May 28, 2004
(via Robert Schwartz):
Calm Down. That Wolf at the Door Has Been Here Before. (BEN STEIN, 5/23/04, NY Times)
One of the best antidotes to fear is to consult with reality. Another is to consult with experience. On both counts, there is a certain amount of cause for optimism.For one thing, we are in the middle of a powerful recovery from the slowdown that began in 2000 or 2001. Corporate profits have reached historical highs. The stock market, as measured by the Dow Jones industrials and the Standard & Poor's 500-stock index, is at a more sensible level, compared with earnings, than it has been in more than five years, and possibly longer. In other words, stocks are priced more sensibly by historical measurements than at any levels since the bubble. The stock "market" is a market for buying future earnings, and, at least for the Dow, these are priced more reasonably than they have been since before Bill Clinton's second term.
Housing is phenomenally strong. A record share - more than two of three - of Americans own their own homes. A high rate of home ownership is usually considered a sign of economic strength; it is also a prime cause of the increase in household indebtedness, as people acquire mortgages. Even with rising mortgage rates, there is little sign of a construction slowdown.
The "jobless recovery" is over. New jobs are running at close to 300,000 a month, well above the average of 115,000 added each month in the era since World War II. There is even rapid growth in manufacturing employment.
The economy now has a good kind of inertia on its side. Recoveries in the postwar era have tended to last about 50 months, on average, and they have generally grown longer as time has passed since V-J Day. If the current recovery started near the beginning of 2002, it still has at least two years to go - and probably more, if it is in line with the average.
What about the inflation and the oil and the commodities and the rising interest rates? Well, as Roseanne Roseannadanna used to say on "Saturday Night Live," "It's always something." But oil prices tend to fluctuate greatly when there is terrorism near oil-producing areas. So far - and this is a fascinating fact in and of itself - there has never been a long-lasting interruption in supply because of terrorism. Sharp price increases in oil tend to be followed by price declines.
(I hasten to add, however, that this is no excuse for not having a national program of conservation, turning coal into oil and doing anything else that will reasonably reduce our energy dependence on people who hate us. This kind of Project Independence, first proposed by my former boss, Richard M. Nixon, is long, long overdue.)
If oil reverts to historical patterns, this period of increases will be followed by a correction. Even if it is not, the economy has dealt with oil price gains before, and lived to tell the tale. And commodities are on a long-term downward, not upward, trend - and upticks are often temporary. When they are not, many substitutions are possible.
There's a terrific new book out by Chris Farrell, Deflation : What Happens When Prices Fall, which explains why we may well be in a deflationary cycle quite similar to the one at the end of the 19th century and why this is not at all a bad thing. It'd be nice if oil prices came down and the Middle East reformed itself peacefully, but it's hard to see how the economic outlook could be better otherwise. Posted by Orrin Judd at May 28, 2004 4:15 PM
Deflation at the end of the 19th century devastated the small farmer...lest we forget.
Posted by: Bartman at May 28, 2004 6:07 PMDeflation at the beginning of the 21st century is going to devastate some group, as well.
It will certainly continue the trend of manufacturing decline in the US, and the shrinking pool of well-paid semi-skilled jobs.
However, as touched on by the MSNBC article, computer chip makers, computer assemblers and retailers have suffered from hellish deflation all throughout the 90s, and yet there are still many, many billions of dollars of profit to be had in those industries.
It's all in how one plays the game.
In fact, there are still profitable family farms around - They just operate slightly differently from their 19th century forebearers.
Stein is wrong on many counts:
- Equity valuations are still high by historic standards. Saying that they are more reasonable compared to 1999 is like saying Bill Clinton was more sexually responsible compared to Jack Kennedy. Valuations never got as high as in 1999-2000, even in 1929. The stock market is still a bubble, slowly deflating.
- Spikes due to terrorist threats are only one part of the equation for oil. Everyone is ignoring the effect of a booming economy in China and, secondarily India. There is more demand for oil now than ever before. This is not going to subside anytime soon.
- The current economic upturn was bought with unprecedented governmental stimulus, which cannot be sustained. Comparing the amount of job gains and revival in demand to what it cost to produce those gains, you have to believe that the patient is sicker than anyone will admit. You have to pull the I-V at some point, and the patient has to function on his own.
- The housing market has peaked. (http://www.businessweek.com/magazine/content/04_23/b3886127.htm)
Construction has oupaced demand, the number of unsold homes is going up. All these new homeowners were shoehorned in using the most irresponsible of lending practices and interest rates that will never be this low again. Risk management is no longer a force in the market. Personal bankruptcies are climbing and rate increases will only throw fuel on that fire.
- Trade deficits have not stabilized, they are still climbing. The decline of the dollar has not affected this, as most of our deficits are with China and Japan, against which the dollar has not dropped much at all. The dollar has a long way to fall before our exports can begin to grow again.
I could go on.
Posted by: Robert Duquette at May 29, 2004 12:57 PMAll the big businessmen I interview have one big worry -- where to get competent workers 10 years from now.
Immigrants will not do it; they don't have the skills.
Posted by: Harry Eagar at May 29, 2004 4:13 PMRobert:
The Chinese gov't has artificially kept exchange rates high, in effect subsidizing US consumers' spending.
What's not to like ?
Posted by: Michael Herdegen at May 31, 2004 7:03 AMWhats not to like is the fact that it is a trend that cannot continue forever, and when the yuan is eventually de-linked from the dollar, the pent-up inflation will hit us like a ton of bricks. They hold more and more of our debt, and that makes us dangerously dependent upon them. It also supresses our own manufacturing and export industries. A nation that only consumes the products of others on borrowed funds is not a nation that will stay strong for long.
Posted by: Robert Duquette at May 31, 2004 11:46 AMRobert:
Don't be silly. Thanks to our ideas any pack of mongoloids can assemble the goods we use.
Posted by: oj at May 31, 2004 12:47 PM