|by Wes George
Waiting For The Big One
You were probably thinking things are starting to look up again in the economy. The stock market is acting bullish. It's now certain Clinton isn't going to get impeached. I'm not sure why that's important, except that the stock market hates uncertainty even more than lecherous presidents. Perhaps you were wishing you had bought in the last down-turn and wondering if it's not too late to buy back in now?
Don't. It's a bull trap. The last year of following the world economy has turned me short-term bearish. There are so many reasons for this that it's hard to say which ones are the most important. It's the cumulative effect that is worrisome. I'll list out as many as I have room for but first all let me state, for the record, I'm still a long-term bull. I'll have to write an article next week on why I'm bullish long-term to counter-balance this weeks' bearish sentiments. So, if you're a long-term investor, that is looking out three plus years (hey, that's long-term in the high tech world), you can skip this Apple Trader column cause you'll be just find. Fast-buck artists and traders may want to read on...
1. Currency Chaos: The whole monetary crisis thing is really underrated, probably because no one but George Soros and economic professors, and not all of them, even really understand it. I know I don't.
Here's what I do understand. The high stock values on Wall Street and in the European bourses are based on the hope that the emerging global economy will be very, very good to business. Free trade across formerly closed or tariffed borders means far more efficiency in the economy leading to higher productivity and swelling profits. The problem is every sovereign state issues it's own fiat currency at the whim of their central bankers who hark to the clarion call of politics, nationalism and/or corruption. It's as if the economy of the U.S. were based on fifty different state currencies - some floating, some pegged, some not worth the paper they're printed on. The fact is that the world economy doesn't need more than a handful of currencies to operate. A single global currency would be the ideal "best of all worlds" situation. This, of course, is not politically possible. Already the economies of many countries are based on the underground exchange of dollars. Take the farce of the Mexican peso as an example. According to the Wall street Journal, "The price of the dollar in pesos has increased by 81,000 percent in the last 22 years; inflation has averaged 37 percent per annum in the same period. The stable peso of the 1960's has lost 99.8 percent of its value." The average interest rate in Mexico is about 47 percent. The scary thing is that the state of the peso is the rule, not the exception, in the developing world.
Unfortunately, I'm no visionary and can see no acceptable political solution to the monetary crisis, however, it's obviously not going to go away. It has the potential to be the instability that causes a major bifurcation in the steady-state of the global economy. Perhaps this is what egghead economists mean when they use the term "creative destruction".
2. Japan is doomed: Their problems are our problems. Japan cannot save itself for reasons inherent in their culture and will continue to spiral downward. Japan has organized it's economy for full employment and to capture market share. The US economy is based on profits and on a flexible, not static, work force. It has been said that the Japanese are the only tribal society to successfully survive the transition to an industrial capitalist state intact. The Japanese concept of honor and "face" is the big obstacle. For example, you've probably heard about the Japanese gangsters extorting money from giant Japanese firms like Mitsubishi and JAL. To Americans, this brings up images of gangsters threatening corporate officers with cement galoshes and meat freezer hooks. But nooooo, in Japan the gangsters garnish protection money just for agreeing not to show up at the annual shareholder's meeting in Gucci suits and asking polite but embarrassing questions about the books. The corporate officers are so terrified of "losing face" over issues of poor management that they have developed extremely unorthodox methods to hide losses. Japanese shareholders don't ask financial questions as this would be seen as very rude. The banking system is systematically hiding trillions of dollars in losses.
Another problem is the huge rate of personal savings in Japan and other Asian nations. According to G. Pierre Goad, an economic journalist in Singapore, the savings rate in some Asian nations are as high as 50 percent. "The only time you have that kind of savings in the U.S. is during a war. But a healthy, steady-state economy has some consumption. We've got a structure, a Pacific economy, in which the U.S. consumes and Asia produces. The ability of the U.S. to consume is now being tested." Ironically, Americans often get blamed for hogishly consuming the world's resources but if we slow down our consumption the global growth party is over. There is an enormous build up of capacity in Asia without the corresponding rise in consumer demand. Again, Mr. Goad, "One way of looking at it is that the rest of Asia imitated Japan but it's mathematically impossible for everybody to run Japan-sized trade surpluses with the rest of the world." I'm clueless as to what the exact effect this will eventually have on the global economy but it smells real bad.
3. The Y2K problem: Yeah right, all the world's computers are going to crash at midnight so clean out the old cold war bomb shelter. Actually, I doubt the Y2K meltdown is going to be very severe. Still, I think I'll skip the Times Square midnight celebration. Y2K, as overrated as it is, will have a drag effect on the profit margins of many big automated corporations and thus a dampening effect on GDP growth. Just a little, but it's the combination of things that's going to spell "market downturn" in the next couple of months. Perhaps the biggest effect of the Y2K hullabaloo is the uncertainty. Markets just hate uncertainty. Better buy some bonds. Part of this uncertainty has nothing to do with computers. The year 2000 has an almost mystical resonance for many people, even though it's an absolutely arbitrary marker. Every nut case in the world using a Gregorian calendar is going to come out of the closet to celebrate the end of the millennium in their own special way, whatever that might be. Uncertainty is bad.
4. Deflation. Deflation: is when the price of commodities and other consumer products tend to go down. There are lots of possible reasons for deflation. The two biggies are lack of liquidity and overcapacity. The fed can help the liquidity situation by loosening monetary policy, i.e. print more money and lower interest rates. The fed has resisted this because the old men on the Federal Reserve Board are still terrified of inflation. The truth is that more than half of all U.S. currency in circulation is outside the U.S. borders acting as a defacto global currency and therefore can't contribute to inflation here at home. That's why the U.S. dollar keeps rising in relation to other currencies and our trade deficit is sky-rocketing. The world is hording dollars. Reducing capacity is much more painful as the Asian situation now illustrates. The whole world has spent a generation fighting inflation and has yet to recognize that we are in the midst of the exact opposite problem. The last bad bout of deflation in this country was during the Great Depression. Deflation makes companies lower the price of their goods and gouges profit margins. Lower prices = lower profits = slower growth = a stall in stock market gains. It could be the end of the great bull market of the 1990's. Even a tight labor market and the increased wages of workers hasn't reversed the deflationary trend.
5. Irrational Exuberance: None of the above problems would be so bad if stock markets weren't based entirely on human frailties like greed, fear and blind faith. Today the markets are way above their historic trend lines. The Dow is 2,000 points up from late 1996, and 4,000 up from 1995. That's too much, too fast. During the last decade there's been a growing tendency for Americans to use the stock market as a safe haven for their retirement nest egg and kid's college funds. A fine idea during times of inflation such as the Nixon/Carter era when money invested in bonds or savings deposits could actually lose value but perhaps less so in today's nosebleed market. Americans actually have more money in mutual funds now than they have in savings accounts. One day everyone is going to wake up to the overvalued position of the market and decide to take their profits en masse. That will result in a market over-correction presenting us with the last great buying opportunity of the century. Of course, one could argue that I just missed the boat during the most recent market downturn. I don't think so. The recent supposed correction was too short and too shallow to be The Big One.
A strong enough downturn could cause a stampede towards the door with titanic mutual funds driven by the latest computer trading algorithms leading the way. We could all be trapped in a burning theater of our own design. An unlikely scenario, sure, but one worth being well-prepared against. Don't let the last couple of rah-rah years in the stock market tempt you into abandoning the basic conservative rules of portfolio diversification.
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Wes George writes about the financial side of being a Mac nut. Wes has followed Apple's finances for the last 7 years and comes to The Mac Observer every Monday to tell all about his opinions. He is, in his own words, "inordinately fond of money." If you would like to write Wes, make it nice. Someday you might own a company that has something to do with Apple, and Wes will probably still be writing for The Mac Observer...... On the other hand, Mr. George is known to love a rousing, hair-raising debate, so send him your worst!
Disclaimer: This column is for informational and entertainment purposes. While Mr. George may be sage indeed, his writings can not be construed as a solicitation to buy, nor an offering to sell any particular stock. As with any trading in the financial markets, you must use your own judgment to make the best trades that you can. Neither The Mac Observer nor Wes George may be held accountable for trading advice.