-->Unreasonable Expectations
The Daily Reckoning
Paris, France
Monday, 6 January 2002
----------------
*** Another Great Depression? Who's talking about a Great
Depression?
*** Keynes is back... The January Rally...is it over?
*** Gold over $350... Dividends back in style... A winter
wonderland...and more!
----------------
"Don't expect another Great Depression," says economist
Robert A. Levine in the International Herald Tribune.
"Deflation is neither probable nor the greatest danger," he
continues.
Why not?
Because"Keynes is still with us," he says.
Last we heard, here at the Daily Reckoning, Keynes was dead.
But the great English economist seems to have been pulled
from his eternal rest and set to work to help avoid another
recession. Keynes' contribution to economics was his
suggestion that governments run surpluses in fat times so
that they could run deficits in lean ones, thus
counterbalancing the natural cycle of the business sector.
"That lesson was not well learned by policy makers in the
1930s," Levine explains,"but it was proved by the massive
deficits and consequent prosperity of WWII."
Everyone believes that WWII spending got the nation out of
the Great Depression. We are in a very small minority who
believe it is not so...so the burden of proof is once again
on us.
Rather than take up the burden of proof earnestly, we merely
point at it and laugh. In WWII almost the whole nation was
set to work producing things nobody really wanted - guns,
tanks, ships - things that actually destroyed wealth. The
things that people really did want - butter, automobiles and
so forth - were in short supply or rationed. Nor as we recall
did similar wartime spending by Germany and Japan do much
good for their economies.
If WWII America was a model of how to run a successful
economy, then the post-WWII Soviet Union should have been the
best economy in the world. It spent the next 4 decades
producing things people didn't want...while rationing or
forbidding the things they did.
And Japan's economy should be roaring now. In the 1990s, in
addition to the monetary stimulus of near-zero interest
rates, the Japanese ran the world's biggest programs of
fiscal stimulus. Everywhere you look in Japan you see a
government project under construction - a dam, a road to
nowhere, a cement river-bank - things no one really wants
except the contractors. Recently, per acre, the Japanese
poured 10 times as much concrete as Americans - turning the
island into one of the ugliest countries in the world.
Levine doesn't even mention Japan.
Like everyone else. He's confident:"Conservatives [in
Congress and the administration] will practice pragmatic
Keynesianism, and another Great Depression will be avoided."
Here at the Daily Reckoning we were not expecting a Great
Depression... We expect conservatives and liberals to react
more or less as the Japanese did - with massive monetary and
fiscal stimulus. And we expect the economy to respond more or
less as the Japanese economy did - with ups and downs...and a
long, slow, soft depression, not a great one.
U.S. stocks are still ridiculously overpriced...so we buy
gold, gold shares, euro bonds...a few very cheap stocks...and
we wouldn't mind being surprised.
Eric Fry with the latest news from Wall Street:
-------------------
Eric Fry in New York...
- The stock market has kicked off the New Year in grand
style. After the first two trading days of 2003, the Dow
stands proudly atop a 3.1% gain at 8,602, while the Nasdaq is
ahead 3.9%. Encouraged by this promising start, the bulls
hope and believe that their suffering has finally come to an
end. Three straight years of misery will not become four...or
so they believe.
- But weren't most investors entertaining nearly identical
hopes at this same time last year? All of the finest minds on
Wall Street predicted that share prices would rise smartly in
2002."The recession is over," they promised."The economy is
recovering nicely from the problems caused by 9/11...The tech
sector will rebound sharply in the second half of the year."
Such misguided macro-economic forecasts inspired equally
misguided forecasts about the stock market.
- UBS PaineWebber's strategist, Ed Kerschner, expected the
S&P 500 to climb 35% to 1,600 in 2002 - almost twice what it
is now. Abby Joseph Cohen was looking for the S&P to reach
1,300 by the end of 2002. For a while - a very short while -
the bullish forecasts seemed to be on target. Stocks rallied
in January of 2002, which seemed to validate the assurances
by Wall Street strategists that the market would not -
indeed, could not - fall for three straight years. Alas, the
January rally faded and the universally bullish strategists
were once again, universally wrong.
- Jim Stack, editor of Investech Research, examined the stock
market forecasts for 2002 offered by 22 panelists appearing
on Wall Street Week with Louis Rukeyser."Not one analyst
guessed that the Dow would close 2002 under 10,000 (let alone
under 8,400)," Stack writes."That followed an equally
embarrassing year in 2001, when not one of the 22 panelists
thought the Dow would close under 11,000 (it actually
finished at 10,021)."
- For the record, of the 22 panelists on Rukeyser's show to
make a forecast, Marty Zweig called it best, with his
prediction that the Nasdaq would finish the year at 1,700.
Most forecasts were 700 to 1,000 points higher than Zweig's.
The Nasdaq's actual closing level at year-end was 1,335.
After such an abysmal record of forecasting, are the
strategists acknowledging their error and adopting a bit of
humility? Of course not. They are simply teeing up their new
bullish forecasts and letting them fly, just like they did in
2000, 2001 and 2002.
- Unfortunately, richly priced stocks tend to fall, not
rise...And the stock market is still pretty pricey."U.S.
stocks may have already had their January rally," Bloomberg's
Justin Baer grimly predicts."The Standard & Poor's 500 Index
jumped 3.3 percent during the first two trading days of 2003.
That's more than double the average for the month during the
past half-century, according to Ned Davis Research."
- Bloomberg's Baer bases his downbeat call on a familiar
litany of non-bullish items like disappointing corporate
earnings, soaring oil prices and saber-rattling in North
Korea. Baer didn't mention the fact that the stock market
still seems pretty richly priced at 30 times earnings. But he
could have. Even after three straight down years, US stocks
are expensive. At best, they aren't cheap.
- And yet, Wall Street strategists predict higher share
prices ahead in 2003, just like they did in 2000, 2001 and
2002. In fact, they've been predicting pretty much the same
thing year after year, ever since there was an actual wall on
Wall Street. Al Goldman of AG Edwards, Joe Battapaglia of
Ryan Beck & Co., Global Partners Securities' Peter Cardillo
and UBS's Tracy Eichler are among the non-descript gaggle of
strategists who are predicting gains that range from 8.5 to
more than 20 percent.
-"The last time the market fell for four years in a row was
in 1929-1933," says one hopeful strategist,"and, by no
stretch of the imagination, do we see economic conditions
comparable to that in the period ahead." That's a comfort.
Aren't these the same folks who"by no stretch of the
imagination" foresaw the stock market falling over the LAST
three years?
- The hopeful strategist concludes,"Strategists who guessed
wrong for the last three years should have the odds with them
for 2003." Unfortunately, the forecasters in 2002 also
believed that the law of probability was on their side. And
it was. But the stock market fell anyway. Richly priced
stocks tend to fall...And those are the only odds that an
investor should care about.
----------------
Back in Paris...
*** Gold closed over $350 for the first time in 5 years.
***"Dividends are coming back in style," says John Shoven,
economist at Stanford. Baby boomers, beginning their
retirements, are going to need income. Despairing of selling
stocks for big capital gains, they're going to look to the
stock market for income.
But where will the income come from? S&P stocks are already
paying out 53% of their earnings - up from 45% they paid in
1981, when you could get 6% dividend yield. In order to
increase dividends just to 3%, they'd have to pay out every
penny in earnings.
There are only a couple of ways in which dividend yields
could rise - either companies have to earn more money, or
stock prices have to fall.
Don't count on higher earnings. So far, during this
'recovery' stage, profits have been falling - an
unprecedented experience. And there is not much reason to
think they will get much better soon. Businesses have already
cut expenses. Expense cuts produce quick increases in profit
margins for an individual company. But one companies expense
is another's income...so the net effect throughout the
economy is negative. What produces profits is capital
investment...of which there has been very little. Companies
typically build new factories, hire new workers, and sell new
products at a profit - that is what gives them earnings to
distribute to their shareholders.
But policy makers have encouraged consumer spending, hoping
to hold off a worse recession. This consumer spending by
Americans has done wonders for the Chinese economy -
currently expanding at an 8% rate. But it merely deprives the
U.S. economy of the savings and capital investment it needs
to produce profits.
Since earnings are not likely to increase, the only way
dividends might go up would be for stock prices to do down. A
4% dividend yield would imply a Dow below 4,000.
*** Paris was a winter wonderland over the weekend. It began
snowing on Saturday. Roads closed. Neighbors from out in the
country spent 20 hours, with small children no less, in a
traffic jam-up on the toll road to Paris.
--- advertisement ---
You Could Make Profits of 151%, 332%, 668%, AND MORE In
the Months Ahead Regardless of What Happens in the Market...
You are invited to discover a world of"SECRET" investments!
You could to turn $10,000 into $1 million or more in the next
few years, even if the stock market tanks. Sound too good
to be true? No, it's not...
One of our current recommendations has TRIPLED in less than
a year... and more gains are on the way with this one. Join
our elite group of investors so you too can enjoy these type
of profits from my secret world of investments. To learn
more, click below:
SECRET WORLD OF INVESTMENTS
http://www.agora-inc.com/reports/OST/SetForProfits/
--------------------
The Daily Reckoning PRESENTS: Not necessarily what 'will'
happen in 2003, but what 'ought' too... at least.
UNREASONABLE EXPECTATIONS
by Bill Bonner
"The U.S. economy has surpassed all reasonable expectations,"
writes David Hale, chairman of Prince Street Capital hedge
fund, in Barron's.
In our view, both the economy and the stock market flew by
reasonable expectations sometime in the middle of the last
decade. Both went up when they should have gone down.
Here at the Daily Reckoning, we have a forecasting approach
all our own. We do not try to figure out what will happen,
for it is impossible to know. Instead, we look at what ought
to happen. Without 'will' we have only 'ought' to do the work
of forecasting. 'People ought to get what they've got
coming,' we say to ourselves. In the markets, they usually
do.
In the late '90s, even after the nation's greatest central
banker, Alan Greenspan, noted that investors had become
irrationally exuberant, they seemed to become even more
irrationally exuberant. And then, when recession and bear
market threatened, these irrational investors were sure that
the very same central banker who couldn't stop a bubble could
nevertheless stop it from springing a leak.
Alas, this proved a vain hope; a bear market beginning in
March of 2000 reduced the nation's stock market wealth by $7
trillion - to January 2003. But another remarkable thing
happened at the same time - nothing much.
"The 2000-2002 stock market slump failed to produce a
financial crisis," writes Hale."Wealth losses in the U.S.
equity market since March 2002 have been unprecedented. They
have been equal to 90% of GDP, compared with 60% during the
two years after the 1929 stock-market crash. But during the
past two years only eleven banks failed in the U.S. compared
with nearly 500 during the 1989-1991 and thousands during the
1930s."
And in the economy - the same remarkable lack of anything
special. Unemployment lines grew longer, but not so much as
you would reasonably expect. And consumer borrowing and
spending didn't fall, as you might reasonably expect, but
rose."In 2002, mortgage refinancing shot up to $1.5 trillion
compared with a previous peak of $750 billion in '98," Hale
tells us.
Following a mild economic downturn in 2001...and after the
opening shots in the War Against Terror..."it is difficult to
imagine a more benign scenario than the 3% growth in output
that the economy actually enjoyed during the past year," Hale
concludes.
What bothers us about this situation is precisely what
delights Mr. Hale - we could not reasonably expect it. What
ought to follow a spectacularly absurd boom is a
spectacularly absurd bust.
But the Japanese bubble wasn't completely destroyed in a year
or two either. Economists don't like to cast their eyes
towards Japan - because they cannot explain it. Neither
monetary nor fiscal stimuli seem to have done the trick. But
if you could grab the back of their heads and turn them
towards the Land of the Rising Sun they would see that after
a mild recession GDP growth continued in Japan following the
stock market peak in '89 - at about 2% to 3% per year. This
went on for several years. But then the economy went into a
more prolonged slump. By 2000, GDP per person was back to
1993 levels!
In both cases, Japan and the U.S., what ought to have
happened was something very different. Why something
different didn't happen is the subject of today's letter...
along this additional forecast for 2003, or beyond: it will.
Japan's example, we are told, doesn't apply anywhere outside
of Japan. Because the Japanese created a form of capitalism
which was almost unrecognizable to westerners. It was a
system of cross-holdings, state intervention, cronyism, and a
stock market that had become a popular sensation. In the
financial frenzy of the late '80s, Japanese companies ceased
to act like capitalist enterprises altogether, for they
ignored the capitalists. Profits no longer mattered. Assets
per share had become an illusion. All that seemed to count
was growth...market share...and big announcements to the
press.
What kind of capitalism could it be where the capitalists
didn't require a return on their investment? And was it so
different from the U.S. model? American businesses seemed to
care even less about their capitalists than Japanese ones
did. As stock prices peaked out on Wall Street in early 2000,
profits had already been falling for the last 7 years.
They continued to fall, sharply, for the first 2 years of the
slump. Executive salaries soared - first as profits fell...
and later as many of the biggest companies in the country
edged into insolvency. Plus, the managers gave away the store
in options to key employees - further disguising the real
costs of business.
Despite all the hullabaloo about investing in New Economy
technology actual investment in plants, equipment and things-
that-might-give-investors-higher-profits-in-the-future
declined. In the late '90s, net capital investment dropped to
new post-war lows.
Instead of paying attention to the business, U.S. corporate
executives focused on deal-making, acquisitions and short-
term profits - anything that would get their names in the
paper.
You'd think an owner would get upset. But none of this
mattered to the capitalists - because they had ceased to
exist. Old-time capitalists who put money into businesses
they knew and understood... with the reasonable hope of
earning a profit... had been replaced by a new, collectivized
lumpeninvestoriat whose expectations were decidedly
unreasonable. The patsies and chumps expected impossible
rates of return from stocks about which they had no clue.
Management could run down the balance sheet all it wanted. It
could make extravagant compensation deals with itself. It
could acquire assets for preposterous prices... it could
borrow huge sums and then wonder how it would repay the
money. It could cut dividends...or not pay them at all; the
little guys would never figure it out.
The lumpeninvestoriat in Japan, as in the US, ought to have
jumped away from stocks, debt, and spending immediately
following the crash in the stock market. The market could
have plunged...and then recovered. But government
policymakers and central bankers were soon out in force -
spreading so many safety nets, there was scarcely a square
foot of pavement on which to fall.
Of course, the little guys never knew what they were doing in
the first place... was it such a surprise that they did the
wrong thing again; holding on... dragging out the pain of the
correction...and postponing a real recovery? In Japan,
analysts got weary waiting. Then, the slump continued...
slowly and softly, like a man drowning in a beer tank.
For the moment, the U.S. economy continues to run ahead of
'all reasonable expectations.' Eventually, reasonable
expectations will catch up. Or, at least they ought to.
Bill Bonner
|
Thread-Ansicht
Mix-Ansicht
Reihenfolge
Thread gesperrt
