Corporate Self-Mutilation (Richebächer) / The Daily Reckoning

verfasst von - Elli -, 05.05.2003, 16:30

-->Corporate Self-Mutilation

The Daily Reckoning

Ouzilly, France

Monday, 5 May 2003

--------------------

*** The Bull is Back...maybe...

*** Still Bullish after all these years...unemployment at
6%...the dollar!

*** Gold down...profits down...but portfolio managers still
upbeat...

--------------------

"The Bull Is Back," says the front page of this week's
Barron's. The paper says that"America's upbeat portfolio
managers...see the Dow rising nearly 10% by year end."

The paper does not mention that these are the same
portfolio managers who saw the Dow rising 10% last year,
the year before, and the year before.

Not that they won't be right about the Dow rising in some
year...but whether it is this one is anyone's guess.

Still, technology stocks are up more than 10% so far this
year. It is a little like old times. Microsoft is trading
at 9 times sales, just as though we were at the top of a
bubble. And investors are once again putting money into
equity funds - $1.6 billion in March. Not a lot of money,
but better than the $10.6 billion they took out in
February.

Stocks rise against a wall of worry, say the old-timers.
What bothers us is not the wall of worry...but the open
road of complacency running up to it. Even after three
years of stock market losses...unemployment at 6%...12 rate
cuts...a trade deficit equal to 5% of GDP...soaring federal
and state deficits - portfolio managers are still"upbeat."
And investors are still putting their money in these
managers' mutual funds. [Which, by the way, could be a huge
mistake. See: The Coming Crash of Your Fund Portfolio
http://www.dailyreckoning.com/body_headline.cfm?id=3135 ]

And the dollar? It's just another thing not to worry about.
"Like other disaster scenarios that people get worked up
about - Y2K, Skylab - the big, bad dollar drop has never
happened," CNN reassures us.

No matter what they say to pollsters, Americans are still a
confident race; they still seem to think that bad things
only happen to other people, and the rules that govern
other people's markets bend around America like a speeding
ticket in the hands of a friendly judge.

In Japan, for example, over the course of a 14-year bear
market, investors have gradually, painfully given up on
stocks. At the height of their bubble market, Japanese
households had half their wealth in stocks, up from less
than 10% two decades earlier. Now, the figure is down near
10% again.

Back in 1980, only 6 out of 100 American households counted
stocks among their wealth. By 2001, 52% had stocks.

Eventually, the number will work its way back down. Then,
when portfolio managers are waiting tables, and Barron's
stops announcing a new bull market every month or two, and
American households once again have only 10% of their
wealth in equities...then, stocks can begin to find a
toehold or two in the wall of worry.

Right, Eric...?

------------

Eric Fry in New York City...

- The stock market roared ahead last week, as the Nasdaq
gained 5% over the five-day span to 1,503 and the Dow added
3.3% to 8,583. The major averages have now rallied about
16% from their March 11 lows. What is the stock market
celebrating? The economy's endless loss of jobs, or the
endless slide of the U.S. dollar?

- As Addison Wiggin reported over the weekend, the U.S.
labor market weakened significantly in April, as companies
shed jobs for the third straight month and the unemployment
rate jumped from 5.8% to 6%. Non-farm payrolls fell by
48,000, following close on the heels of losses totaling
124,000 in March and 353,000 in February. The economy has
lost 332,000 jobs over the past 12 months, shed jobs in six
of the past eight months, and idled more workers than it
employed for the last three months in a row.

- It gets worse...The manufacturing sector shed 95,000 jobs
in April - the worst job loss in the factory sector in 15
months."Manufacturing firms have cut jobs for 33 straight
months," CBS Marketwatch reports,"a carnage that now
numbers 2.3 million jobs. Employment in the sector is at
its lowest level in 42 years."

- Meanwhile, the dollar is fairing no better than an
unemployed welder. The greenback is sliding against every
major currency...and even many of the minor ones.

-"Could this be the beginning of America's long-awaited
current-account adjustment?" wonders Morgan Stanley's
Stephen Roach."The problem is the gap between nations with
current-account deficits (mainly the U.S.) and surpluses
(mainly Asia but also Europe) has never been larger. And
for a saving-short U.S. economy, a dramatic deterioration
of America's fiscal position points to an ever-wider
current account deficit over the next few years - moving
from a record 5.2% of GDP in late 2002 into the 6.5% to
7.0% range by late 2004...The only question in my mind is
whether the dollar falls quickly or gradually."

- The dollar made a series of new four-year lows against
the euro last week."The mighty U.S. dollar - against which
almost all countries measure their own money - is on the
ropes, staggering yet again after two years of waning
strength," the Toronto Globe and Mail reports."Last week,
the greenback suffered a particularly nasty drubbing. The
Canadian dollar - which went over 70 cents (U.S.) yesterday
for the first time since April, 1998 - is at a five-year
high against the U.S. dollar, as is the New Zealand
dollar."

- Maybe Roach is right. Maybe we have finally reached the
epic"tipping point" for the U.S. dollar.

-"All of which leads us to the nightmare scenario,"
remarks CNN Money."It comes up every few years, and it
goes like this: All those global portfolio managers,
worried about the hits they're taking from the dollar, are
going to start selling U.S. assets, which is going to: A)
send U.S. stocks lower and B) further damage the dollar.
Which is only going to make the global investors (and U.S.
ones) more twitchy, and beget more selling. Which will
beget more selling. Pretty soon you have a massive rush to
exit U.S. assets, and a global financial catastrophe."

- We at the Daily Reckoning have no trouble imagining such
a scenario. But nor do we have any trouble imaging that the
dollar might lose its value slowly and imperceptibly, like
an evaporating puddle. Of course, the speed of a dollar
decline does not alter the ultimate outcome. Even a slow,
"orderly" devaluation would be costly for those of us who
own a few of these distinctive green banknotes...Maybe it's
time to hold fewer of them.

------------

Bill Bonner, back in Paris...

*** Gold backed off a little on Friday, but is still over
$340. The free subway daily,"20 Minutes," tells us that
drug dealers are suspected of moving their profits into
gold in order to launder it. Two gold dealers from the rue
Vivienne were charged with laundering as much as a million
euros each week for the last five years. If governments
decide to outlaw gold in order to protect their paper
currencies from competition - they will probably do so as
an anti-drug, anti-terrorism initiative.

*** U.S. executives"don't care whether their boards are
diverse or not diverse," said Warren Buffett over the
weekend,"...they care about how much money they make..."

They don't care much about making profits either. Profits,
as a percent of GDP, have been falling since the '80s. A
remarkable article entitled"Securities: The New Wealth
Machine," published in 1996, explained that profits didn't
really matter, anyway.

"History, manufacturing, exporting, and direct investment
produced prosperity through income creation," begins the
Foreign Policy article. But now,"the new approach requires
that a state find ways to increase the market value of its
stock of productive assets...an economic policy that aims
to achieve growth by wealth creation therefore does not
attempt to increase the production of goods and services
[or profits], except as a secondary objective."

Of course, this"new wealth machine" slipped a gear in the
last three years. But Americans still believe they are
heirs to a special bequest from the gods that allows them
to escape from the normal, tedious methods of wealth
creation. More from the good doctor below...

---------------------

The Daily Reckoning PRESENTS: Far from creating wealth,
says economic gadfly Kurt Richebächer, the cult of
"shareholder equity" has ravaged corporate balance sheets
and is, in fact, impeding the recovery.


CORPORATE SELF-MUTILATION
By Dr. Kurt Richebächer

To create wealth through rising asset prices is the one
great fallacy and folly in America's shareholder value
model. To create business profits through mergers and
acquisitions and cost-cutting is the other big fallacy and
folly that has done great and lasting damage to the
economy. The reality is that Corporate America's profit
performance has persistently gone from bad to worse since
the early 1980s.

The thing to see is that this has happened not despite
these new strategies, but because of them. Narrow-minded
microeconomics, focusing exclusively on shareholder value,
clashed with the compelling, opposite laws of
macroeconomics. What looked like new, highly sophisticated
microeconomics was, from the macro perspective, utter
economic nonsense.

By manipulating share prices upward through grossly
overpaid mergers and acquisitions, managers satisfied their
shareholders and themselves. That is, of course, the
aspired, supreme goal of America's new equity culture.

But unfortunately, the spectacular and highly desired
positive effect on market valuations implies a whole
variety of macroeconomic effects - on profits, business
fixed investment, debt levels, balance sheets, interest
expenses, corporate net worth, the current-account deficit
- that, on balance, overwhelmingly harm the economy. It is
virtual corporate self-mutilation.

Trying to assess the past, present and future, we have
traced and explored the development of these harmful
effects in detail back to the 1980s. As to the most recent
developments, we have to say that across the board, these
features and signs lack any meaningful improvement,
suggesting to us that the U.S. economy is close to a
relapse into recession.

America's economy is by long tradition a high-consumption
economy, with low rates of saving and investment. Remedying
this structural deficiency was the declared primary aim of
the much-heralded supply-side Reaganomics. In hindsight, it
is evident that this experiment grossly failed on all
accounts. Rather, national savings and net capital investment
plunged to unprecedented new lows. Profits and net
investment, two other key measurements, were virtually flat
over the whole period, implying for both a steep fall as a
share of GDP.

As promised, the economy was effectively restructured, but
exactly opposite to the declared intention. In 1989,
personal consumption accounted for 65.5% of GDP, as against
62% in 1979. At the same time, the share of gross fixed
investment in the nonfinancial sector shrank from 12.9% to
11.1% of GDP. National saving temporarily fell to 2% of
GDP, compared with an average of almost 8% in the 1970s.
The current account of the balance of payments exploded
between 1981-87 from a small surplus into a deficit equal
to 3.5% of GDP.

What propelled the economy's growth during these years was
definitely not booming corporate investment on the
economy's supply side, but soaring credit and debt growth
on the part of consumers and the federal government,
driving the economy's recovery from the demand side.

Corporations, too, stepped up their new borrowing. For the
first time, though, it was not for new investment, but
mostly for mergers, acquisitions, stock repurchases and
leveraged buyouts. As corporate debt soared while new
investment lingered, the corporate sector's net worth
suffered a steep decline. It was the obvious beginning of
America's casino capitalism, in which corporations are
supposed to make money without any regard to the real
economy. Measured by the GDP aggregate, economic growth
appeared quite stellar, yet its pattern and structure was
grossly imbalanced. After a brief, sharp spurt, business
fixed investment faltered again. Business profits went
nowhere, while the economy's current account skyrocketed
temporarily into a huge deficit.

Assessing an economy's development, we focus, first of all,
on two aggregates: trends in net investment and profits of
the nonfinancial sector. During the 1980s, both went
nowhere in the United States. Measured as a percentage of
GDP, they ended the decade at record lows.

Far from improving the economy's supply side, Reaganomics
drastically ravaged it.

We come to the 1990s. Actually, they divide into two
strikingly different parts. For the consensus, the years
until 1996 are the bad part with sub-par economic growth,
while the following years became the great, new paradigm
years.

Healthy economic growth, as we have stressed many times,
shows primarily in high rates of capital formation and
profit growth. Both always go together. By these two
measures, the U.S. economy performed best in the first half
of the 1990s and miserably in the 1980s and the late 1990s.

Actually, profits and net capital formation had their most
excellent performance in more than two decades in the first
half of the 1990s. After their protracted, poor growth in the
1980s, both suddenly took off in steep upward curves.

Before-tax profits of the nonresidential and nonfinancial
sector soared from their recession-low of $226.5 billion in
1991 straight towards $504.5 billion in 1997, more than
doubling within six years. Even more impressive was an
unprecedented steep rise in nonresidential net investment
from barely $100 billion in 1991-92 to $407.3 billion in
1997, virtually quadrupling. It was a typical investment-
led cyclical recovery.

Now compare what happened to these two crucial aggregates
in the following three new-paradigm boom years from 1997 to
2000. Profits abruptly slumped from $504.5 billion to $423.
Nonresidential net investment continued to grow from $299.7
billion in 1997 to $407.3 billion in 2000, but it did so at
a sharply slower pace than in the seven years before.

We have reviewed this recovery of the U.S. economy in the
early 1990s in the hope of finding some clues for the
present situation. We did, but these clues are
overwhelmingly on the negative side. Considering profit
prospects as the single most important condition for a
sustained economic recovery, we have focused in particular
on the specific causes behind the sharp profit recovery in
the early 1990s and found that all of them are presently
missing.


Sincerely,

Kurt Richebächer,
for The Daily Reckoning

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• Corporate Self-Mutilation (Richebächer) / The Daily Reckoning - - Elli -, 05.05.2003, 16:30
  • Re: Corporate Self-Mutilation / De-Industrialisierung Amerikas? - Palstek, 05.05.2003, 16:56