OVERESTIMATION
by Bill Bonner
"The first thing to get straight is that this was - and still is - the most outrageous bubble economy in history, far worse than the U.S. bubble of the 1920s and Japan's bubble of the 1980s."
- Dr. Kurt Richebacher
"What have you written in the last 2 years?" we asked the French analyst mentioned above. The last article we saw from him was dated March, 2000.
"Nothing," came the reply. "I only write when I have something to say."
Daily Reckoning readers may sigh.
"We write every day - whether we have anything to say or not," we explained.
But the trouble is, we never know if we have something to say or not until we've said it. In that spirit of adventure and discovery, we take up our laptop this morning.
You are warned, dear reader. We head out this morning with neither map nor compass...and will be as surprised as you are by where we end up.
First, we look around and notice that we have managed to stay well ahead of the crowd this past six months. We almost always march at some distance from the crowd; occasionally, we find ourselves in front of it.
"Our guess," written at the beginning of the year, was that "Mr. Market will decide to punish Americans' super-confidence."
This he has begun to do. After 475 basis-point cuts, Americans are no longer quite so sure that Greenspan has the economy under control. Nor are they quite so confident that the American business model will forever be the envy of the world. Nor are they as ready to believe that a strong recovery - in both stocks and the economy - is coming in the next quarter.
Now, with the crowd headed in our direction, we look for open ground. "Don't Bet Against America," says Barton Biggs. "Never underestimate the resilience of the American economy," say economists and investors all over the world. The particulars have proved disappointments.
There was no economic miracle after all...no New Era...no technological utopia. The business cycle is still with us, and so is human greed and error.
What remains is an inchoate feeling that this great American economy - with all its innovators, risk takers, empire builders, and flexibility - won't disappoint us.
But who ever underestimated the American economy, we wonder? Au contraire, it seems to have been over-estimated in every detail and by every measure. What economist imagined that it would produce fewer new jobs in the 21st century than it did at the end of the 20th?
Who thought corporations would earn less money in 2002 than they did in 1997? What pension fund forecast was based on negative stock market growth for the last 3 years?
And even now that the Dow is down 24% from its peak, how many investors underestimate its prospects for the future? Almost none. Instead, surveys show that investors think these last three years have been the work of the some temporary devil...a brief interruption in the normal march of financial progress. Their estimates for the next few years have never been higher.
And although unemployment levels have reached a 19-year high, what consumer worries that he will not be able to find a job in the American economy of 2003? Hardly a single one.
A man's tendency is to think better of himself than he deserves. The latest figures from Dr. Kurt Richebacher show just how high Americans' estimates of their extraordinary economic strength have become.
"For the fourth quarter of 2001," he writes, "the national income accounts show personal savings of $27.9 billion and business savings (undistributed profits) at -$3.5 billion, both at an annual rate. Aggregate net private savings thus amounted to $24.4 billion. This is virtually zero, compared to a total of about $473 billion in 1997."
Five years ago, private savings were 5.8% of GDP. Today, they are at less than 1%. If people save for a rainy day, based on current savings rates, they must think it will never rain again.
While Americans stopped saving, they continued spending at an even faster pace. "Private consumption grew at an average of 5.1% a year from 1997 through 2001," writes Richebacher, "far faster than the 3.1% average annual increase of GDP."
Not everyone's estimates are so optimistic. Businesses, trying to figure out how they're going to pay their debts and make a profit, see precipitation in the forecast. In contrast to individuals, businesses have become reticent about borrowing, hiring, and spending.
"Total business borrowing edged up in the first quarter at an annualized rate of $127.4 billion versus increases of almost $600 billion in 1999 and 2000, " Dr. Richebacher elaborates. "Corporate debt growth, meanwhile, fell even more sharply. After averaging annual increases of about $400 billion during 1998-2000, it increased at an annual rate of just $12.6 billion in
the first quarter."
Who underestimated the fall-off in business investment?
Who underestimates it now?
Who imagines that this marvelous economy - the strongest, most flexible and dynamic in the whole ding-dong world - might completely fail, just as Japan's miracle economy of the 1980s fell apart in the 1990s?
Who believes the U.S. economy is not underestimated, but still greatly overestimated?
We do.
Your editor, signing off until next week...
Bill Bonner
P.S. Daily Reckoning readers are surely better off than most investors. "Stocks will fall," we said, forgetting to hedge our bets. But stocks did fall. Investors who had the good sense to panic out of equities in January spared themselves a 12% loss on the Dow...and much more if they were holding the most popular stocks.
Doing nothing, as we advised, has been about the best thing you could do. Cash - what you end up with when you do nothing with your money - is at least even. And euro-cash, which we also advised, is ahead by 8% against the dollar.
Cash is the one thing most people don't have. They have stocks. They have houses, with mortgages. They have SUVs and big screen TVs. They have bills. What they lack is cash.
Mr. Market favors what people most need, we notice.
People with a lot of debt and a little savings need cash. As the months go by, we suspect Americans will come to appreciate what cash they have and wish they had more.
Looking back over our recommendations and predictions made in January, we find we were wrong on only one point. Consumer prices, we thought, would begin to head down in 2002. So far, they have not. But, the year is not over. Neither is the bear market.
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