Japan, is still in denial. Six years ago, we worked our way out of our
banking crisis, and they are still screwing with it. There doesn't seem
to be any leadership there. And you can't expect an awful lot out of
those banks now. They really are undercapitalized -- particularly if the
stock market keeps going down -- and especially when you start looking
at their lending to Korea. So I can't give you any handy-dandy way out
of Asia. Or parts of it. Don't forget, China itself is kind of
insulated. Taiwan is still in good shape.Schafer: Why is China
insulated?Neff: Its currency isn't convertible.Schafer: But China's
currency has appreciated 50% recently against the Asian countries with
which they compete in exports. So what happens if, as has happened,
Chinese inflation goes way down? What happens if they then start having
real problems in their export economy?Rogers: There's a black market,
too.Zulauf: Worse, people have calculated that China needs 8%-9% growth
just to keep employment stable at the current rate. It has about 130,000
government-owned companies, half of which are operating in the red.
Support for those companies and the other rotten entities in the Chinese
system will go away in two to three years -- the government has said
they won't support those companies.Schafer: They're going to lay off one
million workers from the railroads in the next three years.Zulauf: The
state-owned companies employ 130 million workers. CPI inflation in China
is now zero. The growth rate for last year was about 8% and declining.
With what's happening in other parts of Asia, China's exports are going
to go down. Which probably brings its growth rate down to 4% or so. So,
problems will be mounting in China.Neff: Four percent is not exactly
chopped liver.Zulauf: True, but it won't be good for China's employment
situation. Neff: Yes, but then what? Are you implying there'll be great
civil unrest out in the boonies in China?Zulauf: Then you'd have the
army --Rogers: You'll either have terrible economic unrest, or political
unrest. You may have both. China can't simply ignore the rest of the
world collapsing around it.Neff: The Asian uncertainty, on top of
whatever uncertainty you already have in our domestic market, makes it
just seem to me that our market really has its neck out. Here we are at
22 times earnings, a 1.6% yield, and there isn't going to be any
earnings growth in the new year. There isn't going to be earnings
growth. When you've had these kind of multiples in the past, which has
been rarely, there have been expectations of pretty good zip in earnings
around the corner. You ain't going to get that.Q: Do you think that the
U.S. consumer is going to be affected psychologically and economically?
Neff: No. One, the consumer is not exactly a dumbo to start with. They
have become very good at waiting for price, or something attractive, to
coax their dollars out of them. The savings rate has moved up to 4%.
People say that is terrible, versus the rest of the world, but we're
hardly starting from a position of having a shortage of capital in this
country. So there's enough wherewithal for the consumer to continue to
respond. Unless somehow they're eventually panicked. But boy, it takes
an awful lot.Q: John, 50 million people presumably have an interest in
the stock market, one way or another. Don't you suspect a substantial
market decline would affect their spending habits?Neff: That was the cry
after the '87 crash. You're quite right -- there are more people in the
stock market. But there hasn't been that much wealth effect visible.
Obviously, Gucci and Saks and German cars and some of those other
indulgence areas did okay.Perkins: A single-family lot in Palm Beach
last week sold for $17 million. There are some little signs of the
wealth effect.Neff: There are only so many Gabellis in the world.
Schafer: Someone told me that 1,000 people on Wall Street got a $5
million bonus last year.Q: Still, watching the stock market has actually
become the national pastime in the last couple of years. That has to
have affected consumers' attitudes.Neff: I see the consumer hanging in.
He isn't going to be ebullient. But he isn't going south, either.
Samberg: Didn't a survey come out last week saying consumer confidence
is at its highest level since 1969?Q: Glad you brought that up. Do you
know what happened to the market then?Samberg: It went down -- a lot. I
remember it well. I got into the business two years before that.Q:
Exactly. Samberg: But it seems to me that you had some differences. You
had guns and butter and Vietnam. You had Mr. [William McChesney] Martin
at the Fed, instead of Mr. Greenspan -- whether he is the second coming
or not.Perkins: You had a balanced budget. The first in years and years,
in '69.Samberg: We have another one now.Perkins: That's what I am
saying!Samberg: When a balanced budget is about to go into a high
inflation era, where there are oil shortages and stuff like that -- that
is something to worry about. Now, I don't see where that's something to
worry about --Rogers: Art, you're saying we have the highest consumer
confidence we've had in 29 years, and it is going to go higher?Samberg:
No. Not at all.Rogers: That is what is bearish.Samberg: I am hearing a
lot of hypotheses, like I've always heard, from people who have been
generally negative. And I don't know how much of it is fitting the
current scare to the mood, versus reality. I personally don't know how
to predict it. It is a challenge. But a lot of it, I think, is old
bear-market talk in new dress.Q: What old bear-market talk? There hasn't
been an old bear market.Samberg: I know. But people have been fighting
the bull market for years.Ziegler: The other bullish thing for the
consumer is that wages are going up faster than inflation.Gabelli:
There's a lot going for the consumer. He has a tax break. More broadly,
if you step back and consider that, for 100 years, you had a tug of war
between a centrally planned economy and a free-market system -- and the
free-market system won when the Berlin Wall came down -- you can gain
some perspective. Right now the excesses that have developed are
creating a really nasty problem in Southeast Asia. And they're going to
have to come to grips with how to cope with that. But the silver lining
in all this -- if we don't get the equivalent of a Smoot-Hawley -- is
that we should emerge with the free-market system actually reinforced in
places where there still have been strangleholds on the markets --
whether in the way China handles Hong Kong, whether in South Korea with
their chaebols. So we have problems. But they're birthing pains.Another
thing that is fairly obvious to anyone, like Arthur, who has studied
Japan, is that if you were a CEO in Japan -- other than a few
enlightened individuals like [President Nobuyuki] Idei at Sony -- you
basically went to your country club and got compensated for how much of
the market, on a global basis, your product commanded. Never did you get
compensated for share of profits. If we see a major revolution take
place out of these seeds of discontent and challenges that we face right
now, you could see "share of profits" becoming the mantra for the CEOs
of the future in these countries. That'd lend itself to a lot of very
bright sides.Having said that, there is no question you need a Marshall
Plan-equivalent for Southeast Asia. But in 1973, nobody sitting in this
room could tell you how we were going to handle $3 energy going to $10.
Neff: Likewise, nobody knew how we'd cope with the S&Ls collapsing.
Gabelli: You have problems. Structural imbalances on a global basis.
You've heard about all the capital invested in Southeast Asia and the
problems with that. If I were a Thai businessman, I'd cut my price down
to my variable incremental cost and try to export as much as I could --
beggar thy neighbor, if I had to.Rogers: Mario, in 1973 the U.S. was a
creditor nation by a gigantic amount. Now we are the world's largest
debtor nation. Who is going to bail us out -- bail the world out -- this
time?Samberg: We don't need a bailout.Rogers: Half of Asia does. What do
you mean, the world doesn't need -- Schafer: Don't worry. Jimmy has to
put that statement in every year.Gabelli: Let's do some numbers. You
have a trade deficit of, say, $125-$150 billion in the U.S. -- the run
rate. I'm just cuffing the numbers. Roughly $50 billion of that, the
last time I looked, was with China and $50 billion was with Japan. A
small portion was with the newly industrialized countries -- whatever
they call them. NICs. A big part of our trade deficit is also due to the
importation of oil -- and a big part of that, at the margin, is not
going to increase, because either GDP is shaved by 1%, or prices drop.
Zulauf: Or both.Gabelli: Or both. When I try to analyze what impact
these changes have on the U.S. economy and on the companies I follow, I
look at the consumer -- who, last time I looked, was still two-thirds of
GDP. I say to myself, "The consumer is in fabulous shape." I mean, they
are rooting for the Denver Broncos, as opposed to Green Bay.Ziegler:
Boo!Gabelli: They are basically fat. Full employment. They have been
working hard, earning extra bonuses, making a lot of money. Maybe a
little less overtime isn't so bad. All of a sudden, the $140,000
mortgage on my house, I can refinance at 1.5% less. That's $150 a month
I'm going to save. In addition, my gasoline prices are coming down. It's
a warm winter -- my heating fuel bills aren't as high. Hey, I'm in
pretty good shape. Do I worry about my stock portfolio? Hell, everybody
tells me I'm in it for the long term, anyway.So my sense is, yes, Asia's
problems will shave 1% or 2% off GDP growth. Come the spring, you will
have a few more issues to worry about. But I have to live through this
-- maybe, because I am uncertain, I won't spend that extra $1,000 to go
to the Caribbean. But the economy is going to muddle through this, just
like we did in 1973.So, what are my concerns? Yes, at the margin, we've
lost 1% of real GDP growth. Profits that four weeks ago you might have
expected to be up 6% on the year, now are going to be flat. The market
has to adjust.Neff: That 6% was a modest expectation. The Street's
earnings estimates -- if you averaged what all the analysts were saying
-- probably were 12% or 15%.Go to part 2 of the RountableParts 2 and 3
of our 1998 Investment Roundtable will appear in the next two issues of
Barron's.
Return to top of pageCopyright c 1998 Dow Jones & Company, Inc. All
Rights Reserved. |
