A Myth Exposed
Bob Prechter reveals that "economic expansion" during the so-called boom from 1974 to 2000 was demonstrably weaker than it’s predecessor, 1942 to 1966.
How many times over the past decade have you heard glowing reports about the "New Economy"? Hundreds, maybe thousands of times, right? It’s been everywhere.
While the number of references to the "New Economy" in US and global publications hasn’t reached anywhere near its year 2000 zenith of 4247, the mainstream continues to grasp for the illusion. In 2001, mainstream publications mentioned the vaunted "New Economy" 2408 times.
Even in early 2002, following high-profile scandals on Wall Street, the term "New Economy" was still garnering an enormous amount of interest. In the first 3 months of this year, the press tossed around the term at nearly a 1000-times annual rate.
Economists continue to celebrate the broadening "service economy" and proclaim that economic growth in the new Information Age has been "unprecedented" in its vibrancy, resilience and scope.
Rhetoric is cheap. Evidence is something else.
As a regular reader of the Daily Reckoning you know that. You are well aware we have not had anything near a New Economy, and that all that talk is bogus. But what you may not know – and what you are about to discover – is that the economic expansion of recent decades in the world’s leading economic power, the United States, much less the rest of the world, is even far less impressive than most investors have been led to believe.
In fact, economic expansion during the late great "boom" period, which lasted from 1974 to 2000, was demonstrably weaker than that during the previous boom, which lasted from 1942 to 1966.
Both periods sported a persistent bull market in stocks that lasted about a quarter century, so in that sense, they are quite similar. But one noticeable difference is that the DJIA gained only 971% during the previous expansion, but a remarkable 1930% during the most recent one – twice the amount.
This tremendous bull market in stocks is the great "boom" that people have felt in their bones. Yet as you are about to see, the economic vigor and financial health of the boom period from 1974 to 2000 – the one that has received so much radiant press – failed to measure up to those of the 1942 to 1966 by every meaningful comparison. Please take a look at these comparative measures of "Economic Health":
Gross Domestic Product (GDP)
* From 1942 to 1966, the average annual real GDP growth rate was 4.5%. * From 1975 through 1999, it was only 3.2%.
* The average annual gain in industrial production from 1942 to 1966 was 5.3%. * From 1975 through 1999 it was only 3.4%.
Combining GDP and industrial production figures, we may generalize from the reported data that the economic power of the most recent boom period was one-third less than that of the previous.
But that’s only the beginning. To grasp the full measure of the underlying weakness in these "fundamentals," one must look beyond economic figures to the social balance sheets that underlie the results. Here are three examples:
* At the end of 1966, consumer debt was 64% of annual disposable personal income. That is considerable, but compare that to the end of 1999, where consumer debt was 97% of disposable income.
Federal Budget Deficit
* From 1942 to 1966, federal budget deficits were not sustained. The only consecutive years of deficits were in the war years of 1942-1946. The average annual federal deficit was less than $9 billion.
* In the current era, the annual federal deficit averaged $127 billion, which is far greater, even when adjusted for inflation.
Personal Savings Rate
* During the boom of the ’50s and ’60s, the personal savings rate followed a fairly flat trend, bottoming at 6.5% of disposable personal income in February 1969.
* It’s no secret what has become of savings in our time. The personal savings rate dropped persistently, falling to a record low of 0.5% in March 2000.
Despite media hype to the contrary and a widespread desire among gullible investors, it has not been a "New Economy" at all but rather a comparatively lackluster one.
Collectively, these statistics reveal that the economic advance in the United States has been slowing on a major-trend basis, a trend that is still manifest today. More than just a single or double-dip recession, the persistent deceleration in the U.S. economy from 2000- 2002 portends a major reversal from economic expansion to economic contraction.
But we need not rely on hypothesis or statistics alone. The 20th century provides two great precursors to the current situation.
As has been widely discussed here in the Daily Reckoning, the phrase in vogue in the 1920s was that the economy had entered a "New Era." Economists of the day, as President Hoover ruefully recalled in his memoirs, gushed over the wonderful economy, just as they are doing today. Were the Roaring Twenties truly a New Era, or was such talk a spate of hype spurred by the good feelings associated with a soaring stock market?
According to data from Professor Mark Siegler of Williams College (MA), from 1872 through 1880, the annual inflation-adjusted Gross National Product of the United States rose from $98 billion to $172 billion, a 68% gain.
From 1898 to 1906, real GNP rose from $228.8 billion to $403.7 billion, a 56% gain.
In contrast, from 1921 through 1929, during the Roaring Twenties, GNP in the supposed "New Era" rose from $554.8 billion to $822.2 billion, only a 48% gain.
This latter performance was particularly poor given that the stock market enjoyed a greater percentage rise from 1921 to 1929 than it had done in any equivalent time in U.S. history.
Similarly to today, the economy of that time failed to keep pace with the advance in stock prices and under- performed the prior expansion. The aftermath was the Great Depression.
And if you are over 20 years old, you surely remember the "Japanese Miracle" of the 1980s. The country’s corporate managers lectured and wrote books on how they did it, and the world’s CEOs flocked to emulate their style. The Japanese Nikkei stock average soared, and foreign investors poured into the "sure thing." Was the Japanese economy truly miraculous, or once again, were economists ignoring economic statistics and simply expressing the good feelings associated with its stampeding stock market?
Japan’s growth from 1955 through 1973 was extremely powerful, averaging 9.4% per year. But its economic growth from 1975 through 1989 averaged only 4.0% per year. This relatively poor economic performance coincided with a record-breaking stock market boom. Just as in the U.S. in the 1920s, the economy in Japan’s celebrated years failed to keep pace with the advance in its Nikkei stock index and under-performed the prior expansion. This double dichotomy signaled an approaching reversal of multi-decade importance in both stock prices and the economy.
Since the top of its own boom, the Nikkei stock index has plunged 70%, the economy has had three recessions in a dozen years, and the banking system has become deeply stressed.
The "New Era" of the 1920s ended in a bust. The "Japanese Miracle" of the 1980s ended in a bust. What do you suppose will happen to today’s "New Economy"? More to the point, are the recent rallies in the stock market the sign of a bottom and imminent recovery?
You can decide for yourself.
But I suspect that when historians return to this time they will discover the slow but persistent regression in both U.S. and worldwide growth over the decades in the latter half of the twentieth century and wonder why so few recognized it as a signal of the coming change.
for The Daily Reckoning
August 1, 2002
Editor’s Note: Bob Prechter is president of the economic forecasting firm Elliott Wave International. He is also the author of Conquer The Crash, #1 on the Wall Street Journal’s Business Bestseller’s List. Part 1 of Conquer the Crash investigates all the evidence that bust is coming. Part 2 tells you what to do about it.
Is the smart money going back into the stock market? We don’t know… but if we had any smart money would WE buy stocks now?
In 1962, stocks took off from a P/E of 12.5 – the highest "bottom" ever recorded. 4 decades later, we all have more labor-saving devices – such as computers and the worldwide web – on our desks, so we can work more…and we no longer know what P/Es really are. But even the most optimistic measures of the S&P 500 put the P/E at more than twice the ’62 level.
Professor Jeremy Siegel was on TV, I am told – the Kudlow Cramer gabfest – arguing that P/Es ought to be higher now…because the historical average was dragged down by inflation, depression and war. Thank God we don’t have those problems to worry about any more. Still, there may be at least as many threats to the corporate profit stream today as there were way back in ’62. Back then, the baby boomers were getting bicycles for Christmas and looking ahead to 3 decades of consumption. Now, they’re on the downhill slope…and saving Christmas wrapping paper for next year’s presents to the grandchildren.
Back then, the U.S. ran a current account surplus…and was still a creditor nation – rather than the world’s biggest debtor.
Back then, people could go through an airport without having their shoes x-rayed…and could smoke a cigarette in public without getting threatened with a prison sentence.
And, of course, back then…the Dow, at the low, was only 524.
As long as this old ball turns there are bound to be problems. And all of a sudden, it seems to us, more and more of them are welling up in one place – see tomorrow’s letter…
Eric…what’s the latest news?
Eric Fry, reporting from the Big Apple:
– The stock market keeps hanging tough. Its steep slide yesterday morning found plenty of buyers standing at the ready. The Dow dropped 140 points in the early going before reversing course to end the day 57 points higher at 8,737. The Nasdaq did not fare quite as well – falling 16 points to 1,328.
– The stock market’s respectable showing was all the more impressive given the less-than-stellar economic reports that crossed the newswires.
– First of all, it seems that the US recession last year was both deeper and longer than previously reported – that’s according to the new and improved data from the Commerce Department. Thanks to revised GDP data, we now know that the economy contracted for three quarters last year – not just one, as was originally reported. Now that all the facts and figures have been checked, rechecked and blessed by the powers that be, it turns out that the economy fell from January to September 2001, compared with the original estimate of a slight increase.
– Whew!…I’m glad we got this recession thing all cleared up. Now we can move on to the second half of the double-dip recession, without wondering whether the first half of the recession ever actually occurred. It’s so much cleaner this way.
– Yesterday, the Commerce Department also handed out its initial estimate for the second quarter’s GDP. The numbers didn’t look too hot. Second-quarter gross domestic product grew at a sluggish 1.1% annual rate, down significantly from the first quarter’s revised 5.0% growth rate.
– Some of the numbers inside the GDP report were even more disconcerting. The executive summary is as follows:
* Businesses aren’t investing * Consumers aren’t consuming * Government spending is on the rise * Prices are rising
– Gee, sounds terrific.
– According to the report, business investment fell for the seventh straight quarter. Meanwhile, the pace of consumer spending slowed to a crawl – advancing just 1.9% after growing 3.1% in the first quarter.
– About the only folks who are spending money these days are bureaucrats…and that’s not usually a good thing. Federal government spending soared during the quarter at a 7.4% annual rate.
– Lastly, the GDP report indicates that inflation is inching higher. The chain-weighted price index for gross domestic purchases rose at a 2.1% pace in the quarter – nearly double the pace of the prior quarter.
– Echoing the GDP report, the Chicago-area purchasing managers’ report released yesterday also shows that prices are on the rise. The report’s prices paid component jumped to 64.5 in July from 58.2 in June – the highest reading since September 2000.
– In other disquieting news from the windy city…the Chicago index of area business activity fell to 51.5 in July on a seasonally adjusted basis from 58.2 in June, while the new orders index tumbled a similar amount…oh well, maybe business is a little better in Peoria.
– Not all of yesterday’s news was downbeat, however. If we are to believe Unilever, the Anglo-Dutch consumer products group, business is booming. The company raised its full-year earnings forecasts, saying its top brands had proved resilient to the global economic turmoil.
– Apparently, consumers are cutting back on everything but Dove soap, Lipton tea and Hellman’s mayonnaise. The shares jumped 5.3% on the news…Hooray for Unilever! But before we pop the champagne corks and let the confetti fly, we should point out that Unilever’s market-pleasing result cost about 28,000 jobs.
– The company proudly boasted that its restructuring program, called "Path to Growth," has "succeeded" in firing 28,600 workers out of a planned 33,000 and has closed 75 factories, with 60 still to go.
– Is this really growth? It looks a lot more like shrinkage. Closing factories and firing workers might be exactly the right thing for Unilever to do at this exact moment. But over the long haul, neither companies nor economies can grow by shrinking. Growing companies and growing economies tend to hire workers, not fire them. It is probably not a good omen that one of the best profit performances of the quarter is the result of a company shrinking itself.
Back in Paris…
*** A stunningly beautiful day in the City of Light. The sky is as blue as any we’ve seen. The sun is bright. Birds sing in the trees and drunks sing in the streets. What a wonderful world!
But all around us, there are nervous Europeans who check the news and worry. They’ve got the largest share of $9 trillion worth of foreign investments in U.S. dollar assets. If the dollar goes down as it did in the mid- ’80s…they stand to lose $4.5 trillion. Little do they know…it could be far worse…look for more on the subject in tomorrow’s letter…
*** "You can’t swing a dead cat without hitting a corrupt jackass, in or out of government, these days," opines the Mogambo Guru. The Financial Times studied the compensation of corporate insiders at the many large companies that have gone bankrupt this year. "The Barons of Bankruptcy" walked off with $3.3 billion in compensation – leaving stockholders holding the bag, says the FT.
*** But the Mogambo thinks big. "I am now convinced that we are not only seeing the end of the bull market," he writes, "but we are seeing the end of the world as we know it." Has the Guru gone mad? If so, he has company here at the Daily Reckoning.
*** But heck, many people made money and had a good time – even after the Roman Empire peaked out during Trajan’s reign about 100 AD. Romans partied on the banks of the Tiber for another 355 years, until the city was finally sacked by the Vandals in 455.
*** Is it time to buy biotechs? We wouldn’t have thought so. We know even less about biotechs than about other things…and we’re proud to say that we’ve been drug free for many years now. Still, there they are – in Grant’s Interest Rate Observer – the picks of the Millennium Value in Biotechnology Fund. We don’t know what the companies do or if they do anything at all. But we note that several of them have more cash in the till than the market says they are worth. So, even if the drugs are worthless…maybe the companies are not.
*** Synaptics could be a hit Broadway show…or it could be a "large, unappreciated patent estate in the area of G protein-coupled receptors." We don’t know. But according to Grant’s, its market cap is only 156% of its market cash. Titan, meanwhile, could have a "schizophrenia drug partnered with Novartis" or it could have a nuclear missile. Maybe it depends on the day. But what it definitely has is a lot of cash – nearly enough to buy back all its shares at present prices.
*** Variagenics has enough to buy back all its shares twice. So does Pharmacyclics. What these companies do, we don’t know. But we note that investors commonly go mad in both directions – bullish and bearish. The question is open…investors might now be bearishly mad on biotechs…or by freak accident, they might have come to their senses.