 The booming economy? Part 2
Someone is being primed
to become roast pig
David Chapman
March 14, 2005
Six months ago we wrote a piece questioning whether we were in
a booming economy (Technical Scoop - The
booming economy? - September 18, 2004). Today of course we
can't help but notice that since then the stock market is up
about 5% for the Dow Jones Industrials, 7% for the S&P 500, just under 8% for the NASDAQ and
the real star the S&P/TSX Composite is up about 15% led by
energy, metals and gold. A strong economy or the belief that
the economy is going to improve is one of the prime reasons that
the stock market rises. So does that mean that we are off and
that the stock market is now headed for the highs of 2000 on
the back of a rising economy? Especially when it was only in
our last article that we wondered "Is America broke?"
This month is also the 5th anniversary of the all time stock
market highs. So if the measure of a booming economy is the heights
of the stock market then it is clear that while we are certainly
well up from where we were in October 2002 (the lows) but the
highs of five years ago remain elusive. Indeed we are reminded
that anniversary dates are very important and seeing that once
again we are at highs on these important anniversary dates is
not exactly a warm fuzzy feeling we get as they are often important
turning points.
The Dow Jones Industrials topped first on January 14, 2000 at
11723 (close). The NASDAQ followed on March 10, 2000 topping
at 5049; the S&P
500 topped on March 24,
2000 at 1527 and finally the S&P/TSX Composite topped last
six months later on September 5, 2000 at 11,328. Today the DJI
remains about 1000 points below its all time high close or about
8%, the S&P
500 is down over 300 points
or about 21%, the S&P/TSX Composite is off over 1600 points
or about 14.5% while the NASDAQ is the hardest hit down almost
3000 points or about 59%. Some boom.
Of course as always, is the glass half full or half empty or
as I am sure the bull optimists might view - don't look how far
we have fallen but look at how far we have come. If your perspective
is from the depths of the October 2002 lows then things are indeed
looking up. The DJI is up almost 44%, the S&P 500
up 50%, the S&P/TSX Composite up a huge 70% and the NASDAQ
up even more at 84%. Times are great. Let the good times roll.
So which is it boom or bust?
We have always contended that we are in secular bear market but
experiencing a cyclical bull market. And these cyclical bulls
(or B waves as Elliott Wave Theory would call) within the context
of a secular bear can be very tricky. The hardest hit in the
bear market was the big winners of the late 1990's, the high
tech sector. Numerous high tech flyers are today trading at a
fraction of their value in 2000. Witness Nortel who topped in
late July 2000 near $123 and today sits at $3.64 (note: which
is well off its low close of $0.69 in October 2002). In between
the tech wreck left thousands of investors a lot poorer, cost
ten's of thousands their jobs and resulted in numerous scandals
and bankruptcies. Today the high tech industry while somewhat
recovered still sits with huge overcapacity and will take years
to recover even a modicum of its former glory. The companies
that have survived are probably a lot a stronger for the experience
but they themselves may never recover to those former highs in
most people's lifetime.
The market of the late 1990's was pushed along on a sea of liquidity
as the Federal Reserve flooded the system with money related
first to the US$ currency and bond crisis of 1994, pushed further
by the Asian flu of 1997 and then the Russian crisis and more
Asian flu in 1998 and finally the looming Y2K crisis of 2000.
Indeed not only did the Federal Reserve help flood the system
with funds but all Central Banks globally were guilty. But since
Central Banks don't actually print money it takes a huge loosening
of the private banking system to really unlock the funds to provide
the liquidity. Reserve requirements also ended by the mid 1990's
and this as much as anything helped unleash the fuel for the
bull market at the end of the century.
Only when the Fed was forced to raise interest rates in 2000
and take some of the steam out of the bubble market and soak
up some of the excess liquidity did it unleash the collapse of
the market. Then along came September 11 and everything was forced
to change again. The Fed and other central banks as well unleashed
more liquidity into the market coupled a with ratcheting down
of interest rates to the point where they became negative (interest
rates less than the rate of inflation) and they have remained
there despite recent interest rate hikes. This has now unleashed
a second bubble not only in stocks but as well in bonds and the
housing market as the banking system further loosened the system
with the low interest rates to provide seemingly a never ending
stream of mortgage funds and lending knowing that the Fed will
not raise interest rates to no further than a neutral level.
At that level it still doesn't cause any serious pain and lenders
(banks) still maintain huge lending spreads while paying little
for their funds.
And the investment dealers, banks and hedge funds after smarting
from the collapse of the tech market rebounded jumped into the
fray with additional speculation not only in investment grade
bonds but derivatives and junk bonds. Today junk bond yield spreads
to US Treasuries are at record low levels despite a track record
of knowing that after 3 years 50% of junk bonds are typically
in default and after 11 years 80% of junk bonds are in default.
Key of course is getting out at the right time. While the investment
dealers, banks and hedge funds might they also ensure that the
public will probably be left holding the bag as they chase yield.
Today others are wondering whether there is a bubble in commodity
stocks (particularly oil) and here in Canada, Income Trusts.
But commodities are driven by growing global demand and the income
trusts while driven by yield many of the businesses are there
because the income trust model suits them well and they have
a long track record in the business.
One of the more dangerous bubbles is in the housing and property
markets where low interest rates have encouraged record mortgage
lending including refinancings and the subsequent cash has been
poured into the purchase of consumer goods thus propping up the
economy. Rising interest rates will cool the mortgage refinancing
and with millions already refinanced demand will fall but rising
interest rates on mortgages many of which were financed with
floating rates will be pressed. Long after the purchase of that
second or third SUV or 60 inch LCD Television wears off the mortgage
remains and as demand falters for housing prices revert to a
their long term mean.
While housing prices have shown no real tail off as of yet it
is already on the downswing in places such as Great Britain where
interest rates have risen faster. As well one only has to look
at the rising stock of rental units coming on the market to realize
that the housing and property bubble is getting near the end.
In typical fashion it may end with a thud rather than any clear
sign that a top is being made. A bust in the housing market will
typically harm the most those centres where property and housing
prices have been rising very quickly. Those areas are in large
urban centres in the United States and Canada which of course
contain the largest stock of housing.
But as another sign that the so called booming economy may not
be what it is all cracked up to be we noted a report composed
of data taken directly from the US Department of Labour, the
US Department of Commerce, the Conference Board, the Congressional
Budget Office, the Office of Management and Budget, and the Brookings
Tax Policy Center. It is an interesting array of data.
During the period 2001-2005 (to February) the period of the George
W. Bush Presidency the following has taken place:
- While non-farm payroll is
up roughly 400 thousand jobs, private non-farm payroll employment
has fallen 500 thousand jobs. Worse Manufacturing Employment
has lost 2.8 million jobs for a net loss of 2.9 million jobs.
- The Bush Administration is
the first US administration since Herbert Hoover to have a net
job loss.
- The Unemployment rate rose
from 4.2% in January 2001 to 5.4% in February 2005 and given
the way unemployment is actually compiled it is suspected that
the real unemployment rate may be 9% or higher.
- Long term unemployment as
defined by people unemployed for more than 26 weeks has more
than doubled since January 2001.
- It was estimated that between
tax cuts and economic growth in February 2003 that upwards of
2 million jobs would be created by now. The reality was about
300 thousand jobs.
- During the period 1996-2000
real median weekly earnings of full-time workers averaged a 1.7%
increase. Since 2001 it has averaged .2%.
- From 1950-2000 average US
GDP growth was 3.3%. Since 2001 it has been 2.7%.
- Investment growth is the
second lowest in 50 years only surpassing that under the administration
of Gerald Ford.
- Business investment in plant
and equipment has grown less than 4% since 2001 as many businesses
have closed and reopened in low cost Asian countries.
- Consumer confidence despite
improving of late still sits 10% lower than where it was in January
2001 (Conference Board).
- The stock market of course
remains well down from its all time highs the first administration
since Richard Nixon to have it happen and only the second since
Herbert Hoover.
- Large projected budget surpluses
that were estimated to be in the area of $397 billion annually
by 2004 instead turned into a $412 billion deficit (Congressional
Budget Office).
- In February 2001 the Bush
administration (Office of Management and Budget) projected Public
Debt would be $1.2 trillion by 2008; the current projection is
$5.7 trillion.
- The Brookings Tax Policy
Center has calculated that the tax cuts for people making one
million or more is more than 90 times the cut for middle income
homes.
- Household income has fallen
1.2% the greatest average decline in household income in any
administration in over 40 years.
- Real Median Household Income
has fallen $1535 since 2000 (average $44,853 down to $43,318)
(US Department of Commerce).
- The poverty rate in the US
has climbed the second highest average of any administration
over the past 45 years (only exceeded by the administration of
George H. W. Bush). (US Department of Commerce).
- 4.3 million more Americans
are estimated to live in poverty since 2000 (US Department of
Commerce).
- 5.2 million more Americans
are without Health Insurance now totalling over 45 million (US
Department of Commerce). Upwards of half of all bankruptcies
are due to a health crisis.
Posing the question "Is America going broke?"
is of course gratuitous. US debt still maintains an AAA rating
as do many other highly industrialized countries such as Canada.
That rating is of course based on unlimited taxing power. Of
course they could also slash huge swaths of domestic support
programs which is what has been proposed. That they are of course
domestic support programs provides dislocations of a different
sort. Boosted on the other side are Homeland Security and Defence.
Over the past five years total debt has grown by roughly $6.1
trillion or about 33%. This is against a backdrop of GDP growth
of $1.9 trillion or 19%. Meanwhile Personal Income grew $1.2
trillion less than 15% while consumer debt grew $3.2 trillion
up 46%. Debt is growing at a faster rate than income. In 2000
debt to disposable income was 98% and in 2004 it had increased
to 120%. Numbers in Canada, Britain are not a whole lot different
and indeed in Britain they are worse. While household assets
prices have been increasing they are only 70% of disposable income.
Debt is growing even faster. The housing boom over the past decade
is growing at a faster rate then even in the late 1980's that
ended in a huge housing and property collapse. Yet we are told
there is no bubble.
While the bulls love to point out that things are a lot better
than they were in October 2002 one has to put that in perspective.
Looking at many of the numbers above one realizes that it is
a world of illusion built on a bed of debt. US private sector
real wages and salaries are up barely 2% from the trough back
in 2002. The average of the last six recoveries was just over
10%. As our numbers indicated above wages are actually falling
behind even as debt grows. Massive build ups in debt always end
badly and over the past 5 years we have allowed debt to grow
to enourmous levels. A booming economy? We think not. Someone
is being primed to become roast pig.
David Chapman
email: david@davidchapman.com
Charts created using Omega
TradeStation or SuperCharts. Chart data supplied by Dial Data.
 David Chapman is a director of Bullion
Management Services, the manager of the Millennium BullionFund
www.bmsinc.ca.
Note: The opinions, estimates and projections stated are
those of David Chapman as of the date hereof and are subject to
change without notice. David Chapman, as a registered representative
of Union Securities Ltd. makes every effort to ensure that the
contents have been compiled or derived from sources believed reliable
and contain information and opinions, which are accurate and complete.
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to be reliable, but the accuracy or completeness of the information
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