An Economy Singed: Markets' Mood Reflects Poor Outlook

An economy singed: The markets' mood reflects a poor outlook for America's economy

“AMERICA'S economy is the healthiest in a generation and the strongest in the world.” So Bill Clinton bragged to his fellow summit leaders when they last met in North America five years ago. The Denver G8 summit marked a high point of American triumphalism, with European and Japanese leaders left to squirm uncomfortably in their cowboy hats as their exuberant host extolled the wonders of America's new economy. For the first time in a quarter-century, they were told, the world had an undisputed model for economic success.

How times change. When George Bush visits the Canadian ski resort of Kananaskis on June 26th for this year's G8 summit, he will have much less to brag about. Certainly as far as investors are concerned, the much-touted American model has lost a lot of its allure. They are fretting over several potential economic weaknesses, and also over continuing revelations of corporate America's shoddy accounting, greedy managers and lousy investment decisions—and they are selling.

The results are clear. For the first time since the 1920s, stockmarkets have been falling during the first few months of an economic recovery. The Dow Jones Industrial Average has fallen in ten of the past 13 weeks, and is now down to the levels of early 1999. And the mighty dollar, long a symbol of America's miraculous economy, continues to slide. Since January, it has fallen by 10% against the euro and by 8% against the yen.

To determined optimists, notably Paul O'Neill, America's Treasury secretary and cheerleader-in-chief, none of this behaviour makes sense. “There is an unbelievable movement in the market without...substantive information,” he said of Wall Street last week. Far from losing its allure, the American model has proved how resilient it is, shrugging off the bursting of the technology bubble as well as a huge terrorist attack, with a recession that was remarkable for its mildness and short duration. With productivity growth continuing to surpass expectations, America's economic future still shines more brightly than anywhere else. Once investors realise this, the argument goes, they will abandon their irrational funk.

Mr O'Neill's analysis may be partly right; but his conclusions are wholly wrong. America's economy has indeed shown a striking resilience during the past year or so. Although the new-economy hype of the late 1990s was hugely overblown, American productivity growth remains impressively stronger than it was in the 1970s and 1980s. But despite this, there are good reasons for the markets' current angst.

Doubts about the pace of economic recovery lie behind much of it. Wall Street is still, by any historical measure, extremely highly valued (see article). In so far as they ever made sense, such valuations assumed a speedy return to the extraordinarily high profit claims of the late 1990s. That assumption seems increasingly far-fetched. Mr O'Neill may not have noticed any “substantive information” recently, but others have. In particular, they fret about signals that the American consumer may be running out of steam. May's retail sales fell by an unexpectedly large 0.9%. With no evidence of a rebound in investment, any hint of a flagging consumer suggests that the recovery will be weak at best, and certainly not the robust boom that markets counted on at the start of the year.

The second and even more intractable cause of the angst is investors' loss of trust in American companies (see article). In the six months since Enron collapsed, many of the titans of American capitalism have been toppled. Andersen, which audited Enron's accounts, was convicted last week by a court in Texas for obstructing justice. It will go out of business in August. Several high-profile chief executives have fallen from grace and been ousted from their jobs. The list of companies facing accounting scandals grows longer by the week.

Almost 1,000 American companies have now restated their earnings since 1997, admitting in effect that they had previously published wrong or misleading numbers. As the Securities and Exchange Commission cracks down on creative corporate accounting, more such admissions lie ahead, even among household names. Phoney accounts mean that much of the profit growth of the late 1990s, the ostensible justification for Wall Street's bubbling up to its ephemeral heights, was equally phoney. It is hardly surprising that investors are so anxious.

Disappointment and anxiety have prompted investors, particularly foreigners, to re-examine America's economic model in a new and more critical light. And, unfortunately, several other long-ignored blemishes are now glaring. Notable among them is the country's reliance on foreign savings. With a current-account deficit of around 4% of GDP and rising, America is absorbing an ever-rising share of global savings—a trend that is ultimately unsustainable. Worse, unlike in the 1990s, these savings are not financing a private-sector investment boom. With business investment flat, foreigners are now largely financing Americans' consumption and, increasingly, a rising federal budget deficit.

Driven largely by last year's recession, America's budget deficit is likely to reach 1.5% of GDP this year. Unfortunately the combination of Mr Bush's enthusiasm for tax cuts and Congress's proclivity for spending suggests that deficits of 1% of GDP or more may linger even as the economy recovers (see article). It is no small irony that, just as the sliding dollar suggests that foreigners are becoming increasingly unwilling to pay for Americans' lack of thrift, the Bush administration and Congress are doing their best to pull America's saving rate down yet further.

Add all these things up, and the great model that Mr Clinton touted at Denver looks a lot less triumphant. That does not mean that any new star has taken its place. Set against Japan's slow-motion implosion and even against Western Europe's still-sluggish economies, America still stands out for its dynamism and flexibility. Its economy remains the “strongest in the world”. But the gap between the United States and the rest has shrunk—and is still shrinking.

Well, gee, time to get a clue?

The Enron-Andersen scandals finally brought to public attention some nasty accounting tactics used by Wall Street to cover up bad news. The tip of the dirty corruption slimeberg is just starting to show.

One really sad story a few years back was the trend for cautious investors to dump utility stocks to grab the brass ring and gamble on dot.coms. Now people are seeing wholesale corruption hammer the markets.

There is no crystal ball. But if al Qaeda bombers start up over here ....

Personally I think our economic "problems" are being intentionally exasperated by American business that wouldnt mind having a weaker dollar. They've been telling us for months, as they've been telling us for years that the outlook in the near future was poor, despite every single indicator from unemployment to inventory levels toconsumer spending pointing to the contrary. Every indicator shows the country restarting the its economic growth, but all we see on the news is speculation on what might go wrong or how conssumers might stop spending, or useless comparisons of year to year unemployment figures when quarterly figures are showing recent declines. Business wants this, and they could not care less about how a weaker dollar could lower the value of everyday people's assets.

It's not just business that wants all the news to be gloom and doom economically. It is the Demonrats. They cheer every downturn in the stock market. And, I believe, their "plumbers" are out their doing their job of shorting the market then selling it down. They could care less who gets hurt - actually they care a lot. They want our economy to go into a depression so Hillary can step on the stage in 2004 as the modern Roosevelt - Eleanor this time!

President Bush needs to bring in top economic minds - a summit = and get things moving in the right direction as much as is possible for him to do.

I urge him to do this. In the fall - it is the economy that will be motivating everyone - despite the war on terror.

Tax cuts were the beginning - but there must be more. And the Fall campaign could be centered around:

Send me Senators and Congressmen and Women who believe in America and who want to turn our nation around! I need their help - together we WILL cut and keep taxes low, we will get tort reform that is killing both our healthcare system and our businesses, and we will encourage entrepreneurship and small businesses again - the real engine of this economy.

Of all the problems we have - this is the one that I believe is being neglected - to the great danger of our nation. He must, He must, He must - be seen to be taking aggressive action to help the economy - in the common sense, sane way of doing it.

Come on, Mr. President. Your instincts are right. Please, sir, go on offense with the economy.....your team can make a difference - but you need the right team. Bring them in!

This is not remarkable. The 90s are more accurately described as the Clinton Bubble. His 'new economy' was just smoke and mirrors driven by a tech explosion. Clinton was lucky, manipulative, and self-aggrandizing...big surprise.

The promise of high-tech has just as quickly disappeared. The tech-heavy NASDAQ has fallen by about 70%. This is a VERY typical pattern for tech run-ups. The unique factor in the 90's was that the internet-driven run-up promised economy-wide changes. So there were economy-wide over-valuations.

Stocks were WAY overvalued then and they remain so today. Market fundamentals are market fundamentals are market fundamentals. Companies were stuck with wildy over-inflated valuations (I know, poor babies). When reality couldn't match the hype, they lied. Hopefully, the appropriate people will suffer the appropriate consequences.

If anything, stocks will be lucky to remain flat while the economy catches up with their valuations. Expect wild fluctuations combined with a downward trend. And G_d help the market if we slip into a major recession.

The dilemma for Bush is whether to manage to market decline or to leave it alone while it finds its own equilibrium.

Recent market performance, IMO, is not about a shaky economy as much as it is about valuation. With the S&P 500 P/E around the low twenties which is still high by historical standards. I think mid-twenties isn't so high, given interest rates, but to support it takes a lot of confidence. With the spotlight being shown upon Enron, Aurthur Anderson, Global Crossing, Adelphia Communications, and Tyco to name just a few, such confidence is hard to muster. Hence we have a stock market where valuations are being contracted. Call it the opposite of "irrational exhubarence"(sp?)

Simplified it's not the earnings (or economy) but confidence in those earnings being reported honestly.

BINGO! YOU WIN! YOU ARE RIGHT! ... What do you win? You win a stock market recovery, coming soon! once the economic recovery news overwhelms the gloom-and-doom.

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