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of Business Results and Trends in U.S. Market
U.S. Economy: Looming Bust
After Loony Boom
Flight of Capital after Rates Are Lowered to End of Stockmarket Boom?
PHOENIX, Dec. 1 - Amid the media feeding frenzy that focuses on Ryder trucks and not-so-supreme beings in black robes, it is easy to lose sight of some stories that will have a much more profound impact on the lives of average Americans. Our economy is grinding to a halt, and a scant few people either realize it or seem to care. Except, of course, for those who are already up to their necks in alligators in bankruptcy courts.
More than one million Americans who have filed for bankruptcy this year probably could not care less if either Al Gore or George Bush became president, or if Fidel Castro were appointed governor of that banana republic that lies just north of Cuba. For, their spending binge, which the vice president hailed as a sign of the “strong economy,” is now followed by a sobering financial hangover.
Since the start of the year, personal bankruptcy filings have increased by 10%, measured by a moving 12-week average, the Wall Street Journal reported today (Dec. 1). All in all, some 1.26 million Americans will have declared themselves insolvent this year. The consumer debt research firm, SMR Research of New Jersey, projects that bankruptcies will rise as much as 15% next year, surpassing the all-time high of 1.4 million cases set in 1998.
So much for Gore’s “strong economy!”
But a rising tide of financial defaults did not stop other fools from reaching for fools’ gold. National TV networks feasted on scenes of anxious shoppers lining up on Friday, Nov. 24 (“the biggest shopping day of the year,” we are told) in the wee hours of the morning for the privilege of SPENDING money at department stores! Another one of those “only in America” images that make people in other countries shake their heads in disbelief.
But the day of reckoning comes eventually. For most such compulsive shoppers, it begins with the arrival of their credit card bill. “Bankruptcy takes a heavy human toll, and many of those who seek protection from their debts see it as a humiliating admission of failure,” the Journal writes.
“But the economic costs can also be substantial,” the Journal adds. “Creditor losses from debts erased by bankruptcy run into the tens of billions of dollars each year. The filings, meanwhile, may be the harbinger of a significant slowdown in consumer spending that could make a ‘soft landing’ for the U.S. economy nearly impossible.”
"We've just finished one of the plateau periods for bankruptcies, which hit a peak in 1998 and then fell a bit," says SMR President Stuart Feldstein. "But now that we've caught our breath, they're about to go way up again. We're on the verge of another flood."
The Journal explains:
consumer-spending binge of the early 1990s was built on a fragile
foundation of massive household borrowing, so for spending to keep pace
going forward, borrowing would have to continue to increase as well. But
the current increase in the number of bankruptcies means that many
households are having a hard time repaying existing debts, suggesting
they'll be far less eager to amass new ones. And with Americans already
spending every dollar they earn, a reluctance to borrow more money means
the pace of consumer spending can only slow, serving as a significant drag
on the broader economy.”
Low-income Americans - most of whom voted for Gore, according to a Nov. 12 New York Times report - have been among the first to feel the strain. And pain. Unlike the sitting president, who seems to feel everyone else’s pain but his own, the low-income Americans experienced it firsthand.
About 10% of households making less than $50,000 were more than 60 days late on at least one loan payment, a recent survey showed, compared with less than 4% of the families earning more than that amount. Furthermore, it's becoming harder for low-income Americans to work the extra hours or get second jobs - to earn the money to repay their debts.
And so, the growth in consumer spending - the bulwark of the supposedly strong economy and the biggest component of the gross domestic product growth - is starting to ebb. On Thursday (Nov. 30), a new government report on personal income suggested that consumer spending will advance at an annual rate of just 3% this quarter, far lower than the 4.5% pace recorded a quarter earlier. The slower pace could easily translate into a relatively weak holiday season for the nation's retailers, the long lines in pre-dawn hours on Friday, Nov. 24 notwithstanding.
Nor are the increased bankruptcies and slower consumer spending the only signs of a loony boom turning into a looming bust of the U.S. economy.
The Labor Department said that first-time claims for unemployment benefits soared by 19,000 to 358,000 last week, their sixth consecutive increase and a two-year high, the Wall Street Journal also reported today (Dec. 1). The four-week moving average of claims, which flattens out short-term volatility, jumped 12,000 to 343,000. Both measures had been declining for most of the past few years, before beginning to climb several months ago.
Two other reports, which usually attract little attention, illustrate the worsening condition of the manufacturing sector that continues to shed jobs.
Most of the indexes in the Chicago Purchasing Managers' report are now at or near historic lows. The National Association of Purchasing Management-New York said that optimism about the economic future fell in the region despite strong levels of tourism and retail sales.
As if to spruce up the dry statistics with some real life factory sob stories, DaimlerChrysler Corp. said today that it planned to idle more North American factories after posting a 5% decrease in total U.S. vehicle sales during November. The company plans to temporarily shut down two of its 12 North American facilities during the week of Dec. 4. Last week, Chrysler idled three factories in order to reduce overflowing inventories at dealerships. The closings left 13,600 auto workers without jobs that week.
Meanwhile, Delphi Automotive Systems Corp., an auto parts supplier, said it will place more than 1,700 hourly employees - or 3.1% of its 54,000 hourly U.S. work force - at its Michigan, New York and Ohio facilities on temporary layoff, citing reduced volumes.
Bad news from the automotive sector trails an even worse news about the computer PC sales declines that rocked the market yesterday (Nov. 30). This knocked billions of dollars out of the market capitalization of PC vendors, such as Gateway, IBM, Dell, HP, and Compaq. The drop pushed the technology-heavy NASDAQ index down by 4% to under 2,600 points. That’s nearly 50% down from the NASDAQ peak reached in March of this year.
All these business woes meant that the U.S. economy grew at just a 2.4% annual rate in the third quarter - less than half the second quarter's pace. Any sign of slowing makes money-lenders leery of borrowers' future earnings, and therefore its ability to repay. As a result, the recent plethora of bad economic news also has had the bankers twitching nervously, and tightening the credit even to their good corporate clients, the Wall Street Journal also reported today (Dec. 1), in a front page story.
A Federal Reserve survey shows that 44% of U.S.-based banks have tightened standards for commercial and industrial loans in the past three months, in part, because regulators are pushing them to curtail risky lending. Many of the largest and the most profitable U.S. corporations have seen their borrowing costs go up (such as Xerox or Levi Strauss, for example).
Why the sudden credit crunch? Because of the “once burned twice shy”-syndrome. When the Southeast Asian crisis hit three years ago, the flight of capital from that part of the world landed mostly on the U.S. and Western European financial shore. So the last three years have created a cashflow-driven appearance of prosperity in western markets, thus our term - “loony boom.”
During that time, flush with more cash than wisdom, bankers gave money to lots of companies that, in retrospect, shouldn't have been funded nearly so richly. Some financing deals done in 1997 and 1998, which the Journal terms “frothy,” have turned around to bite investors. They typically involved over-leveraged "roll up" companies on acquisition sprees, and Dot.Com and telecom companies with no earnings.
In June of this year, total borrowing by non-financial U.S. companies stood at $4.6 trillion, up 61% from five years before, Moody's says. So far in the fourth quarter, Moody's has been lowering the credit ratings of 3.9 corporate borrowers for every one it raises, the worst ratio since the fourth quarter of 1990.
Also, 3.3% of syndicated loans were considered troubled as of the end of March this year, up from 1.3% two years earlier, according to bank regulators' latest Shared National Credit survey. Now, more debt is going bad. The junk-bond default rate is above 5%, the highest in nearly a decade, the Journal says.
The Journal points out that the corporate Chapter 11 bankruptcy filings this year include firms such as AmeriServe Food Distribution Inc., whose $1.5 billion in debt was more than nine times its annual cash flow. Rattling investors further is the fact that some of the year's biggest Chapter 11 filers have been companies that had investment-grade credit ratings, such as grocer Pathmark Stores Inc. and Laidlaw Inc., a transportation company.
Finally, the Commerce Department also reported today (Dec. 1) that the nation’s personal incomes declined to $8,405 trillion in October from $8,421 trillion in September. We could have probably picked up a few more depressing economic stories in the morning papers, but chose to stop here. Frankly, the preceding compendium was more than enough of a bad news digest even for a hardened analyst.
Maybe we should all let Al Gore take credit for such awesome business hum, just as the Democratic candidate did when he was spinning the news as “the man who invented the Internet?” He would probably not know the difference between hum and humdrum anymore than he would between booing and booming. He’d likely tuck them all away into the same lockbox. And then lose the key?
Poor Al… Everybody’s on his back, making fun of him. Even dogs (see the “Good doggie!”-photo at our web site). Gore is rapidly becoming the Rodney Dangerfield (in getting no respect) of American politics, but without Rodney’s sense of humor. And that’s the man who would be president?
Meanwhile, back to business, what can we expect in the future given such a shaky economy?
Well, let’s start with no-brainers. We can expect the Fed to lower interest rates. Which will weaken the U.S. dollar. Which will help the exports. Which will boost financial results of multinational companies with substantial overseas revenue and earnings contributions. Which will all fall on deaf ears on Wall Street, since the stockmarket has long ago stopped caring about business fundamentals of the companies whose shares it trades.
So why should you care? Because the next pink slip may be yours. So you might as well have a Plan B, just in case.
And what’s that? Move overseas?
If you can afford to.
For, the smart money will leave Wall Street to its conundrums, and invest overseas just as easily as it arrived in the U.S. three years ago. If that happens, we will see an outflow of capital from America. The upshot will be lower U.S. stock prices, especially in overhyped sectors, such as technology, which are already taking a beating.
IBM’s CEO, Lou Gerstner, seems to agree with us. At least his actions do, if not his words. One week after giving Wall Street a pep talk about IBM’s bright future (see Annex Newsflash 11-01, Nov. 10, 2000), the Big Blue boss registered to SELL (!) 700,000 IBM shares worth an estimated $70 million. It was Gerstner’s largest stock disposal ever, surpassing even the blockbuster 678,000 shares that the IBM CEO announced he would sell in August 1999 (see “Best Years Are Behind,” Annex Bulletin 99-28, Aug. 10, 1999).
Way (not) to put your money where your mouth is! The IBM CEO must be getting ready for Washington after he is finally booted out of Armonk. Either way, despite his sweet talk, Gerstner is evidently seeing the writing on the wall, both for IBM and for the U.S. market. And is bailing out while the going is good.
The new president, whoever he is, will not have that option. Rolling out the red carpet in Washington at inauguration time may end up symbolizing the red ink flowing in the rest of the country.
So maybe the way to cut the Election 2000 Gordian knot is to have two presidents - so they can each take half the blame. Gore can be president of New York and California, or example, and Bush can run the rest of the country. Except for Florida. We have a feeling that both presidents and most Americans would be happy to cede it to Castro by now (see this writer’s August 1996 Washington Times column, “When Cultures Collide...”, about the upcoming U.S. break-up, in which we did call Florida “North Cuba” - you can see it at our web site even labeled as such on our 1995 map of the U.S.).
The real problem, however, would be Wall Street, not Florida. For, both presidents are beholden to it. It’s just that Al’s been working the left side of the street, while Dubya has been hitting the wallets on the right side of the street.
So maybe we should erect a new “Berlin Wall” in the middle of the street, with Al getting the left block, while George claiming the right block? After all, it is a street called Wall, isn’t it?
“But wait a second,” can’t you just hear a lawyer arguing, “what is left and what is right depends on whether you stand at the north or the south end of Wall Street.”
“Generally, it does. But what is left and what is right makes no difference to Gore or Bush. Only what is might. Which both of them are trying to grab with all their might.”
Meanwhile, the business editors of the New York Times joined today (Dec. 1) the chorus of economic doomsayers with a story, “Self Employment on the Decline.” But this article turned black into white. It alleged that even the 30 million-and-counting American entrepreneurs are losing their zip to win and their zest to compete. And that the large U.S. industrial companies are somehow benefiting from it. Here’s an excerpt:
1994, the number of self-employed Americans outside agriculture has fallen
by 146,000, to 12.9 million, according to the Bureau of Labor Statistics.
The period between 1994 and 1999, hailed as a golden age for
entrepreneurs, is the first five-year span since the 1960's in which the
number of self-employed fell. By
contrast, for most of the last three decades, self-employment grew
slightly faster than the overall labor force.
in recent years, as the economy has added millions of jobs, the portion of
Americans who say that they work for themselves whether on their own or
with dozens of employees they have hired has dropped by almost one-tenth,
according to the bureau's survey of 50,000 households.
In 1994, 10.9 percent of the nonagricultural work force was
self-employed; in 1999, it fell to 9.9 percent.”
word of caution about the tricks numbers can play.
Between 1994 and 1999, the U.S. work force has grown by about 9%.
Which means that 10.9% of the 1994 number is virtually the same as
9.9% of the 1999 number. In
short, the self-employment stayed basically flat.
So the Times is obviously trying to make the facts fit its views,
given the bombastic headline and the opinionated “news” story.
a surprise," said David G. Blanchflower, an economics professor at
Dartmouth, who writes about entrepreneurship. "We don't really
is clear, economists say, is that much of the widely believed hyperbole
surrounding the Internet and the new economy has exaggerated the ease with
which people can hang out their own shingle.”
again, the Times appears to have formed an opinion and then is trying to
retrofit the data to it. Just
like that famous trial lawyer who finished his summation to the jury with
the following remark: “And those, ladies and gentlemen of the jury, were
the conclusions upon which I based my facts.”
Even the supposed 146,000 entrepreneurial self-employment
deficit over five years is a mere one percent of the total U.S.
employment. But the most
important point that the Times and its professorial sources are missing is
that successful entrepreneurs - CREATE JOBS!
And that some of the successful entrepreneurs that were start-ups
or were non-existent five years ago, are LARGE companies today.
AOL, for example. Back in
1994, the reference point the Times had chosen for its story, AOL was a
virtual start-up. Today, AOL
is s a household name and a corporate giant with capitalization of about
$100 billion. AOL employs
over 15,000 employees, not counting the Time Warner payroll of about
70,000 people (AOL is in the process of acquiring Time Warner).
Yet the Bureau of Labor statistics that the Times used, which
reflect only self-employment, would have missed such huge American
entrepreneurial SUCCESS stories.
In addition, the Times story makes no mention of the
destructive effect Washington’s globalist policies have had on small
entrepreneurs in this country, as in many other countries around the
world, especially in the manufacturing and retail sectors (for more on
that, see the next story). Nor
does it pin the blame for it on the real culprits - the Wall Street sharks
- on whose behest Washington has been carrying the “free trade”
globalist flag around the world for decades, and spending the U.S.
taxpayers’ money (think Mexico, Russia, Indonesia, Brazil…).
extent to which the Democratic Party’s political hogwash, along with its
big industrial advertisers’ self-interests, has permeated even the
business editorial room of this New York “liberal” paper can best be
seen from the following paragraph:
the strong economy, it seems, large companies desperate for additional
workers have managed to lure employees from all over, in part by offering
some of the benefits of self-employment. At the same time, the
difficulties of entrepreneurship have become less tolerable.”
what we mean? Here’s the
Times echoing the Al Gore hogwash about the “strong economy” and
hailing “large companies” as supposed winners in today’s market.
the opposite is true, of course. The
ONLY hope the U.S. economy has if it is to recover from the
cashflow-driven illusion of prosperity created by Wall Street and
Washington is if it does churn out more entrepreneurial success stories
such as AOL.
this were some “ma and pa” local newspaper spewing out such nonsense
in the face of irrefutable FACTS that we presented in our earlier story
(“U.S. Economy: Looming Bust after Loony Boom”),
the Times piece wouldn’t have been worth the time or the ink we’ve
already spent on it. But
given this paper’s reach and range in polluting millions of readers’
minds across America, and its propensity to present the “liberal”
propaganda and its advertisers’ interests as “facts,” we thought
that you may appreciate having the record set straight.
“All the news that’s fit to print?” - the Times front page motto. Who are they kidding? How about, “all the news that fits our opinions?”
Happy bargain hunting!
Volume XVI, No. 2000-27
Editor: Bob Djurdjevic
P.O. Box 97100, Phoenix, Arizona
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