Deja Vu All Over Again
SAN FRANCISCO -- "If the U.S. sneezes, the rest of the world catches a cold," remains an overused, unproven but generally accepted market principle.
But what happens if the U.S. has a hacking, wheezing case of bronchitis where it's coughing up giant chunks of equity-shaped phlegm? That's the question more investors -- and central bankers -- around the world will be asking themselves after today's session on Wall Street.
The
Dow Jones Industrial Average tumbled 436.37 points, its fifth-largest point decline in history (although the 4.1% drop was not similarly historic). The close of 10,208.25 is the Dow's lowest since October 2000.
The Dow is now 9.7% below its all-time high, but the
S&P 500 is 22.7% off its record close, after falling 4.3% today. Meanwhile, the long-beleaguered
Nasdaq Composite shed another 6.3% and ended at 1923.38, its lowest close since November 1998.
At 1.2 billion shares on the
New York Stock Exchange and 2.1 billion in over-the-counter action, trading was heavy but not overwhelming. What was overwhelming was down volume vs. up, which led 11 to 1 in Big Board trading and 19 to 1 in Nasdaq action.
The numbers accompanying today's session echoed the worst trading days in recent memory. Although trading wasn't halted, as was the case on
Oct. 27, 1997, similarities to that period exist. Notably, the question of whether we're facing another global contagion.
As noted here
Friday, a growing case is being made for coordinated easing by central bankers around the world, specifically to alleviate the burgeoning crisis in Japan. What's occurred since Friday only enhances the possibility of such action.
Over the weekend,
Prime Minister Yoshiro Mori made overtures toward resignation, but
Liberal Democratic Party officials wouldn't confirm that he will step down. Meanwhile, the LDP issued an economic reform plan that would, in addition to changing the tax code, encourage banks to transfer equity holdings to a new private-sector stock fund,
The Wall Street Journal reported. Another plan being discussed to avoid insolvency entails Japan's banks writing off about $280 billion in bad loans in exchange for public monies.
On Monday, the
Nikkei 225 fell 3.6% to 12,171, its lowest close in 16 years, despite a stronger-than-expected report on the nation's gross domestic product. Intraday, the yen traded at its lowest level vs. the dollar in 20 months and its lowest level vs. the euro in two months.
The problems aren't limited to Japan. Hong Kong's
Hang Seng Index hit a 10-month low today, while bourses in South Korea and Indonesia suffered heavy losses. In Europe, London's
FTSE 100 fell 1.5% to its lowest level since February 1999, while Germany's
DAX and France's
CAC each fell more than 2%.
One way or another the declines all stemmed from concerns about economic growth in the U.S., particularly after comments from
Cisco (CSCO Quote - Cramer on CSCO - Stock Picks) late Friday that the slowdown in capital spending could last more than two quarters and extend abroad.
Today, Germany's 10 top private banks lowered forecasts for economic growth in 2001 to 2.2% from 2.7%, citing the impact that slower U.S. growth will have on European exports,
Bloomberg reported.
When the 1997-98 Asian currency crises spread to other emerging markets, the U.S. proved to be the bulwark for the global economy -- an "oasis of prosperity," according to
Federal Reserve Chairman Alan Greenspan.
But rising problems here currently suggest the odds of a "synchronous global recession" are rapidly increasingly, according to Steven Roach, chief economist at
Morgan Stanley Dean Witter. "In retrospect, it wasn't just that U.S. financial markets were levered to a high-performance U.S. economy. The world economy itself appears to have been overly dependent on the American growth miracle of the past five years."
Now that our "growth miracle" is losing its magic, the rest of the globe is feeling the pinch while Japan lurches toward crisis, Roach writs today.
The economist leaves open the possibility for "reflationary policy initiatives" that are "global in scope," but suggests they are unlikely to stem the damage.
"I continue to believe that structural headwinds will intensify, making the world economy surprisingly unresponsive to traditional efforts at policy stimulus," Roach writes. "Unfortunately, for financial markets still banking on the time-honored V-shaped recovery, that leaves plenty of room for further disappointment."
Roach couldn't be reached for additional comment, but seems to be suggesting that the possibility of multiple rate cuts by global central banks will fail to revive economic growth or financial markets. For those who still have faith in the Fed, that's a scary thought, indeed. It's also a scenario fairly similar to one long forecast by Don Hays of
Hays Advisory, as faithful readers of this column will recall.
Something Else Altogether
Another theory is that the devastation in the tech and manufacturing sectors is masking the fundamental strength of the U.S. economy, and that additional rate cuts plus tax cuts will thus
rekindle inflation. But both the 1930s-style Depression or 1970s-esque inflation scenarios are "bizarre extremes" that suggest the true, ultimate outcome lies somewhere in between, according to Robert J. Barbera, chief economist at
Hoenig.
Barbera agrees the bursting of the tech bubble is a "global event" but believes "contagion, so far, is an overstatement."
Because so many tech bellwethers are U.S. companies, "we have the lion's share of economic duress that's tied to the tech bust," he says. But there's an important, critical distinction between the U.S. today and Japan after its asset bubble burst in 1989. Specifically, that
all asset classes in Japan were "preposterously priced" in the 1980s, while in the U.S. recently there was only one sector.
Yes, excesses in technology permeated other aspects of the economy -- such as real estate in Silicon Valley -- but they didn't extend across the board and we never got anything akin to Japan's real estate bubble, he argues, when commercial real estate was once valued at 12 times that in Manhattan or Paris.
Barbera dismisses the "Japan-Armageddon story," noting that would mean the Fed could lower rates to 2% (or less) without the economy's responding. If you believe that, "then you have something to worry about," he says.
He also dismisses the reinflation story, something I have expressed more concern about lately than the Japan-reprise scenario. While acknowledging that certain producers of basic materials may have pricing power because of the elimination of capacity, Barbera argues that "in an environment where you have cost pressures but rotten front-end demand, profits suffer but you don't get inflation."
So what is he expecting? First, Barbera believes we are in a recession that will likely last through the end of this year and that no interest rate policy can get, for example,
Yahoo! (YHOO Quote - Cramer on YHOO - Stock Picks) back to $230.
"The notion we can boom on a long-term sustainable basis because of spectacular advances in productivity tied to explosive tech investment doesn't come back" when the economy recovers, he says. "Tech will survive and remain a positive contributor to growth, but you can only raise a souffle once."
That said, he's adamant we'll have a recession and not a depression and that we don't have to pay a long-term price for the excesses in tech during the past five years.
"If I'm right, 2002-2008 will be an unremarkable period, reasonably positive relative to the last 50 years, but profoundly disappointing to those who expect us to return to boom times," Barbera forecasts.
Implied in that forecast of "reasonable" economic times is a prediction of a return to more normal growth in the stock market of 8% to 10% a year. While many investors will no doubt long for the heady days of the late 1990s-early 2000, most will likely embrace such an outcome.
Especially compared with the alternatives.
Aaron Task
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