US state and individual spending cuts dash recovery
While much attention has been focused on increased spending at the federal level in the United States, whether bank bailouts or stimulus packages, the spending cuts by local governments and individuals have acted in the reverse direction. This is going to make the recession longer and deeper than optimists believe.
Just look at the fiscal nightmare now confronting Californian Governor Arnold Schwarzenegger, with a pay cut so far of 14 per cent for 235,000 state employees. Arizona, Indiana, Ohio, Connecticut and Missisippi are among other states facing major budget deficits and spending cuts because the recession is slashing tax receipts.
Consumer cutbacks
At the same time US consumers are saving and not spending, with the annual savings rate now at a 60-year high of $769 billion. That is money coming out of the US economy, and if the figure looks familiar that is because it is almost the same size as President Obama’s stimulus package.
The Federal Government has been attempting to save the US economy from an even deeper slump by its interest rate cuts, bank bailouts and stimulus measures. But this is being at least partially undone by private savings and spending cuts at the state level.
However, there has always been considerable doubt among economists about a country’s ability to spend its way back to prosperity, especially in a nation whose economic problems arise largely from overspending and debt, particularly housing mortgages.
When households have overspent they have two solutions: sell the house or cut spending to service and repay loans. Remortgaging and indulging in another round of spending would not make this situation better. It would create a worse position with bigger debts and a longer time horizon for repayment.
The equivalent for a nation is a long recession, a period of below average consumption to make good some of the acummilated deficit. But the danger then is that this downturn in consumption can compound into a deflationary spiral and depression.
Pain to come
Economists are only too aware of this problem, and that appears to have made some investors overconfident about a quick solution. The reality is more subtle, and while some of the very worst of the downturn can be avoided that is a considerable difference to avoiding it all.
It is this unwinding of negative personal and state balance sheets that is going to prolong this recession, which may be less than half-way done. And while that is happening there is the threat of a further banking crisis as bad loans continue to be unwound both for personal and corporate credits.
And a final sting-in-the-tail is likely to be a bond market crash as the public sector will eventually only be able to borrow to meet its commitments by paying very much higher interest rates. The recession is therefore far from over.
The Times ought to cease publication in Dubai
Sadly The Sunday Times today missed publishing this photo of Paris Hilton in front of The Atlantis Hotel in Dubai which appeared on a Canadian website. All it could offer Dubai readers in a free copy published locally was a single story about the ruler of Dubai and a house purchase near to Newmarket.
One has to wonder how long this venerable British newspaper will continue rolling its presses in Dubai where it seemingly has less to say than its former editor Simon Jenkins whose recent Guardian article about Dubai proved highly offensive locally, more for its factual inaccuracies than obvious bias.
Internet site
If people in Dubai want to read The Times than they have only to turn to its extensive website or surf for its articles on Google.
It is interesting to read about green issues in its pages, but then perhaps ceasing publication in Dubai would save more trees – and an awful lot of paper must be wasted in the copies thrown over the walls of local villas to meet newspaper audits.
The plan fact is that whoever thought that distributing The Times in Dubai might one day prove a money spinner ought to be fired, if indeed the Murdoch family needs any prompting to do the honorable thing.
The outpourings of Wapping are just not relevant in Dubai. There is a three thousand mile cultural gap, and what appeals to the average UK person on a Sunday is hardly relevant in Dubai. Even a British visitor to Dubai might want to learn a little more about this Middle East multicultural enclave and not about the many problems of the UK.
Publishing error
How did this ever happen? Dubai is not the Costa del Fish-and-Chips. Nobody here wants to read long and arguably largely fictional articles about what might have happened in the UK last week.
Local advertisers have also largely voted with their feet. Who wants to know about the 299-pound, 32-inch television on sale at Richer Sounds in the UK? And does Richer Sounds really want to be promoting its cut-price TV in Dubai?
Surely the Al Murdochs know what is working and what does not, and ought to stop wasting their money by publishing newspapers in Dubai that nobody reads and which have nothing worth reading in them. But of course like any super-rich family what they choose to spend their own money on is their own business.
Reasons to think the bear market bottom not yet here
To be a true optimist about share prices this summer then you have to hold that last December was the bear market bottom, and that the rally since then still has further to go. Both assumptions can easily be challenged.
If you turn to the conclusions of the classic ‘Anatomy of the Bear: Lessons from Wall Street’s four Great Bottoms’ by Russell Napier then it is fairly clear that last autumn was not a bottom, even if we take this bear market back to 2000 and the dot-com bust.
Bear market cycles
Nine years is short for a bear market as these cycles can last up to 14 years. When Napier wrote his book in 2005 he said we would need to see four things before a true market bottom emerged: a bond market crash, a recession, lower interest rates and a general price disturbance (inflation or deflation) leading to a final bottom in share prices.
Given that in the past four years we have only seen two out of these four factors – recession and low interest rates – at least two more things still have still to happen based on the historical precedents of the 1921, 1932, 1949 and 1982 stock market bottoms.
‘Equities will have to fall below fair value and the likely catalyst will be a bout of deflation or, more likely, inflation. There will have to be a bear market in bonds and a recession,’ concluded Napier.
‘Before the bear market is over, the DJIA is likely to decline by at least 60 per cent – perhaps something more than 80 per cent (given the current level of earnings and replacement value of assets.’
Hyperinflation scenario
That would take the Dow down to 2,800-5,600 points, sometime between 2009-2014, according to Napier. Recently the hyperinflationists like Dr Marc Faber and Jim Rogers have suggested that inflation is likely to come to the rescue of share prices and support the Dow in an economic recession.
Share prices would therefore be supported in nominal if not real value terms. Yet there is nothing from the experience of the 1970s to support this theory. You have to look at the Weimar Republic or Zimbabwe for a precedent.
It could be that the US economy deteriorates to such a degree but surely we would first see a re-run of the 1970s? And that would allow time for Napier’s bottom to be formed in US markets. Unless you think it is different this time, Napier will be right. History is always a good precedent.
