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Today's Commentary: 12.29.03 It was a wonderful year in terms of gains, but even those gains are relative to (past)losses and don't really add up to anything worth congratulating ourselves about. We bought speculative stocks and were handsomely rewarded for our risk. But congratulations will still be the order of business as we drop the ball on the New Year, understanding that it is safe to say that everyone will remember the positives of '03 as having defeated and overcome even triumphing over all the negatives. In blurring those lines, which are firmly delineated as good news/bad news, we have in a sense decided that we will believe the best story while discounting the bad news sooner. That will make it easier to be forgotten as the clocks turn to '04.
As Americans we are comfortable in this amnesia, looking only to reminders that have been or will be reported to us if necessary. Even as we chose to forget, these reminders are the same ones that will haunt historians, both financial and geo-politically for decades as they ruminate the repercussions of poor policies at the beginning of this century. It will be the same history that will be twisted by the economists, uncovered as an anomaly, not the creation of a financial demi-god in the position of Chairman of the Federal Reserve at the end of nineties.
The chairman has chosen the path we will take, pointing a learned and educated finger in the direction he is steering the economy. But first we should try and understand how we came to be at the whim of his advice even as he set all of the wheels in motion leaving us only one option.
Mr. Greenspan presumed and perhaps correctly that overseas markets can't be having difficulties economically if we, the U.S. intend on prospering to our fullest. The steps he took in light of this realization eventually brought the equity markets to their literal knees. But since his decision was so far removed from the effect, it has taken us quite a few years to zero in on the exact moment. He did this by cutting short term interest rates in 1998 just as the U.S. economic picture was becoming the brightest it had been since the gold standard had been dropped in 1971.
Loosening of the money supply in such a manner allowed companies to expand but for the wrong reasons. The stock markets also believed, The good times had suddenly gotten even better. This they believe was their deserved place in time. It was not meant for us. But no one had the heart to explain this simple notion to the average investor as we moved into the light under the weight of infectious exuberance. From that point, there is no further need for me to explain what happened next. Enough articles have included the word "bubble" in the succeeding years to have permanently implanted caution into every one of our psyches. Right? We all understand the risks now, the need for fundamentals, diversity, and investments that are both worthy and substantial. Every last one of us learned lessons from those three long years. Right? Wrong. Again.
Standing in the artificial light, we see a host of economically accommodative policies. We see a very liquid money supply accompanied by the underlying message via Mr. Greenspan that it will continue into the new year and the near future. Already the President's tax cuts being hailed as the turning point for the economy the ripple effects spilling over into new year in the form of tax returns. In this light the markets are dazzling investors and bears alike - not to say that bears aren't investors but they shouldn't be grouped in with those that have given rise to this past year's markets - with a sense that things are getting better. It is easy to be swayed by good news as we are sweeping the bad news under the financial carpet.
But lurking down that path, the very one this wise old man has led us to is at first glance a foreboding place with hidden dangers in sinister shadows. These he points out are not be something we should worry about. The chairman in cahoots with this administration has assured us that if there is any danger, it is not going to derail the recovery.
Those of us that have jobs have been at the forefront of this economic hocus pocus doing what we do best, spending. The very worst scenario now would be if we understood that these debts will not be forgiven and as a result of that epiphany we suddenly pulled back to satisfy some of those obligations possibly committing in the process the very sin that will bring this economy to its knees, begin saving. The real reason Mr. Greenspan has kept rates low is to discourage you from doing just this. Saving for your future is bad. Savings kills growth; spending with abandon keeps things going.
But what about those production numbers you ask. The economy is booming because we are getting so much more from those left in the workplace. If you are one of those workers who have been statistically counted to produce more than in the past, you are growing weary with the advent of each new work week. Those whose jobs are threatened have been asked to do more under that type of fear. American business has done an excellent job convincing Wall Street that if current capacity is to grow, hiring temps is one way to go (no benefits, long or short term) but a better solution would be to take those new jobs to the inexpensive market of willing and less expensive laborers overseas.
Bob Herbert of the New York Times pointed out in column on Monday, 12.29 that IBM is planning just such a move but in the name of increased profitability. He argues that this will do little for the domestic state of the economy as companies become more profitable through "job destruction and wage compression" not through growth of employment. This is the result of a very accommodative policy that puts corporations first, policy whose long range effects are fed by the short term maneuverings of the Fed.
Those of who have continued to work have dutifully spent, much the way this administration has. What we have in this blissful state of economic sanguineness are the sharp thorns of debt. Growth in the GDP will not be enough to offset this in the coming years. If that proves true, '04 looks to be the year when that debt reaches beyond three times Gross Domestic Product with no opportunity to slow down. If we all started to save half of what we spent, the U.S. would tumble off the world economic stage for quite some time to come.
So Mr. Greenspan cannot change his path for fear of creating two major problems, both of which would illuminate those dangers ahead. Should Mr. Greenspan deem the spring as the time to change the Fed's stance, he will be doing so at the end of a year long rally. If that rally turns out to be a bear market rally, a change in monetary policy would blow this house of cards down just as the presidential election begins to heat up. And speaking of housing, its role as the economic underpinning of this rally would cease eliminating a major player. Refinancing would literally slow to a trickle taking much of the renewed financial sector with it.
Unemployment will grow in 2004 as well I'm afraid and that will be a significant drag on any optimism of rosier times ahead. If that happens, scenario number two would not give the chairman any room to move. The false bottom of mortgage backed securities, almost a third of this economy would not allow the reinflation that Greenspan and the President need so desperately to allow another four years for the current administration and a very favorable recollection in the history books for Mr. Greenspan.
It will be hard to ignore the fact the '03 will weigh heavily on this year in terms of elections. If you have been reading this column long enough, you will know that I have never let our President take credit for any financial or fiscal policies that ignored more people that it supposedly helped. It is my hope that relief is on the way this year, although the candidate that will lead us into the next century as a world leader and not as a potential economic powder keg has yet to fully emerge. So call it a renewed, better yet, re-invigorated resolution to look at the dark shadows that lurk in many of our current economic remedies and shine the light on them. If I can alter the process through this column in the new year, I will do so with the same presumption that I have always had - you would like to know what it really means.
Happy New Year to all of us.
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