wave of refinancing taking place will help bring that ratio down sharply this year. Furthermore, every dollar of credit card debt now supports about twice the transactions of a decade ago. Removing the transactions component of credit card debt results in an adjusted debt service of 12.7% of income, well below the levels of the 1980s (chart, bottom page 4). If business uncertainty keeps companies from hiring, near term growth would be weaker than the 3.5% we currently expect for the second half. Job gains need to be stronger than the 6,000 posted for July for consumer spending to hold up. But high-frequency data remain encouraging. Jobless claims fell by 15,000 to 376,000 for the week ended August 3, while the four-week moving average moved down to a new 17-month low. So we expect a larger gain in August payrolls. But, if August looks like July, the Fed would probably ease again.