"But will the stock market collapse further in 2001? Most capitalist commentators say no. Indeed, their forecasts in the pages of the Financial Times, the Wall Street Journal, Forbes or Finanzen predict a new rally in stock prices. Behind their optimism lies a belief that, although the US and the world economy may slow down in 2001, it will be a "soft landing". In other words, the capitalist economy is not heading for a recession where output actually falls for at least half a year and unemployment rises; or even worse a depression, where the world economy does not come out of its collapse for years, as in 1883-5 and 1929-32. That would be a "hard landing".
"A colossal shakeout is now under way. It will continue through 2001. Never before in the history of capitalism have the prospects for economic growth, employment and incomes been tied so closely to the stock market. Just as important and dangerous for the prospects for the US and global capitalist economy is the extent to which American households now depend on the stock market for their savings and spending power. If the stock market crashes and stays down, then companies will lose the funding they need to maintain investment and households will lose the backup to spend. Unlike 1987, a Wall Street slump this time will mean an economic recession."
That was how, last January 2001, this column described the view of the majority and my own view of how things would go in 2001. We now know who was closer to the truth.
Last month, the respected National Bureau of Economic Research (NEBR) finally declared that the US was in 'recession'. The NBER reckon it started last March, with the expansion having lasted exactly ten years, beating the previous record expansion that lasted from February 1961 to December 1969 and far exceeding the post-World War II average of four years.
Barely a year ago, the world's leading economic and financial organisations and most economists predicted that the U.S. economy would grow by 3.5% in 2001 and by a similar rate in 2002. Just six months ago, the forecast for the two years was down to 1.7% for 2001 and 3.1% in 2002. The numbers for the third quarter put the year-over-year increase of U.S. real GDP at merely 0.7%. Considering that new data show an economy that is rapidly deteriorating right across the board, a final outcome of less than zero growth until year-end 2001 presently seems the best bet.
The question now is not whether the world is in recession but how long it will last and how deep it will be. The majority view is still optimistic. Most capitalist commentators believe the US economy is already bottoming out and that it is likely to begin a sharp, V-shaped recovery during the first quarter of 2002.
The US financial magazine, Barron's, recently published its Big Money Poll. It found that two-thirds of poll respondents described themselves as bullish or very bullish on the market's prospects up to June 2002. It was the highest level of optimism the poll has seen in years. An incredible 84% of the institutional investors approved of Fed Chairman Alan Greenspan's job performance. The International Strategy & Investment (ISI) group's poll of institutional investors has also found near-record levels of bullishness among professional money managers.
Recently, Morgan Stanley strategist Barton Biggs asked 800 individual investors whether the world one year from now would be better, the same, or worse than before the terrorist attack of 11 September. About 60% said better, 30% the same, and only 10% worse, Biggs reports.
Biggs was not so confident. "I still believe the world economy is weakening and that any V-shaped [recovery] will be later rather than sooner. That's because all the King's Horses and all the King's Men can't put the American consumer back together again."-
Morgan Stanley's chief economist, Stephen Roach has also expressed his amazement at the prevailing optimism. "In a breathless leap of faith, the stock market has made a remarkable bet on the coming economic recovery," adds Stephen Roach. "The financial markets are screaming for an imminent 'V'. I'll continue to take the other side of that call."
Certainly not much of the current economic data can justify a recovery. The US economy shrank faster in the three months following September 2001 than in any quarter since the 1990-91 recession. The business magazine, Fortune's index of business confidence - assembled from a poll of the Fortune 1,000 companies - is at its lowest level ever. Productivity is now rising at just a 1.5% annual rate - the worst in ten years.
The earnings of the top 500 US companies are in a freefall, down 44.9% in a year. The last time earnings plunged this much was in the third quarter of 1938 and the fourth quarter of 1932 (the Great Depression). Every penny of the total profits earned by the 4,000-plus companies on the NASDAQ stock exchange since mid-1994 has been wiped out. Indeed, one company, JDS Uniphase, recorded the largest single loss in the history of civilisation - $50.6bn, in just one year!
The absolute number and dollar amount of company defaults are unprecedented. This year's default total dwarfs by more than 150% last year's record $42.3 billion. Enron, the seventh largest US company in revenues, has gone belly-up. Its stock has collapsed from $90 to a low of 25c, wiping out more than $65 billion in invested capital, almost every single penny invested by its 58,920 investors.
Already this year, a record 230 public companies, with more than $182 billion in assets, have filed for bankruptcy - more than double the assets for all of last year. And that's excluding Enron! US companies have defaulted on $75.2 billion in junk bonds - more than 57% above the record $47.8 billion recorded last year. The most famous US steel company, Bethlehem Steel, defaulted on $179 million in bonds and has now filed for bankruptcy, gutting the portfolios of thousands of investors. US banana producer Chiquita defaulted on $700 million in debt and wireless data provider Metricom defaulted on $300 million. Comdisco, a leading information technology leasing and venture capital company, just filed for bankruptcy, leaving holders of its $2.82 billion in public debt out in the cold.
And corporate indebtedness continues to rise. The non-financial debt-to-equity ratio has climbed from 77.4% at the end of 2000 to 81.2% at the end of September. That means businesses are in no position to resume investing, even at low rates. Industrial production growth is now slightly weaker than at the bottom of the early 1980s recession.
On Madison Avenue, times are also tough. Advertising spending fell 7.8% for the first three quarters of 2001 compared with the same time period of 2000. And on Wall Street, year-end bonuses will likely be at least 30% less than last year's, or about $4 billion less than the prior year's bonanza.
"Last year," reminisces an article in the Wall Street Journal, "the well-groomed bankers - inspiration for Bret Easton Ellis' novel American Psycho - fed the city's economy with their fat bonuses. They easily dropped $200,000 at Gucci on a Saturday shopping spree and test-drove new BMWs with serious buying intent. It was the norm for a 28-year-old top associate at a bank like Goldman Sachs or Salomon Brothers to earn a $90,000 salary, topped off with a $210,000 bonus. At the height of the bubble economy, people played the money game as though it really mattered. Money seemed to mean everything to people...even though they spent it as though it were nothing."
It has been two years since the mania reached its zenith. Times have changed. All across the economy, people are rubbing their eyes and straining to see what the future holds. And almost everywhere, they see earnings melting away like snow in Miami. Stocks are down - with the broadest measure, the Wilshire5000 off 27% from its high. Wall Street bonuses are expected to average about 30% lower than last year. "Scrooge puts lid on pay raises in '02," says a headline from Southern California. First year associates at law firms are getting only half the bonus they got last year, reports the New York Times. Bonuses are extremely important, explains the NYT, because young lawyers measure their success almost completely in terms of money and jump from one firm to another in search of the highest salary. The law firms have to play the game, too, or they will lose their talented associates.
And between the two coasts, the story is much the same. Even assembly-line workers in Elkhart, Indiana, are getting slimmed down bonuses and less overtime - if they still have jobs at all. Never before in U.S. history have so many people depended so much on the profit performance of US companies. Over the last ten years, a sizeable portion of the workforce has moved towards incentive-based compensation plans. If the company does well, so do its employees. While profits and share prices were rising, the shipping clerks and marketing managers, as well as the CEOs, could anticipate an increase in earnings - often in the form of a big bonus at year end. But this year - as perhaps never before - the bonuses are smaller.
But the real pain is still to come in job losses. Businesses are hell bent on cutting back, not spending more. Since October 2000, they've fired 2.2 million US workers. They've cut down their help wanted ads to the lowest level since 1982. They've slashed expenditures on new technologies to the bone and outlays on travel almost to zero.
Some consumers are spending again - but only if the prices are slashed or the credit is free. Sure, cars are rolling off the lots across America. But no wonder, with purchase terms of: no money down, 0% financing and no payments until 2003. But there's no profit in this. Ford CFO Martin Ingliss commented, "The [financing] programs are very expensive and unsustainable." Ford warned it would make a loss of about $900m - about 50 cents a share - in the fourth quarter and faces a loss of about $1.3bn for 2001 - the company's worst result in almost a decade.
Massive price-cutting in the Christmas shopping season may keep things going for a while. But as soon as these special deals run out, you're going to hear the clicking sound of millions of pocketbooks slamming shut once again.
Barton Biggs remarks again: "I met with the CEO of one of the premier industrial companies. He reported that business across a broad variety of diverse product lines was still weakening and that pricing power was non-existent. Margins were being squeezed and profits were under pressure. He saw no reason as yet to be optimistic about 2002."
Nevertheless, the conventional wisdom seems to be that interest rate cuts by the US Federal Reserve and fiscal stimulus through tax cuts will somehow guarantee renewed economic vitality in 2002.
Certainly Alan Greenspan has been trying to cook up enough bubbles in the economy. This Harry Potter of central bankers has continued his march to zero interest rates. But the Fed's money pumping will not end the decline. At best, it will only generate temporary lulls and upticks. At worst, it will just raise expectations and cause even greater disappointments - and more panic - for investors. The Fed can pump in another trillion dollars and drop the Fed funds rate to zero and it still wouldn't be enough to spark a real recovery in the economy
This time last year, the International Monetary Fund, world capitalism's foremost financial institution, forecast over 3% growth in the US economy and even more for the world as a whole in 2001. It has had to eat its words. Now its forecast is 2.4% for the world economy for 2002. But the IMF is worried. It said the overhang created by past over-investment and high levels of consumer debt might depress demand and lead to growth being even lower than the already pathetic 0.7% forecast for the US.
The European Central Bank has also said economic growth in Europe will be as little as 0.7% next year, the weakest in at least seven years. And remember this is the same ECB that blithely told us last year that Europe was immune from any slowdowns that might affect the US and Japan.
Prospects are even worse for Japan, the world's second largest capitalist economy. The yen has tumbled to a three-year low against the dollar after a report said Japanese companies are failing at the fastest pace since 1984. In 2001, 1,851 companies filed for bankruptcy and not just small companies. A retailing company called Daiei is going down with $18bn in debt.
Emerging economies are collapsing in the wake of the global slowdown. Argentina goes into the New Year in a state of collapse, with the economy falling at over 10%, unemployment at over 25% and the currency likely to be devalued by 50-70%.
The optimism of capitalist politicians, economists and investors is so much wishful thinking and hogwash. The optimism after the 11 September attack on Wall Street repeats ominously the optimism of 1929 after the October stock market crash. Then stocks began to recover strongly amid wildly bullish comments and confident statements by Wall Street personalities. Then, as now, the central bank provided easier credit.
Charles Mitchell, who headed the National City bank, announced soon after the 1929 crash that the trouble was 'purely technical' and 'the fundamentals remained unimpaired,' while the President of the Continental Illinois Bank said, 'There is nothing in the business situation to justify any nervousness". It's the same tone with Alan Greenspan now.
Again, back in 1929, President Hoover assured Americans that "the fundamental business of the country - that is, production and distribution of commodities - is on a sound and prosperous basis." The Treasury Secretary then, Andrew Mellon, was bullish too: "I have every confidence that there will be a revival of activity in the spring." These words are similar to those uttered by President Bush and Treasury Secretary O'Neill now.
In 1929, the world's leading economist Irving Fisher stated that the "factors leading to the crash of the American stock market were not factors of depression but of prosperity, unexampled prosperity." Well, I reckon we're headed into the biggest economic smash-up in history.
It's always dangerous to say something like that. After all, science and technology will continue advancing, and most people will continue working and saving. And downturns in capitalism have usually been brief. But the underlying economic forces increasingly suggest that the recession of 2001 is developing into the depression of 2002.
The whole world is levered on what happens in the US, even more than it was in the 1930s. The US and Japan account together for 46% of world output. When the US stops buying foreign manufactured goods and the Japanese do the same, it's going to hit world trade like a sledge hammer.
The danger in 2002 is competitive devaluation and deflation, driving the world capitalist economy further down. Japanese officials are now talking openly of their intentions to weaken the yen against the dollar, to make Japanese imports cheaper in the US and world markets. This is clearly going to hurt many US businesses. And in the last month alone, the yen has slid over 7% against the dollar.
And the rest of Asia will not stand idly by and let the Japanese lower their currency so that they lose market share to the US. They will also work to make their currencies weaker so their industries can compete with Japan. That is not good for profits in the US, because it is not good for US companies that depend upon exports to Asian foreign markets. The steel industry is an example. The Bush administration is already demanding that other countries cut their steel production, as US steel firms are having serious problems against cheaper foreign steel.
And deflation is gathering pace around the world. In Japan, consumer prices have been tumbling virtually non-stop for two years. A hamburger costs half of what it did a year ago. Cotton polo shirts are 60% cheaper. Real estate prices are down 50-60%, and even 80% in key areas. In the US, the going price for registering an Internet domain name has fallen from $70 to $7. You can now buy almost-new computer servers made by IBM, Compaq, or Sun for 30 cents on the dollar. The price of a 128-megabyte dynamic random access memory chip, or DRAM, used in virtually all personal computers, plunged from $14 in February to under $2 - an 86% plunge in just 10 months (it recently recovered slightly to $2.80). No wonder companies that make them are losing money hand over fist.
In the world commodity markets, prices are also collapsing. Crude oil plunged 24% in a mere ten days in October. The Middle East oil producers along with Norway and Russia have hurriedly agreed to try and restrict production from the New Year in order to get prices back up above $20 a barrel. It won't be easy to achieve if world demand continues to slide.
Since the beginning of 2001, copper prices have fallen over 12%; zinc down 28% and nickel down 14%. Natural gas hit $11 per million BTUs back in December 2000. Now it lingers a hair above $2. In October, US wholesale prices suffered the sharpest decline since the government began keeping records in 1947. In just one month, vegetables fell 11.4%, passenger cars fell 4.7%, and gasoline prices fell a whopping 21%.
So optimism reigns in the stock markets as we start the New Year. The US economy is going to recover and quickly. The dollar remains strong. Yet industrial production remains terrible, unemployment is rising fast, Christmas bonuses have been slashed and Christmas shopping was mixed at best. Elsewhere, the global slowdown gathers pace and prices of goods sold by exporters continue to soften and even fall. And some highly indebted developing economies, like Argentina, have gone belly up, threatening the prospects for Brazil and the rest of South America. This is the optimism of fools.