Understanding The “Kitchen Sink Economy”
To figure out where you are going, it sometimes helps to know where you have been. This is one of those times.
The last Bull Market began in 1982, and ran almost uninterrupted for 18 years. During the last 3 of those years, an enormous bubble – mostly Dot.com/Tech/Telecom – inflated. As that mania began to unwind in March 2000, few were willing to believe it. The Bulls failed to recognize the shift, and “pounded the table” all the way from Nasdaq 5100 down to 1100. This is not atypical behavior.
The post-Bubble economic environment was exacerbated by a modest recession and then by the 9/11 attacks. But in our opinion, the most significant negative factor was and remains the great 1990s bubble, and its repercussions. That set the tone for the economic issues of the ensuing decade.
As is typically the case, the aftermath of the popped bubble was extensive. Huge excess capacity was created at the same time that fantastic productivity gains were being made. Hiring was frozen, capital expenditures ground to a halt. The economy had a hangover proportionate to the huge frat party that was the 1990’s tech & telecom fest.
Market crashes are typically followed by “refractory periods” of a substantial length of time in which the prior excesses get wrung from the economy. This process sets up the next healthy expansion. In an ideal world, the powers that be would recognize this, and allow market forces to work off this hangover on its own. Alas, most elected and appointed officials lack the discipline and the will to get out of the way.
The post-crash era saw massive government stimulus: Personal income taxes were cut, deficit spending soared, interest rates were dropped to half century lows, money supply increased dramatically, two wars were prosecuted, corporate dividend taxes were slashed, capital gains taxes were cut, capital expenditures were granted a special accelerated depreciation. Massive stimulus from the government included “everything but the kitchen sink.”
Now, that stimulus is fading. The most vibrant sector of the economy – the real estate complex – is slowing. Increased energy costs are a drag on the global economy. Interest Rates and taxes have been going higher. Earnings momentum, as measured on a year-over-year basis, has been slowing for 5 quarters. Hiring remains anemic, CapEx is unimpressive, LEI are softening, GDP is fading.
The market has begun recognizing that the first post-bubble expansion was premature. It has failed to develop organic momentum of its own. Without further stimulus, this cycle will more likely than not end over the next 2 or 3 quarters.
Tuesday, April 19, 2005 | 12:29 PM | Permalink
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» This is the boom from Fester's Place
Right now is the boom of this cycle.
Depressing isn't it. Job growth is keeping even (at best) with population growth. Hourly wages are stuck in an extremely narrow band where the only movement is random statistical noise. Total cash compensati... [Read More]
Tracked on Apr 20, 2005 9:47:36 AM
Comments
Nice analysis.
Posted by: anne | Apr 19, 2005 1:31:09 PM
Agree.
Posted by: Hans Suter | Apr 19, 2005 1:59:14 PM
This morning's Lex:
Macroeconomic trends evolve slowly. Shifts in investor sentiment, however, have more in common with the behaviour of lemmings.
Posted by: fatbear | Apr 19, 2005 2:11:19 PM
all that overcapacity in telecom provided the Asian Tigers instant access to the global information web overnight. U S venture capitalists inadvertantly provided a vital tool for 21st century business to India and China virtually free of charge.
Posted by: rob | Apr 19, 2005 2:13:36 PM
As the smoke clears, the big picture emerges, and it's not pretty. Our politicians want us to hang in there as long as possible so they can finish their agenda. That's why they keep up their pep talk and so far the public has been persuaded. Paul Volcker, on the other hand, is retired from the government so he can be brutally honest.
For those investors who glimpse the big picture, this is perhaps the scariest time they ever remember. Even cash looks bad because the dollar seems likely to deflate. This is truly a nightmare about to happen.
Posted by: Grim Reaper | Apr 19, 2005 2:42:02 PM
Yeah, but Yahoo and Intel earnings were killer today afterhours. CPI in the morning...
Posted by: muckdog | Apr 19, 2005 9:06:03 PM
Lighten up, Francis.
Posted by: mh497 | Apr 19, 2005 9:21:44 PM
The amazing thing is that 90% of the stimuli you mention -- the tax cuts, more tax cuts, deficit spending, and one of those two wars -- were part of an agenda created during the bull market and bull economy of the 1990s, but an agenda that couldn't be enacted until the GOP controlled both Congress and the White House. Remember that back in the 2000 campaign, Bush was going to cut taxes because budget surpluses were immoral. "Stimulus" was a rationalization after the economy changed (and well before 9/11). And we now know that the Iraq war of Wolfowitz, Perle, and Cheney has its origin well before the election of George W. Bush.
So, it's all just coincidence that this "stimulus" happened during a period of recession.
Posted by: seamus | Apr 20, 2005 6:49:59 PM
The economics are dead on, the implied political implications in the comments are entertaining simply because if there was a left agenda in the White house the right would be saying the very same thing.
Posted by: Stu | Aug 24, 2005 11:45:27 AM
