[Posted 7:15 AM]
Washington…and Keynes
One couldn”t help but think of John Maynard Keynes this past
week, as the debate over the state of both the federal budget and
the U.S. economy raged. As I wrote in a recent “Wall Street
History” piece (7/13/01), over the years Keynes has been
associated with liberalism and heavy government / deficit
spending, but, in fact, he was also for huge tax cuts in times of
economic distress, a policy advocated by Republicans Ronald
Reagan and George W. Bush. This latter part of Keynesian
thought often gets distorted because during the time he was
advising FDR, in the midst of the Great Depression, very few
were paying income taxes of any kind, so for that particular
generation, Keynes told FDR he had to spend, spend, spend his
way out of the economic mess. FDR faintheartedly followed his
prescription, with limited success, until World War II rolled
along and the spending side, and the economy, took off.
Now turning to today, what you have is a party, the Republicans,
who supported the tax cut medicine, yet they also want to reduce
the level of federal spending (at least in theory), while many
Democrats already are talking about repealing portions of the
Bush tax package, as well as increasing spending.
Oh, it”s a hell of a lot more complicated than that, of course, as
both parties talk out of each side of their mouth, but this
increasingly bitter argument takes place with the following
economic backdrop, as defined by Alan Greenspan and the
Federal Reserve this week, which lowered interest rates for a 7th
time this year, to 3.5% on the federal funds rate, the lowest since
April 1994.
“Household demand has been sustained but business profits and
capital spending continue to weaken and growth abroad is
slowing, weighing on the U.S. economy…risks are weighted
mainly toward conditions that may generate economic weakness
in the foreseeable future.”
OK. So the Fed, at least, isn”t saying the U.S. economy has
bottomed, let alone in the rest of the world. And we also learned
this week that when the economy slows, revenues don”t flow into
government coffers as much as they do when the economy is
humming.
Which means that when you have a Republican president, the
Democrats, both in Congress and the media, can have a field day.
The New York Times: “(Bush) inherited the strongest economy
in a generation and the largest surpluses in history, and in a few
months we”ve seen those surpluses slip through our fingers.” [Of
course we now have the 2nd largest surplus in history…but
whatever…]
Democratic Senator Kent Conrad: “This is fiscal mismanagement
big time.”
My New Jersey paper”s front page blared: “Federal Budget
Surplus Runs Out.” Another headline read, “Bush reckless in
managing surplus.”
First off, let”s all take a deep breath and calm down. But as I
mentioned last week, Republicans are going to lose this debate
(unless their chief messenger gets his act together), because the
vast majority of Americans will blindly follow what the media is
shoveling, and if 90% of this group is of a liberal-bias, ergo, the
elephants are in deep trouble come 2002, unless any rebound in
economic activity is robust.
Yes, the Bush administration”s April estimate for the fiscal 2001
surplus was $280 billion, and now it”s $158 billion. And the
non-Social Security surplus has fallen from an estimated $125
billion to $1 billion. How did this happen? Well, we received a
tax rebate of $40 billion while, because of the collapsing
economy, tax receipts are off $45-$50 billion. [The rest is
assorted other stuff, like Condit”s girlfriend”s discarded watch
box.]
Of course the Democrats are livid about the tax cut. If you have
a normal job and didn”t have time like I do to explore the issues a
little further in depth, you”d think the collapsing surplus is the
sole result of it. Yet as NBC”s Tim Russert (gosh he”s good)
nailed House Minority Leader Dick Gephardt on “Meet the
Press” last week, the Democrats had originally proposed a $60
billion tax cut of their own for this year.
Which means what? This whole debate is one of the most
ridiculous of all time. Whether it”s tax cuts or spending,
positions are all over the board. But it”s time to go back to
Keynesian theory, at least the tax-cutting version. The first thing
you want to do in a slowdown is slash them. Bush has. Then
increase spending (beyond normal limits) if you have to. [On
this issue, though, I”m disgusted that Bush has caved, as he
reiterated on Friday, in allowing 6% discretionary spending.
There is good spending and there is bad. Even Keynes would
have to agree with that.]
Right now, if the slump continues and revenues dry up further,
we”ll go back to deficits for a spell. The bond market may not
approve, but we”ll eventually get the manufacturing sector
running again, and soon we”ll be able to argue anew about what
to do with the surplus. [He typed with feet crossed.]
Wall Street
The equity markets read the Fed”s remarks on Tuesday and
promptly got sick. Recovery, for both the economy and
corporate profits, seemed further off than anticipated. The Dow
Jones sank back below the key 10200 level and it was looking
bleak. But the situation stabilized and then on Thursday, Cisco
and Lucent had positive comments. Well, they were actually far
from positive, but the Street is desperate to make anything look
good these days. Lucent said it might see 10-12% revenue
growth…by 2003. While Cisco”s CEO John Chambers stepped
forward to proclaim that he had looked at the first two weeks of
the fiscal quarter (commencing 8/1) and there were “signs that
our business is stabilizing.”
That”s all the markets needed to hear. On Friday they staged a
broad-based rally to pull the averages into the plus column for
the week. The Dow picked up 183 points, to finish at 10423, or
smack dab in the middle of its narrow recent trading range of
10200-10600. Nasdaq gained 53 and got back over 1900 (1916).
I jumped for joy as my QQQ position rallied enough to put a
smile on my face, and premium lager back in the fridge.
On the economic front, the big positive was the continuing surge
in the housing sector, this time in new home sales, though there
are some signs the pace is slowing (at least in new home
permits). But when your state paper has a front page story
concerning the most expensive home in the state (a Bedminster
estate which sold for $18 million), you know you”re at the peak
in values, at least. There is no denying the positive impact of
lower interest rates, however, as Newsweek points out in its
cover story this week, but some of the mortgage debt being piled
up is staggering. And not coincidentally, perhaps, it was
announced on Friday that bankruptcies skyrocketed 25% in the
second quarter over last year”s pace.
Bonds “sold the news” of the Fed”s interest rate cut, as it was
already baked in the market, and the strong housing figures
spooked traders some, but after the recent rally, a little breather
was to be expected. Negative news on the manufacturing front
(a horrible durable goods report) certainly would lead one to
believe the Fed has at least another 25 basis point cut in order for
October. But, oh, don”t you know a ton will happen in between.
U.S. Treasury Yields
1-yr. 3.32% 2-yr. 3.73% 10-yr. 4.92% 30-yr. 5.45%
Street Bytes
–An editorial comment in the London Times concerning
Treasury Secretary Paul O”Neill: “It is his knack for off-the-cuff
policymaking…consistent only in its unworldliness, that has
made him so dangerous.” Unfortunately, folks, while I like Mr.
O”Neill, the international finance game requires a little more tact.
–Microsoft has a new judge and the antitrust case could be
resolved soon.
–Regarding McDonald”s and its fraudulent games, I thought my
burger tasted fishy.
–And then there is Polymedica and its Liberty Medical unit,
which this week were visited by 85 FBI agents looking into
Liberty”s billing arrangements with Medicare. You don”t like to
have stories like this, or McDonald”s, but I also couldn”t help but
think, thank God that we are still largely a nation governed by
the rule of law. These two cases would never have been
uncovered, in most emerging market countries, for example,
which is why they”re still just “emerging.”
–General Motors said its outlook was just fine for the 2nd half, so
stop bothering them.
–Gateway”s debt was downgraded to junk status by S&P. It was
a year ago that I told you all about my first purchase of a
Gateway PC, which was also junk.
–Europe: German business confidence surprisingly rose (maybe
execs were interviewed at a biergarten), while 2nd quarter GDP
was flat. Next week the European Central Bank is expected to
finally lower interest rates again.
–There were some interesting items in the durable goods
numbers. Orders for semiconductors are down 56% from one-
year ago and PCs are off 28% over the same period. I”d call that
a slowdown. [I didn”t get a college degree for nuthin”.]
–Following up on my discourse recently concerning the coming
euro conversion, the Washington Post had a story Monday which
quoted business executives as saying that the European Central
Bank has badly underestimated their cash needs, while at the
same time massive counterfeiting has already begun. Money
launderers, in particular, are eying the new, 500-euro note (about
$460), a far bigger denomination than they could previously
employ.
–A federal judge threw out suits brought against Morgan Stanley
analyst Mary Meeker, declaring they were without basis. Which
tells me the judge had shorted Meeker”s recommendations, and
was thus quite satisfied.
–Former Treasury Secretary Robert Rubin. “On balance, I”d say
that the likelihood of continued difficulties here and abroad is
higher than the prevailing view of most economists.”
–Warren Buffett is telling confidants that he expects an
economic slowdown of about 8 years in duration, due to the
“hangover effect” from the excesses of the late 90s, according to
the September 3rd issue of Business Week.
–Abby Cohen was savaged when she slightly lowered her year-
end targets for earnings on the S&P 500 as well as the index”s
year-end level (the latter from 1550 to 1500). Actually, this
space labeled her irrelevant long ago and I found the chatter
rather amusing.
–You”ve probably noticed I also don”t beat up on Alan
Greenspan anymore. But those calling for his resignation, now,
are sadly mistaken. The international markets would not take too
kindly to that at this juncture.
–UBS Warburg strategist Ed Kerschner, who 18 months ago was
saying price / earnings ratios were irrelevant…cough, cough…
excuse me, I”m choking to death…is now calling for a 50% rally
by 12/2002, which, believe me, since I don”t short stocks I”d
certainly welcome as much as the next guy. But that would
mean that we”d be right back where we were before, with totally
outrageous multiples. On a different topic, the U.S. dollar,
Kerschner said we could see parity with the euro by 12/02 as
well. Since the euro is about .915 today, if this were to occur
in the prescribed timetable, it is a huge non-event. In other
words, that”s a very orderly decline in the dollar.
–PIMCO”s Bill Gross, on the other hand, is worried that selling
in dollar-denominated assets could pick up, with momentum
traders ruling the day. Foreign holders selling U.S. bonds and
stocks with gusto is the nightmare scenario we all should fear.
Eventually, the Fed then has to step in and raise interest rates to
defend the greenback and it could get uglier. For these reasons,
Gross only favors shorter-term, high-quality paper at this time.
[He”s also dabbling in European bonds, of similar bent.]
–Energy: Oil and gasoline inventories continue to fall, and a
major refinery problem in the Midwest certainly isn”t helping
matters. Natural gas inventories, however, rose, and the price
dropped to below $2.80.
International Affairs
Israel: I said enough last week and frankly there isn”t much to
add. The German foreign minister is attempting to broker “truce
talks,” which at least tells you that everyone is finally onboard…
“peace” talks being out of the question. And regardless of the
outcome (if they are held at all), groups like Hamas are gaining
popularity in the streets of Gaza. That”s all you need to know.
But, I do have to share the thoughts of columnist Jim Hoagland,
who echoed my feelings of the past few weeks on the Arab
moderates.
“This is the moment for Washington to fashion an informal pact
with them to end the influence of Saddam, Arafat and other pan-
Arab extremists…If the moment is not seized, even more
horrible events lie in wait in the Middle East.”
China / Taiwan: At least the U.S. and China are back talking on
the issue of missile proliferation and topics such as China”s
support of Iraq”s air defense network, not that the discussions
will lead to anything of substance. And China allowed the USS
Constellation to dock in Hong Kong, the first such act since the
downing of the spy plane. Of course Beijing knows that they
have an intelligence bonanza on their hands by letting 20,000
American sailors run around a most permissive city.
Meanwhile, the government expelled hundreds from a Tibetan
monastery (I didn”t hear a peep from Richard Gere…must be
vacationing), while Falun Gong members continue to be
persecuted.
On Taiwan, defense officials are not as fired up as they
previously were over our offer to sell them aging Kidd-class
destroyers. They want the state-of-the-art Aegis ships, which we
already said they can”t have. So Taiwan will have to do with
their sampans, I guess.
Lastly, I picked up the following from Dr. Marc Faber. When
discussing the future for China and the other Asian economies,
understand this. China”s labor costs are 6% of South Korea”s
and Taiwan”s, and 3% of Japanese manufacturing wages. That”s
about as clear a reason as I can come up with for the U.S. to stay
very engaged with Beijing.
Russia: There was lots of posturing on the ABM Treaty, with the
Bush administration making clear it will pull out, probably by
November. But I”m still optimistic real progress between the
two nations will be made. Perhaps more importantly, at least for
this week, were President Putin”s remarks that he doubted NATO
would be successful in disarming the rebels in Macedonia. I
agree with that. Putin also said armed force should be employed
to end the violence. Russia, remember, is an historic ally of the
ruling Slavs in this country.
Macedonia: Speaking of which, NATO will soon have 3,500
troops here (half from Britain), on a mission unlike any other
they have had.
Spain: The Basques terrorists continue to ratchet up their
campaign, targeting tourist centers and killing one last week by
planting a bomb in a toy car.
Germany: Chancellor Gerhard Schroeder”s Social Democrats
may form a coalition in Berlin”s city hall with the successors to
E. Germany”s communist party. Simply lovely.
Northern Ireland: A British poll for the Guardian newspaper
revealed that 41% believe Northern Ireland should be joined with
the Irish Republic. Only 26% said it should remain part of
Britain.
Ireland: The technology exodus has begun in full force, Gateway
was joined by General Semiconductor and Tellabs this week in
announcing plant closures and large layoffs, while home grown
Baltimore Technologies will also have to lay off large amounts
of workers. The bubble has burst.
Social Security
If you care about this issue (and honestly, I go through long
periods where I don”t) hopefully you glanced at my “Hott
Spotts” pieces of 8/9 and 8/16, which lay out the various sides of
the debate. Since I promised I”d give an opinion or two long
ago, I”ll keep my conclusions as brief as possible.
–Social Security was not initially intended to be a retirement
program, but it quickly evolved into that. You can argue the
economics behind it, but you can”t deny its success. As a
society, it is only right to take care of our elderly and while
$1200-$1500 a month may not sound like much to some of you,
it keeps most of our parents and grandparents from the bread
line.
–Having said this, there is no law that says every one in this
country is entitled to everything he or she wants. Social Security
should be means-tested (Savings #1). If you don”t need it in your
later years, don”t bitch and moan that you paid into this system
all your life and now get nothing back in return. Just look at
your ample bank statement and say, “Praise to God for giving me
the resources to enjoy my retirement years and I”m glad others of
my age aren”t suffering.”
–Social Security is NOT a ticking time bomb, but it will become
one if the economy grows at historically anemic rates for long,
extended periods of time. This is highly unlikely.
–Once we get our economy cranking again, the importance of
surpluses is to pay off the federal debt (while leaving some for an
orderly Treasury market) now, so if we have to borrow again
down the road (likely) to pay Social Security benefits, or in cases
of national emergency, we can more easily do so. There is
nothing wrong, in and of itself, with the government running up
debt, but, again, in good times it”s only prudent to pay it down.
–Notice how I haven”t mentioned “trust funds.” I won”t. It”s
irrelevant to the discussion.
–Having private retirement accounts for Social Security, as I”ve
always stated, is the single dumbest idea I”ve heard. You all
have some investment acumen, or you wouldn”t be reading this
site, but the vast majority of Americans don”t. But do we
currently get a good return on our Soc. Sec. $”s? No. Could it
be better, by possibly investing in something like Ginnie Maes,
as Newsweek”s Allan Sloan has suggested? Maybe. This is one
of the areas the Bush commission should be exploring.
*And, we need to be continually reminded that we already have
private retirement accounts, like IRAs, which should be
expanded even beyond the generous provisions of the Bush tax
bill. The mechanism is already in place, so use it. Why create a
new one?
–The retirement age for benefits, currently slated to increase to
67 by 2027, should be further raised to 68-70 (Savings #2). With
plenty of warning, like 30-years plus, people have time to
prepare. And obviously, hopefully it”s a moot issue for many.
–Social Security benefits don”t need to rise at the inflation rate
(Savings #3). I could spend 10 pages on this single thought, but
suffice it to say, if your monthly check is $1500 and your
inflation escalator is 3%, cut it 1% to 2%…$1,530 instead of
$1,545. The savings would be huge and you”re still receiving an
increase. Without the last two steps, however, then yes, the only
way to pay out the current level of benefits would probably be a
significant increase in taxes.
–Lastly, we are being bombarded with projections for 2016,
2037, even 2070, which are totally ludicrous. No one freakin”
knows what the situation will be then. It is laughable. Just look
how quickly our economic picture changed from 1998-2000, and
from 2000-2001. How the hell can you establish policy for
2070? Yes, the demographers and actuaries will attempt to prove
you can know with some certainty, but, again, it”s the economy
stupid. If we grow at a solid rate in the future, we have enough
to allow the elderly to live with dignity. But the politicians are
always playing games. Today”s elderly should have absolutely
nothing to worry about, so stop scaring them!
[You”ll be thankful I”m now burying this discussion, hopefully
for months to come.]
Random Musings
–Al Sharpton has launched an exploratory committee for the
purposes of looking at the 2004 presidential race. This is too
good to be true. Sharpton said his campaign would emphasize
reforming the criminal justice system, election reform, and voter
disenfranchisement. No word yet on what he”d do about Russia,
China, and the Middle East. But for now, I have 5 words for
Reverend Al. Ta wa na Braw ley.
–This week Disney premieres “Bubble Boy,” a suddenly
controversial ”comedy.” The producers say they had never heard
of the real bubble boy, which means one of two things; either
they never saw “Seinfeld,” or they have no clue who Merrill
Lynch analyst Henry Blodget is.
–If I won Powerball I would…buy Chex Mix for all the world”s
starving children…no…I would…buy the parking concession at
Newark Airport…yeah, that”s what I”d do.
–Jimbo advises me that the IRS recently granted a $33.6 million
contract to redesign its web site to Accenture, the consulting firm
incorporated in tax-haven Bermuda.
–I have blasted former President Clinton”s past policies in Africa
while he was in office, and this week further evidence emerged,
in the form of declassified documents, which reveal how Clinton
and then U.N. Ambassador Madeleine Albright ignored all the
early warning signs concerning the Rwandan genocide of 1994.
Many of our diplomats on the ground pleaded with the
administration to do something, but Clinton didn”t want to get
involved, when (in the opinion of your editor), a 100-man force
of Army Rangers probably would have blasted the thugs to hell.
Clinton, you”ll recall, then went to Rwanda in 1998 for his photo
op, and offered a totally insulting semi-apology. Now citizen
Clinton wants to fight AIDS. Good for him. But failing to act in
Rwanda, unfortunately for the rest of us, becomes part of our
legacy as a nation.
[In the interest of full disclosure, the current Rwandan
government also blames other Western nations. But America is
the superpower that could have made a difference.]
–I was reading an AP story which went back to 1962, and the
conversations JFK was having with NASA at the time. Newly
released documents (a big week for this kind of thing) reveal that
JFK was urging the space agency to go to the moon, for the main
purpose of beating the Russians. This isn”t a new revelation, of
course, but what got me was the following. As the AP reports,
NASA wasn”t fired up.
“(NASA administrator James) Webb cites unknowns about
whether men could even survive weightlessness, and argued that
further scientific study should be broadly focused on gaining
”pre-eminence in space,” not just a moon landing.”
Yup, like I wrote on 8/4, regarding national missile defense and
the skeptics at the Federation of American Scientists, “As I
glanced at the august lineup of FAS directors, I couldn”t help but
muse that many of these same individuals probably thought we
couldn”t go to the moon.”
–Evidently, 43% of Brits approve of the potential for a Prince
Charles / Camilla marriage. Only 32% are against. The rest
must still opt for Liz Hurley.
–West Nile Virus is spreading all over, even as far west as
Detroit. While I have been one not to make a big deal of this the
last few years, because the death toll is quite frankly almost
laughable when one looks at the press coverage the disease
garners versus far more pressing health issues, West Nile should
concern us, for its warnings about what is to come. In this world
of globablization, you simply can”t prevent pandemics from
starting. On a business note, though, my buddy Mark R.”s idea
of getting into the screened porch business is looking better and
better.
–So on Thursday, this ugly Frenchman decides to try and land
his parasail in the torch of the Statue of Liberty. As I”m
watching the rescue, I”m thinking, what an a-hole. Mayor
Giuliani called him an “idiot.” [Another reason why I”ll miss
Rudy big time.] So NBC News then asks the question, “Why do
thrillseekers do what they do?” Pretty simple, it”s called the jerk
gene.
–Gary Condit: Sorry to pile on, Connie, but you were awful.
But in watching Condit squirm, I kept thinking, “This guy has
national security clearance? What are we, nuts?” On Friday
Dick Gephardt, responsible for such stuff, finally caught on.
–The yaks are still on vacation at the Crawford ranch. They
have been given the responsibility of supplying the president
with his morning national security briefings. Granted, they just
grunt, but the president seems to understand.
–Now last week I explained how the sharks that had gathered
off Florida”s Gulf coast the previous Wednesday, were going to
head up to New Jersey, for the purposes of mapping out
whatever it is that they have planned for us before too long. So
that means on Thursday (8/15) they would have been around Key
West; Friday, Miami, and then Saturday afternoon…Daytona
Beach!
StocksandNews got hold of Bruno the bull shark the other day, at
an undisclosed location, and he told us, “Look. I can”t control
the rogues and I”m sorry about all those surfers, but if you keep
dropping chum on us, some of the bulls won”t know the
difference between that and a leg, know what I”m sayin”?”
We then confronted Bruno with the stark truth about his species.
Bull sharks have been found up to 2,500 miles away from the
ocean, like in the Amazon River and the Mississippi. “Yeah,
well…well…if you”re insinuating I”m going to take the boys up
the Potomac or somethin”, you”re just flat out wrong.” As Bruno
swam off, I shouted, “And what about the 3 kids you killed back
in Matawan, NJ in 1916?” No reply.
Gold closed at $275…another failed rally.
Oil, $26.90
Returns for the week, 8/20-8/24
Dow Jones +1.8%
S&P 500 +2.0%
S&P MidCap +1.7%
Russell 2000 +1.1%
Nasdaq +2.7%
Returns for the period, 1/1/01-8/24/01
Dow Jones -3.4%
S&P 500 -10.3%
S&P MidCap -2.5%
Russell 2000 -0.6%
Nasdaq -22.4%
Bulls 46.9%
Bears 30.2%
Have a great week. Pump up the economy!
Brian Trumbore
