The analysis and news of the international recovery is positive and uplifting. There is neither cloud nor doubt of the clear skies to come, only some teasing here and there about timing. It really doesn't do to deflate this optimism of future opulence. There are, however, a few niggling negatives that might delay or depress the slope of that sure to come recovery. The major strategy offered to provide stimulus is the lowering of the interest rate. At these low rates, who can afford not to borrow? And yes, it is borrowing that is desired, primarily by those already having shown ability to float a loan, and thus expected to first refinance the present balance and then increase the size of its burden. More and bigger debt is suggested as the right road to recovery. This borrowing (and spending) is called stimulus, and the more stimulated one gets, the greater is the chance for general economic improvement.
Or so the story goes. This approach has worked in the past, and certainly it must work again. The fact that Japan has used it for over a decade, without any sign of improvement, does not necessarily mean the strategy has fault. We note that the Japanese have lowered their rate gradually until it is now essentially zero. But it has not solved the problem. That is indeed disheartening, because now it appears that the yen does not have the ability to earn interest. The Japanese want the yen down as an aid to exports. But lowered dollar rates are squeezing the yen. What next, negative rates? Don't laugh. Warren Buffett, the savvy American investor, recently agreed to accept a multi-million dollar loan at NEGATIVE interest. What do you suppose he knows?
The dollar, however, still has the necessary international following. It is largely a matter of confidence. Though the US debt is beyond any possibility of repayment, and the interest service of the debt is a serious drain on the US economy, foreigners still line up to exchange their local currency for US government interest-bearing bonds and US assets. If the world still wants the US dollar, that means it is still considered a safe haven in these perilous times. It is a game of confidence, and Uncle Sam is the confidence man.
We are coming to the end of a troubling year. The holiday season approaches for the consumer, and the retailer's ads say spending is the right way to celebrate. The US consumer, that trustworthy hulk, is expected to continue to carry the world, just like Atlas of the Greek myth. But the broad back of the consumer is bent from the burden. Whether this wonderful work can be continued until the new world arrives is an intriguing question. The retailers rightly reckon on the annual repeat, many saying that if they don't make it during the holiday season, they won't make it for the year. So, come on, consumer, buy, buy, and buy. We all cheer for you!
Who would mention that the consumer is still paying 20% or more for credit card debt? Is anyone willing to give the golden hero the lower rate the situation deserves? It seems not. With domestic debt at record levels, it is possible the unappreciated consumer will balk, not from reluctance to take on further credit, but simply because the credit card limit is a barrier. It is said that an overloaded horse will carry the load until it drops dead, but a mule will not. Put too much on a mule and it will not move. Is the consumer a horse or a mule? We suspect a horse, and an overloaded one.
If the salvation for the economy is to be the consumer, new ways will be found to increase the debt the consumer is willing and able to carry. The sarcastic satirist says, "There is no reason to discuss the wisdom of keeping a solvent household in these boom times. After all, the world is waddling in war, and everyone must participate, and participate, and participate. Buying is patriotic, part of the war on terrorism. A McDonald burger in the hand stops two terrorists in the Bush."
The consumer is not the typical buyer of stocks. The buyer of stocks is the wage earner who has bought into the company stock plan, the 401K-pension plan, and the mutual fund. The stock buyer is the investor who is convinced that cash in a savings account is for dummies. Lately, the experienced investor is surprised to read on the front page what he has known all along. The highly-paid executive who runs the corporation is a thief, going heavy on the expense account, padding it with personal apartments and gold-plated furnishings.
Only the public exposure is new; otherwise, no one is surprised. What is upsetting is that the executives are fiddling with the earnings numbers. So long as the earnings were said to be there, even though no dividends were paid to prove it, there was no clamour to throw the over-paid rascals out. It is only when the earnings are gone, and the situation is beyond concealment, that alarm arises. What everyone can finally see plainly is that the corporation is NOT making the money it claims. Further, it has lied about the true situation for a long time, with the active collusion of outside Certified Public Accountants.
The CPA's were thought not to lie. The entire corporate structure rests on the impartiality and ethical standard of the neutral accountants. They were once trusted to protect the shareholders interest. Their duty calls for them to reveal anything that might materially threaten the well-being of the enterprise as a going concern. Everyone relied on those rules when the quarterly reports were read, and trusted them when the earnings were revealed. Now we know they have been lying to us for a long time. The question to be answered now is, how bad is the damage? The dangerous threat is not to the idea of the corporation and its image; that is beyond immediate repair. What we wonder is whether there is lasting injury to the capitalist system of stock market trading as a whole. If the stock buyer withdraws his order from the floor, the loss of public paper will reduce the liquidity that allows the capitalist system of corporate formation, merger and acquisition to function.
The damage to the market in the public esteem is extensive. It causes a general distrust in the stock buying public, fooled into believing the price-to-earnings ratio is no longer an accurate and effective measure of stock valuation. This fraud allowed the bubble to form, using fancy terms like "cash flow", "return on equity", and "sales per share." Business schools teach executives that capital expenditure should be recoverable in three years. Longer-term investments require special justification. A P/E ratio of ten-to-one is considered conservative for most industries. It means that if you buy a stock at this ratio it will be ten years (at the present earnings rate) before the company earns enough to recover your capital. A reasonable dividend payout of half the earnings would generally give a 5% return on your money, with some chance of getting out if things begin to look shaky.
Dividends have been out of favor for a long time as a guide to buying common corporate paper, because the notion of making unearned profits from an increase in the share price has made a reasonable rate of return through dividends a relic of grandfather's time. Everybody knows you can't get rich on dividends today. Brokers say, "Buy into new growth industries and don't look back. A ratio of 40-to-1 is nothing to worry about in these boom times. Just buy, and wait for the wealth to accumulate. It is not gambling, nor is it greed. It is the blessing and guarantee of America, the land of the free and the home of the brave. It is a blessing to be a broker."
Some corporate executives are convicted of cheating, using their positions of trust to defraud the shareholders, the bondholders, and the banks that loaned money for growth. The activities of the executives eroded stock buyer's faith that fair treatment in the market is possible. Many politicians at high levels are among the suspected executives, hiding under the covers of a belligerent Executive branch to avoid arraignment. Even the President of the US is a suspect, as is his past-president father. What is the stock buyer to think of the Carlyle Group, heavily larded with ex-politicians and involved in defense and oil industries?
As the disillusioned US consumer faces the coming holiday season, the prospect of impending unemployment stares him/er full in the face. Those with jobs read today that next year more layoffs are planned. For many now unemployed their benefits expire in the first months of the year, and then savings must be drawn on. When it is in the form of stocks, the stocks must be sold, regardless of price. Already the number of defaults on credit card debt is creeping upward, a sign the consumer is stressed.
Today analysts tell us automobile sales in the US next year will be lower. The same is true in Malaysia, where sales are already dropping. Automobile sales are crucial, because automobile manufacturing makes up a broad band of the economy. Every aspect of the industry will be affected, and the effects of reduced activity from this slowdown are difficult to predict. After this news, if the consumer and stock buyer should hesitate slightly before embarking on further debt accumulation, that is understandable. The government tries to bolster auto sales by issuing confusing remarks about the price of cars after the AFTA agreement takes effect in 25 months.
Don't be fooled. The price of foreign cars will be the same or lower than the Proton Waja, or Thailand will go to war against Malaysia. They have allowed the two year respite, but claim a financial adjustment. They will certainly not tolerate a further delay in implementing the agreement. If Malaysia penalises the imported cars, that is a breach. Thailand will discontinue the cooperative gas pipline and the shared electrical power grid if Malaysia reneges on the AFTA agreement. Proton will find it difficult to compete. It is possible Mahathir retires so he is not PM when the national car dies.
The debt-laden consumer, doubling under old debt, is bandied by the blandishments of Madison Avenue style TV and newspaper ads to spend, spend, and spend. In the US, it is camouflaged in the red ribbon of gift giving, but the ring of the cash register is louder than the bingle-bingle of the beckoning brass bell of the Santa Claus figure, begging over a tripod pot at the curb. To buy, or not to buy, that is the question. Should I add to burdensome debt, or prudently go light? “What if there is war?” some ask. “If there is a nuclear war, or a terrorist attack, we will all be killed anyway ... and if there is no war, we will all be OK, somehow. Let's have one more big Christmas ... for the kids.“
South America? Did you ask about debt and default in the South American countries? Don't, please.
The url of this page is: https://harunrmy0.tripod.com/24Consumer.html