Morning Comment ---Friday, 11/21/03 All times EST.
How’d you like Mr. Greenspan warning against “creeping protectionism”? Reality: Certain sectors here have been hemorrhaging jobs for an extended period of time. What has caused this? Technological advances/Productivity gains for one. Also a big factor is the overwhelmingly cheap labor found overseas, forcing whole plants to be shuttered here, whole communities displaced at times, in favor of overseas locales. So those overseas countries are then receiving the economic stimulus (jobs creation) which the United States is losing. The newly-employed foreign workers then create goods and sell them back into this country, heretofore largely unobstructed by any pesky tariffs. And Americans are, by and large, very happy to have these cheap goods as they allow us to continue to pursue the #1 national pastime, consumption. The FED also likes it too, because this action also helps them meet its legal mandate, i.e., keeping inflation at bay. Meanwhile, are we selling them anything at all to try to counterbalance the seeming one-way nature of trade? Sure. We sell them a few goods, lots of services and of course, technology. That’s where it gets interesting. Because this kind of economic give and take is not without pitfalls. And one of the most glaring is that we usually tend to “overdo”. How’s that? Well, pick a “developing” country (used to be called “third world”, but that’s not politically correct these days). Now give it a spark of economic acceleration. A spark, I’m talkin’, not a geyser. And know that this spark is largely the result of them takin’ production away from us. Okay. No hard feelin’s so far. Now get a salivating band of hungry US investors who are flush with funds, courtesy to an extent of the largesse of the FED under the current helmsman and what happens? Right. They react to the “spark” by pilin’ in there like there was no tomorrow. In short, they overdo. They can’t help themselves. All this dough is easily available and they just have to put it to work… somewhere, right? So what happens now? Boom/bust is usually the outcome, noting that the local stock markets usually bear the brunt of this unfortunate action/reaction. Very troubling, too, the stock prices at their peaks, are often light years ahead of the actual level of local economic development, underscoring the speculative nature of the early forays which seek to turn a big buck for US investors with a byproduct being the taking of certain chunks of the global populace out of the dark ages. (Why, I think, for example, that we saw S Korea go thru two complete economic cycles in under two years, using this, er, method!) Now what happens? When they bust? Oh, that’s the good part. Well, seein’ as how a lot of the do-re-mi at stake is of the US variety and a lot of it belongs in the coffers of our most protected species, the banks, the FED does what any central bank in modern times is inclined to do: bail-out. They never let anybody go down the tubes under any circumstances because in so doing, they might just grab a bank or two along for the ride which would jeopardize our whole system. How many times have you heard that excuse? “The system”. Moral hazard be damned, it is the “system” that must be protected at all costs. So the m.o., which became de rigueur, is to pump more liquidity in order to paper over any near-misses or in some cases (Russia comes to mind), to paper over complete disasters, thereby holding the door open in order to give US investors the chance to make a quick exit, hopefully as much intact as possible. Is there anything else we need to mention about this overwhelming largesse? Yep. Once you start it, it is almost impossible to stop it. This notion is borne out by the fact that right here in this country, the excess pumped our own stock markets up to where they burst in March of 2000. It was the era of very easy money as underscored by the boom/busts we had been about the business of cleaning up around the globe in our role of “protector” of the banks which title was expanded to include the bubble. That’s the ticket. “Protector of the banks and the bubble.” And not surprisingly, it was the same “easy money” that caused the bubble in the first place as well as the bursting of same in due course. And what was the remedy for what ailed us following that tragedy? More easy money in the form of taking rates down to a 45-year low over a 2-year period, the upshot of which is that the first, long awaited sign of growth was owing to the waging of war in Iraq (Q2) and then in Q3, more largesse, this time from the federal government in the form of tax relief. So, is there any other byproduct of all this tremendous liquidity that the Great Protector sloshed around the globe? You bet. It’s called Excess Capacity. And boy, let me tell you, is that one big pain in the neck for any company tryin’ to meet eps forecasts! Sheesh. A real thorn in the side of the old margins, let me tell you. Murder on prices. Uh-oh. So, what’s a corporation to do? Well, they gotta’ increase their profits some how right? But since the bubble burst, demand burst along with it. So they ain’t gonna’ make any tracks up that road, right? So they do what they gotta’ do, i.e., they slash costs. Several times if necessary. To the bone is an everyday occurrence. And now that you’ve mentioned it, I think that I’ll start to cut costs by moving as much of my production offshore as possible. I’ll start first with manufacturing jobs and later, as the communications technology improves, I will also start moving service jobs offshore as well. And boy, am I really helping out the local economies over here. But yes, I am an American and I realize that some of my, er, corporate decisions could be viewed as unpatriotic, but I really had no choice as the Excess Capacity issue for one, left me no option but to set up shop over here, spread the wealth around, make some huge investments in the local infrastructure and even establish partnerships with these foreign guys. Because remember: I have a responsibility to the investors in my corporation to do my best to turn a profit. Hey. We bailed these foreign countries out along with our own tails, remember? We created the excess liquidity which caused this whole chain of events, from overinvestment, to boom/bust, to bail-out, to excess capacity, to squeezing of margins, to cost-cutting, to US jobs elimination …… to resentment….. which has now gone full circle to talk of protectionist measures, trade wars and the placing of the CAD of the US in jeopardy! Hello? The way I look at it, the Great Protector started this whole ball rollin’, kept pushing it along until the inevitable happened, i.e., we started to notice that those guys are eatin’ our lunch…… And now the Great Protector is publicly warning about “Protectionism”. Ain’t that hilarious? You bet. Almost as hilarious as commenting yesterday that “Inflation is quiescent despite 10% drop in Dollar”. This is against a reality check of these year-to-date gains, to name just a few items: Scrap iron +33%; Copper +35%; Nickel +44%; Lead +36%; Soybeans +60% and Cotton +40%. Okay. Outta’ my way while I get down off the soap box. Next case. Ugh.