Today's U.S. Economy
Today’s U.S. Ecomony: A Brooklyn Bridge Bull
by Paul Mampilly
“…Today, looking at the future, prognostications are once again for more of the same of what we’ve had recently: low interest rates, higher prices for stocks, bonds and real estate, Alan Greenspan, inflation, contained financial crises, loose credit, more consumer spending, the continued primacy of money over value or values, the belief that things simply cannot go seriously wrong without some painless fix…”
In Brooklyn (where I live), there’s plenty of bull talk but much of it is of another sort. Not the sort that one discusses amongst an august audience. However, in the land eponymous with the ultimate scam: the sale of the Brooklyn Bridge, I have coined a phrase that elegantly illuminates the financial foolishness of our time. In the financial world, one is known as a bull if one believes that prices will increase. What though is a Brooklyn Bridge Bull?
Today’s U.S. Economy: Do you find yourself in the following situations?
a.) You’re currently piled high and wide with technology stocks or stocks in general
b.) You’ve just plunked down the equivalent of 17 years of your annual take home pay for an apartment (Big bets on a bouncy pin)
c.) You have debt that equals several times your income
If you answered yes to one or more of these, then, you’re a Brooklyn Bridge bull.
Today’s U.S. Economy: Or perhaps, you find yourself thinking one of these comforting thoughts
a) That somehow the pincer movement of wage deflation slowly encircling one industry after another will escape you
b) That interest rates will stay low forever, despite record deficits and debt
c) That between the stock bubble and the real estate bubble there will be no day of reckoning
If you find yourself in this second group, you too can put yourself down as a Brooklyn Bridge bull.
As a realist, I find myself merely bullish but on very different things. I’m bullish on protectionism and that trade barriers will increase. Bullish on wage deflation in the U.S. and Western Europe. Bullish on taxes, higher taxes that is. Bullish on the re-emergence of labor as a force. Bullish that interest rates will be higher. Bullish on asset price deflation. Bullish that U.S. economic growth will disappoint. Bullish that the era of Brooklyn Bridge bullishness is near a close.
I portend that the next twenty years will be unlike the previous twenty. Old eras end and new eras begin unannounced. An era has passed us, definitively. It was the era of asset appreciation. Houses, stocks, bonds, paintings, collectibles, tchotchkes, etc., all marked the end of this era with prices in the stratosphere. They will need to pass an era buried in the dirt.
In 1981, when the Fed Funds rate peaked at 20% and the stock market bottomed a year later, a new era began. It began quietly. Two years earlier in 1979, Business Week proclaimed the “The Death of Equities” on its cover. Prognosticators predicted even higher rates, permanently declining stock prices and more stagflation. But that era, marked by tremendous economic (eg: emergence of Japan), political (eg: a shift of the center of politics to conservative ideas) and social change (eg: de-segregation, women’s lib) had ended just as the cries for more of the same were the shrillest.
Today’s U.S. Economy: Looking at the Future
Today, looking at the future, prognostications are once again for more of the same of what we’ve had recently: low interest rates, higher prices for stocks, bonds and real estate, Alan Greenspan, inflation, contained financial crises, loose credit, more consumer spending, the continued primacy of money over value or values, the belief that things simply cannot go seriously wrong without some painless fix.
However, change, an unstoppable force equal to inertia has begun its inexorable work of undoing the past and remaking the present. The new era began quietly with Federal Reserve cutting rates to 1%. Today, one cannot imagine double-digit interest rates or stagnation or deflation or even inflation. Goldilocks is the dominant fable being repeated by Wall Street strategists. Not too hot, not too cold, from here to eternity.
Yesterday, Delta Airlines asked its labor force to absorb $1 billion in cuts. The Democratic party ticket nominated John Edwards for Vice President who campaigned vociferously (during the Democratic primaries) to overturn NAFTA and to re-negotiate trade treaties to protect American industries and workers. Software development and call centers in India and other English speaking nations have begun to eat away at the edge of the service economy. The manufacturing economy in the US has been a declining source of employment in the US for at least a decade. In Europe, French workers at Bosch (a car parts manufacturer) have agreed to work longer hours with no extra pay. Bosch had threatened to move the plant to the Czech Republic if the workers did not accede to the company’s demands. In Germany, workers at a Siemen’s have agreed to increase the workweek from 35 to 40 hours for less pay. United Airlines says it will no longer fund its pension plan. The New York Times reports that layoffs are at a historical high and that new jobs often pay less than what the workers were paid at their old jobs.
I’m often asked if I’m predicting the end of the world. Definitely not, but it might feel like it, particularly if you’re Brooklyn Bridge bullish, stuffed full of debt and waiting for another enriching asset boom.
If you’re a Brooklyn Bridge bull, waiting to break even on Cisco Systems (CSCO) purchased during the boom in 2000 or planning to “flip” that home you bought a few months ago for a hefty profit, the day of atonement beckons.
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Paul Mampilly , CFA is the chief correspondent for www.capuchinomics.com. He has worked as a portfolio manager/analyst at Bankers Trust, Deutsche Bank and ING. You can read more of his analysis and opinions and contact him through www.capuchinomics.com