The whole family visited - and stayed - for the Thanksgiving holiday. During those many hours surrounded by sons and daughter and daughter-in-law and two very lively grandchildren, I decided to take them to the movies. More specifically to Polar Express the latest effort by Roger Zemeckis starring Tom Hanks in five different computer generated characters. Not pretending to be a critic, I was completely swept away in a check-your-brain-at-the-boxoffice type fantasy brought to the screen at the cost of a million dollars a minute.
My inability to shake the growing fear that I have for the state of the markets seeped in to my enjoyment in an analogous way. One scene finds the poor kid Billy straddling a conveyor belt deep in the heart of the North Pole as the first Christmas present he has ever received drifts past. Billy only had to think once before he jumped onto the belt, wrapping his arms around the big wrapped box. His two new friends followed blindly diving onto the moving belt as well.
The following moments were filmed for IMAX as we took a wild ride down a long spiraling chute headed for a large funnel. First Billy and then the other two fell through, landing on top of a huge pile of Christmas presents.
The United Nations had mandated a 50% reduction in poverty world wide by the year 2015. Little Billy, reacting like so many third world countries, specifically in Asia - sub-Saharan Africa has yet to seem attractive enough for capitalization - have jumped onto the global stage grabbing the first gift they have ever received. Meanwhile, his two counterparts symbolically resembling the United States and Europe, both having had the experience of the holiday with all of the trimmings for the entire lives, are left following the newly gifted child.
Allowing the pinstriped suits to walk through newly opened doors in labor rich countries and build factories free of regulatory restrictions designed to protect not only the workers but the country itself has begun in earnest. While the United States and Europe have watched this gradual shift in the balance of the highly wished for globalization of the world economy, they have not shed the old ways of maintaining economic equilibrium in their own backyards.
This is upsetting for two reasons. The first and certainly not the least is the treatment of the dollar. The strength of the recently minted Euro is still not high enough or should I say, the dollar isn't low enough to warrant any real concern. Historically, the dollar would need to fall about 20% lower to reach a real alarm point against the pre-Euro currency average. Unfortunately it looks as if it might just be heading that way.
For the Americans left at home, this, on the surface would seem like a good thing. The much anticipated closing of the trade deficit does not signal an increase in exported products, the from here to there kind. Manufacturing is not poised to ramp up their production to meet demand largely because demand has not been increasing. What they will be able to do is charge more for the same goods both here and abroad.
The expectation that Wall Street has for all of this currency movement is higher corporate profits in the coming year. Estimates have begun to surface in the media from "noted" talking heads that a 7% return is not unlikely. I beg to differ suggesting that if corporate profits find a 3% return for '05, they should be happy.
We simply can't operate in a pricey commodities market. We are no longer set-up to absorb inflationary increases the way we once were. Sure, the price at the pumps seems higher - it has actually been much higher with inflation factored in - but we seem nonplussed. The price although finds its way onto more items that will weigh on the consumer in the coming year.
The rest of the world, namely China and its neighbors to the south are growing up in an expensive commodity market and have adjusted their output accordingly. With cheaper and now better paid employees, countries are able to export goods at a far less expensive production cost while increasing their own standard of living.
Meanwhile, back at home, we find ourselves opening up our wallets, getting into the "Christmas Spirit" and spending what we do not have. Reason number two is about inflation and the interest rates and the way we seem to think good news, or the absence of really bad news, will absorb these demonic influences on our economic well-being.
The Grinch, aka Mr. Greenspan in this instance, went largely unheeded by the American public recently as he spoke to European bankers about the falling dollar. These countries with large operations based on the strength of the consumer in the American economy listened and readjusted forecasts for profits downward because of this news. American companies and the analysts that follow them, went in the other direction.
We make less than we should as a workforce, for many of us, retirement savings and pensions are in jeopardy or are nonexistent, we continue to carry far too much debt as a nation (over $35 trillion) with savings hitting a mind numbing low of 0.9%, and over forty percent of the nation's mortgage holders have adjustable rate mortgages. And in response to what should be a red flag, we have begun to spend more than we earn.
Sometime in December, the Fed chairman will notch up rates again. This will, he hopes shift some of the balance away from monetary policy, which for lack of a better word as been a "shambles" creating an enabled market of increased spending without remorse but did little to create jobs. Manufacturing now has a reason to hire but no willingness to do so because of the higher costs of labor associated with the shift in policy. Many economist suggest that real cost for a company is the inflationary costs of labor, which apparently has been duly noted by CEOs. Control that and commodities could - and probably will - go much higher without any significant pressure on profits.
As we chase the third world nations in the coming years, it would be prudent to enact better fiscal policies along with less restrictive monetary policies. Greenspan is backed against a wall without any other option that to raise rates. Fiscal policy could change dramatically but it will be too late when it does and don't count on the current lame duck President to do anything.
We will find ourselves swirling around the huge funnel toward the economic future, expect when we do drop through, the landing will not be as fortunate as the kids in the movie. We won't land on a pile of presents. We will land squarely on the cost of our miscalculations.
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