A premier source of information for American investors is the weekly newspaper Barron’s, a publication of the Dow Jones Corporation. Among the major events in the publication’s coverage of global markets each year are two semiannual "roundtables" in which the most noted of Wall Street’s investment gurus gather for a lengthy discussion of the economy, corporate profits, and future trends in the financial and commodity markets.
Last June the Barron’s Roundtable was decidedly upbeat. The subtitle was "Summertime and the Fed is easing." The publication summed up the views expressed by its panelists, stating: "With the nation’s economy growing, corporate earnings climbing and the bond market fully prepared for the Federal Reserve to lift interest rates, these legendary investors expect the major indexes to rally as summer unfolds… Sure, there is plenty to worry about… But this is a summer of fun, and potential profit."
A very different picture was painted by another panel that met only ten days later at the Mayflower Hotel in Washington. This panel was organized by the Center for American Progress and a paper prepared for the conference asked the question, "Can Consumers Continue to Keep the Current Recovery Alive?" Professor James Galbraith of the University of Texas talked about weakness in employment growth; Dr. Eileen Applebaum talked about lagging wages; Dr. Robert D. Manning of the Rochester Institute of Technology talked about the extraordinary growth of consumer debt; and Princeton Professor of Economics Paul Krugman stated, "I think the answer has to be [that] consumer demand is not going to keep on growing at recent rates. It might even turn down… The point is that this is a recovery that is more fragile than people have been saying… we may have some unpleasant surprises in the quarters ahead."
Perhaps the discrepancy in the two perspectives was simply that the Wall Street prognosticators were focused only on the short term. But it appears that the longer term questions raised by the Center’s panel last July 1st have now become the short term view of many on Wall Street. Today’s edition of Barron’s contains the final segment of the January Roundtable. Barron’s labeled this roundtable discussion "Against the Wind" and began it by stating:
THE FATE OF THE WORLD HANGS on just one thing: the indomitable U.S. consumer. That’s one thing, at least, on which the members of the Barron’s Roundtable agree. So long as John Q. Wal-Mart and his uptown cousin, Jane Q. Neiman Marcus, have a yen to spend and the means to indulge it – so what if they’ve borrowed against all their worldly possessions? – the wheels of global commerce will continue to spin, and the great day of reckoning for stocks, bonds, real estate and other inflated assets will be postponed. Granted, that’s a big burden to place on so unlikely a savior…
While the panelists had differing views on the course of the economy over the next twelve months, the tone was remarkably more subdued than in June. Marc Faber, managing director of Marc Faber Ltd. of Hong Kong, stated,
To say that economic and corporate growth in the U.S. were good is a joke…there has been massive credit creation. The quality of growth has been extremely low because growth has been due largely to debt expansion, leading to asset inflation.
Fred Hickey, the editor of The High-Tech Strategist, was even more pessimistic:
To avoid Japanese-style deflation after the stock-market bubble burst, the Fed had to cut rates to 1% from 6.5%. Still, the economy was sub-par, so the federal government stepped in with a $1.35 trillion tax-cut package. In 2001 they stuffed money into people’s pockets via rebate checks, followed by further tax cuts in ’03. We’ve been living off that stimulus since. In June we saw the last of the refund checks, precisely the time when retail sales started slowing. They’ve been disappointing in almost every month since. Christmas sales were less than half of expectations. Consumers also were living off mortgage refinancings, and the "refi" market has died. Credit-card rates have risen by a full percentage point and are going higher this year. Consumer housing debt is up to $7 trillion, up 50% over four years. A third of recently issued debt is adjustable-rate. Also, the impact of Fed rate hikes is felt six to 12 months later…The chickens are coming home to roost in 2005. GDP will be disappointing and the consumer will retrench. Every survey shows that corporations plan to hold spending flat, to do more with less. We are heading toward a recession. I don’t know if it will happen in 2005, but we’re heading there, for sure.
Bill Gross, founder and chief investment officer at Pimco, was also concerned about consumer demand:
The world is caught in a tug of war between reflation and deflation. Deflationary forces include high debt levels on a global basis, slowing consumption and globalization. China – and all of Asia – is a deflationary force in terms of introducing cheap labor to world markets and forcing prices lower. The world is suffering from what economists call a lack of aggregate demand.
Mario Gabelli, chairman of Gabelli Asset Management, took this view:
Fiscal and monetary stimulation are going to be headwinds this year, though I’m still working out whether they’ll be a mild breeze or a gale. The consumer is running on a little over empty, but falls into two camps – the guy who shops at Wal-Mart and the guy who shops at Neiman Marcus. If you look at comparable-store sales for December, Neiman’s were up 11%. (Wal-Mart was up 3% but had to cut prices to get there). The wealth effect works only for the people who shop at Neiman Marcus.
Felix Zulauf, founding partner and president of Zulauf Asset Management, made these points:
Structurally, the emerging world is being integrated into the global economy, which results in a deflationary bias. There is a lack of aggregate demand because there are more producers than consumers. The U.S. consumer is the world’s consumer of last resort and is bailing out everybody… Incomes alone aren’t good enough to give you a good consumption picture.
Meryl Witmer, general partner at Eagle Capital Partners, also stressed the problem faced by consumers:
I don’t see a lot of growth. The consumer is pretty tapped out. The government is already spending everything it can. The companies I talk to are very, very conservative about capital spending. That doesn’t help GDP growth at all.
One of the most striking exchanges during the roundtable came on the question of whether the U.S. consumer could be replaced by buyers overseas:
Faber: Wages could rise by 3.3%, but that might be offset by rising inflation. We will experience, maybe not in 2005 but in the future, the limits of monetary policy. You can print money but also have asset inflation, which one day creates an affordability problem. It would be very wrong to think this illusionary wealth creation, which stems from debt expansion leading to asset inflation, will continue forever. And by the way, the American consumer is very important, but he’s not the only consumer in the world. In terms of luxury goods, Asia ex Japan accounts for 11% of Gucci’s global sales. Japan accounts for 20%, while the Americas account for 21%. In the case of Hermes, Asia ex Japan accounts for 16%, Japan for 30% and the Americas for only 14%.
Zulauf: Marc, the Asians are crazy about brands. You are right about the numbers but the traits they demonstrate are at the margin. It’s the U.S. consumer that counts, and the case you make about long-term weakness is a valid one. If it happens, the world is in trouble.
Faber: The world is already in trouble.
Gabelli: We know that.
For those wondering how to manage their Social Security funds once the government gets out of the business, the recommendations of the Barron’s panel were a little disconcerting. While the more optimistic panelists like Abby Cohen of Goldman Sachs recommended some stock purchases, most of the picks were decidedly on the bearish side. They included the purchase of commodities futures contracts, the short selling (purchase of sale of a contract that would allow an investor to make money if the value of a stock declined) and the purchase of companies that mine gold. None of those appear to be options permitted under the plans for managing Social Security accounts.
Scott Lilly is a senior fellow at the Center for American Progress.