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Economy by Igor Greenwald (Author Archive)
The Dumbest Guys in the Room
(Page all of 2)
No costume jewelry makes a louder statement than a small national flag pinned to the lapel. Flags on buildings are public displays of our common patriotism. Flags on lapels, on the other hand, have evolved into authority symbols for politicians and table-pounders on basic cable.
An Old Glory miniature, attached to the breast, conspicuously claims for its owner an extra measure of patriotism. It also serves as a dead giveaway. I choose to believe nothing a flag wearer ever says about any market, unless it's the market for lapel pins.
Perhaps I'm overly sensitive to such displays having grown up in the former Soviet Union. Back in the USSR, the hammer-and-sickle was part of the Politburo dress code, an essential fashion accessory for any two-hour speech on the triumphs of collectivized agriculture.
Those farm reports papered over economic rot that would lead to the empire's breakup within a decade. And while I don't think we're headed for a Soviet-style collapse, I keep hearing echoes of those speeches in recent official pronouncements on the economy and the stock market.
We're another superpower living on credit, borrowing heavily to finance unsustainable consumption. Our terms of trade are deteriorating by the day, hastening payback. And the louder the murmurs of concern, the greater the temptation to recite the modern-day American equivalent of those Soviet farm reports. I'm referring, of course, to the latest earnings growth statistics. But in a pinch, any off-the-shelf nostrum will do, just as long as it points us to a happy ending.
CNBC's Ron Insana: "Now let me ask you a little bit about the stock market, though, because it's had such a bad week. Is it causing you any worry, at all, with respect to what it means to the economy or, you know, what it means to your Social Security reform plan, for instance?"President Bush: "Well, I think the — you know, the stock market is an indicator of people looking at value. I believe this economy and I believe like most economists believe, that this economy is steady and strong. But people are constantly adjusting and I suspect some of the stock market has to do with the price of gasoline. You know, the price of crude oil tends to go up and the stock market tends to go down.
"But, nevertheless, I think long term, the stock market is, will reflect the long-term strength of America. I mean, we are, we're growing steadily. Relative to other economies, ours is a, ours is a strong economy as well. So, I mean, not only are [we] strong at home, but internationally we are competitively strong."
There, hope you feel better. Those huge trade and budget deficits now approaching 6% of the GDP? Nothing to worry about, long term. Larry Kudlow, who six weeks ago was singing the praises of "Bush's Supply Side Boom," believes it's our manifest destiny and birthright to fritter away the savings of Chinese peasants in perpetuity. But then that tiny lapel pin is a powerful mind control device.
Good thing Donald L. Kohn is free of such encumbrances (at least as far as I can see.) The Federal Reserve governor was blunt during a recent speech about the potential consequences of current economic trends:
"Although the overall state of the economy is favorable, some aspects of the current situation might be viewed as worrisome. In particular, beneath this placid surface are what appear to be a number of spending imbalances and unusual asset-price configurations. At the most aggregated level, the important imbalance is the large and growing discrepancy between what the United States spends and what it produces. This imbalance, measured by the current account deficit, has risen to a record level, both in absolute terms and as a ratio to GDP. Moreover, the cumulative value of past current account deficits — the net foreign indebtedness of the United States — is also at a record high, again both in absolute terms and as a ratio to GDP."Kohn eventually goes on to tell his listeners, as tactfully as possible, that in economic terms the economy has been hitting the crack pipe. Have a look:
"To the extent that current spending behavior is built on realistic expectations — in particular, for future short-term interest rates, the exchange rate, rates of return on capital investments in the United States relative to those abroad, and housing price appreciation — the transition should be relatively orderly: Asset prices should adjust gradually to changing developments, as should the spending patterns of households and firms."But if current expectations are badly distorted, then the way forward may not be so smooth. Eventually, reality always asserts itself over wishful thinking, and such realignments are sometimes abrupt, as illustrated by the collapse of the high-tech bubble a few years ago. In such circumstances, asset prices can adjust sharply, and private spending may also respond quickly, making it difficult for monetary and fiscal policy actions to provide a timely enough counterweight to keep the economy continuously on track."
But let's, for argument's sake, take the salesman's word over the economist's about long-term American strength. Toyota (TM) may be running circles around General Motors (GM), Airbus may be taking market share away from Boeing (BA) and Vodafone (VOD) might be far better run than, say, Qwest (Q). But never mind. Let's assume we're still a hyper-productive nation of go-getters, rather than a tribe of borrowers awaiting the next cargo drop from overseas. Does that mean our portfolios are safe? I fear it does not.
It's simply not true that the stock market moves in any sort of lockstep with general prosperity. There was a crash in the middle of the Reagan/Bush/Clinton boom. The last bear market began a full year before the economy slipped into a recession and outlasted the economic downturn. And there are plenty of similar precedents overseas, such as in China, where the Shanghai market has tanked despite years of double-digit economic growth.
So what we have here, on one hand, are vast and growing international imbalances that many economists fear could adjust with a bang rather than a whimper. And on the other hand, we have quasi-patriotic appeals to buy and hold the stock market, if not with the disposable income we can't seem to save, then with a share of the payroll taxes.
We're supposed to do this because America will remain strong forever more, at least in the official rhetoric of politicians lacking fiscal discipline. We're supposed to do this because betting on America is always right, because our workers are the world's most capable and our bosses smarter than the rest. Ultimately we are urged to invest because the economy will do fine in the long run.
If any of these rationalizations sounds plausible, I urge you to try to divorce your investing decisions from patriotic clichés. It's possible that the stock market is discounting something more than a run-of-the-mill "soft patch." And even if it's not doing that now, one day in a none-too-distant future, it will.
We've bought an awful lot of stuff on credit, are buying it still and have no intention of paying any of the principal back until our creditors make us. When they do, I expect our economy and investing portfolios to shrink for a while. But at least we'll still have our flag pins.
Economy
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