Duru's latest economic report
November 30, 2000
Well, even though some of you do not believe that an economic recession is a real possibility, I probably don't need to tell you that things ain't looking so good right now.
This is the first such message some of you are getting from me, welcome! :) This is my longest yet, but I think current conditions warrant a complete expose. Besides, this is always a good way for me to vent.
Anyway, here is the latest. I strongly encourage you all to pay close attention to what the Feds say and do on Dec 19th. Their actions and broadcast attentions could have serious impact on your wallets in 2001-2002. Forget the elections circus, that is a side show as far as the economy is concerned right now.
1. Stock market collapse has closed off additional funding for young companies and companies that were planning to expand and roll out profit-expanding innovations, forcing increasing business failures and job cuts. YOUR company (or your neighbor's companies) will begin to care less about innovating and expanding and more about controlling costs.
2. Stock market collapse will move employees to clamor for more cash rather than stock options for their compensation. This will further squeeze profits at already struggling companies.
3. Stock market collapse has now seriously impacted the wealth of those invested. More than 50% of US households now have some amount of savings in the market. This means people will feel poorer and look for more wages from work and also tighten spending (perhaps).
4. Latest economic numbers show the number of new unemployment claims has hit a 2-year high.
5. Latest economic numbers show personal income has likely dropped for the first time in 2 years.
6. Latest economic numbers show that manufacturing has contracted to a NINE YEAR low (that was our last real recession, remember?)
7. Oil prices are high relative to the past 10 years, but could soften with warm weather in the Northeast and Europe. (I should note that oil is still nowhere close in price to oil in the 70s once you adjust for inflation).
8. Americans' saving rate has fallen to a new all-time LOW of NEGATIVE, yes, NEGATIVE 0.8%. This means that any further spending by us is being done on ballooning and riskier credit. Consumer spending is 2/3 of the economy so any recovery must rely on this spending. You see the dilemma. If people continue spending at this rate, increasing personal bankruptcies are right around the corner because the above points show that this spending will be unsustainable very quickly. Plus, so many people have been spending and borrowing assuming the good times would go on forever since we had finally "conquered" the economic cycle.
9. The world economy is very reliant on American spending. The only thing that has gotten the world through the last fiscal crises of the past few years has been America's willingness to keep buying more and more imported goods and to throw liquidity (more cash) into the world financial systems. This spending includes all the gas necessary to fuel our bigger and bigger cars. Thus, our trade deficit has ballooned to all-time highs. We also are running out of liquidity to keep throwing all over the world. If we slowdown now, we will pull down several world economies with us and start a spiral going.
10. The Euro is already weak. The US has little wiggle room to help prop up the currency. We will export less to Europe because our goods will be more and more expensive to them. Companies again will have their profits squeezed.
11. The stock market collapse could finally ignite an exodus by foreign investors as they run for safety. This will drag our markets down further, weaken the dollar, and send our interest rates spiraling upward. (This however could strengthen currencies such as the Euro).
Think this sounds bleak? Well, it is! Notice how much depends on the stock market? In no other time, perhaps not even the Great Depression, has so much of the economy's success ridden on the success of the stock market. The market is MOST sensitive to interest rates. The Feds just last week indicated that they are still fighting inflation. Inflation remains a real possibility because we keep buying more and more stuff! However, as indicated in "The Coming Internet Depression" (yes, I am plugging this book AGAIN), the economy is no longer a car, but a jet plane. When a car is going too fast, you can tap the brakes and get the proper speed. However, when a plane begins to stall, you must ACCELERATE it towards the ground to prevent a complete stall that sends it crashing to earth. This is a key point hopefully our Fed understands. If after seeing the balance of the good and bad news in the economy, they decide to STILL take an anti-inflationary stance, they will practically guarantee we will head into recession next year, and if they continue that stance for too long, things will go from bad to worse quicker than any of us can comprehend right now!
However, the Fed will be in a true, hardcore dilemma. If they give us too much of a break, we will keep spending and spend even more, thus risking a flare up of inflation where wages are already high, unemployment is still at post World War lows, and component supplies are tight. If they don't give us a break, we will all be forced to quickly lower spending, and, you can guess what happens when 2/3 of the economy suddenly stops spending so much.
For those of you who keep getting these kind of messages from me, you are probably tired of them. But I cannot help but share my thoughts on this because I am truly concerned that people are treating current conditions as just another economic cycle, or just another storm to ride out. Sure, we could be just fine. But given everything I have shown you, hopefully, you will at least begin making preparations for the very real possibility that serious economic trouble could be ahead. Also, I have learned a whole lot over the course of the past 14 months, and am eager to share and get feedback.
For you investors, I continue to recommend a hedging strategy. Make sure you are building up a good cash position, and make very measured bets on good companies that have been hammered hard but will be able to survive vicious competition, tight or non-existent credit markets, and very weak demand, especially companies that have been through bad times before. Consider any other company that does not meet this description a potential short-term play and something to watch very closely! Finally, do NOT plunk all your cash down at once on anything or a set of anything. In 2-5 years, most of the good companies you buy at these prices will make you look like a genius. If the Fed really goofs up, well, we'll have to wait for about 5-10 years before we look like geniuses.
Be careful out there!!!