A hard landing?

Louis Proyect lnp3 at SPAMpanix.com
Tue Jan 9 11:57:46 MST 2001

2001 AD: From Boom, to Gloom, to Doom
By Michael Roberts
January 1, 2001

Year 2000 was when the five-year US hi-tech stock market bubble burst. And
burst it did with a vengeance. In March 2000, the stock market index of
hi-tech companies called the NASDAQ reached over 5,100. That compares with
under 1,000 back in 1995 when the great hi-tech revolution in the internet
and e-commerce really began. But when the stock markets closed on December
29, the last working day, the NASDAQ had fallen back to under 2,500, the
heaviest decline in its 18-year history as an index.

The more general indexes of measuring stock market prices in the US are the
Dow Industrial and the S&P 500. They include all the big US companies, not
just the "new economy" sectors of internet companies like Yahoo or America
Online or the cyber equipment suppliers like Cisco, or the software giants
like Microsoft. They also cover the auto companies, the retailers, the big
chemical and energy companies. In other words, what are now called the
sectors of the "traditional economy". But these indexes did not do much
better than the NASDAQ. Last March the Dow rose to 11,700 compared to under
8,000 just two years before. But by closing at the end of 2000, it had
fallen back to 10,800. The S&P fared similarly.

None of this was exclusive to the US. In Europe, stock markets also lost
ground along with the Euro. The Japanese stock index, the Nikkei took a
terrible plunge. And Asian markets followed the NASDAQ down like a dog
behind its master.

What does this tell us? It tells that capitalist investors lost their
confidence and enthusiasm for buying hi-tech companies and are starting to
lose confidence in companies in general.

That loss of confidence is usually an indication of the worries and
uncertainties about the future not the present. Indeed, the year 2000 was
one of general success for capitalism. The US economy grew at a heady pace
by its standards, up nearly 5%. European economies, including Britain, also
grew by around 3-3.5%. Asian economies continued their recovery from their
horrific collapse in 1997-98 and jumped by 5-10%. World trade rose at a
record rate. Only Japan continued to wallow in economic despair, achieving
just a 1.5% uplift in real GDP.

Apart from oil prices, inflation remained moderate, if slightly
accelerating, during the year. As the year ends price rises are hitting 3%
in the US, 2.5% in Europe, 2% in Asia and still falling in Japan. And the
great energy price fear is disappearing as oil prices drop back from highs
of $35 a barrel to $20 a barrel.

So what is spooking the stock market investors? Two things: first,
throughout most of the year, the central banks of the world have been
raising interest rates. The US Fed, the European Central Bank, the Bank of
England and even the Bank of Japan have hiked rates because they thought
that growth was getting out of hand (apparently you can have too much of a
good thing under capitalism) and that energy prices were going to cause

Bankers are only worried about two things. The first is whether you can pay
them back and the second is inflation. That's because money lenders want to
maximise the returns on their lending. If prices rise, it means that when
you pay them, even with interest on top, the value of their original loan
has fallen. So keeping inflation down is the bankers' obsession. Indeed, it
is written into the objectives of most central banks as their main task.

Raising interest rates means that the cost of borrowing increases. So
households and businesses reduce their borrowing. They invest and spend
less and they save more because the interest rate is better. The result, so
the theory goes, is a slower growing economy. Demand for goods falls back
into line with supply and inflation slows. But, of course, a slower economy
and higher interest rates mean less profit for manufacturers compared with
bankers. That spooks investors into buying less shares.

And that brings us to the second thing worrying financial markets. Up to
the second half of 2000, profits had been growing at a record rate in the
US. Corporate profits had reached nearly 10% of US GDP, a figure not
reached since the mid-1970s.

But now the US economy is slowing down fast. In the third quarter of 2000,
the growth rate dropped to an annual rate of 2.4% from 5.9% in the second
quarter. At the same time, more and more US companies announced that their
profits in the last quarter of 2000 and going into 2001 would be a lot less
than most investors had been expecting. These "profit warnings" really
worried potential share buyers. Instead, they began to sell.

But the big selling binge was in hi-tech companies. Their prices had
rocketed to such levels that investors were paying over 180 times annual
profits. In other words, it would take 180 years to make enough in
dividends to cover the price of the stock! Of course, investors did not buy
on that basis. They expected the price of their hi-tech stocks to rise so
they could sell them at a profit later. Such is a stock market speculative
bubble: you don't buy for the dividend or share of annual profit, but to
sell at a higher price.

And up to March, investors were buying companies that did not even make a
profit. Indeed, nearly all the internet companies or online retailers were
using huge amounts of investor cash to spend and predicting no profit for
one, two or even five years! As the profit warnings started to come and the
economic slowdown became a reality, investors began to realise that most of
these hi-tech ventures were going to fail and it was time to get out.

A colossal shakeout is now under way. It will continue through 2001. You
can take a firm bet that 90% of the current "new economy" companies listed
on the NASDAQ, Japan's JASDAQ, or Germany's Neuer Markt will not exist in
five years time. That is the result of all previous stock market bubbles in
new industries and this time will be no different. Indeed, if NASDAQ prices
in relation to realisable profits fall to reasonable levels, the NASDAQ
index will have to fall to below 1,000. That's over 85% down from its
height last year.

And investors have not realised yet that much of the profit increases
recorded by the companies they have bought are really fake. That's because
many hi-tech companies have spent huge amounts of investors' money not just
on research and development of new software or on computer and telecoms
equipment. They have also bought up other hi-tech companies to incorporate
their potential growth and they have speculated on the stock market as
well! For example, Cisco Systems is one of the biggest companies in the
world in stock market terms. It makes internet and telecoms equipment. It
is at the heart of the hi-tech cyber revolution. It is making considerable
profits. But over 25% of its profit comes from investing in other companies
on the stock market. If the stock market collapses, so does Cisco's
profits. The virtuous circle will turn vicious.

But will the stock market collapse further in 2001? Most capitalist
commentators say no. Indeed, their forecasts in the pages of the Financial
Times, the Wall Street Journal, Forbes or Finanzen predict a new rally in
stock prices. Behind their optimism lies a belief that, although the US and
the world economy may slow down in 2001, it will be a "soft landing". In
other words, the capitalist economy is not heading for a recession where
output actually falls for at least half a year and unemployment rises; or
even worse a depression, where the world economy does not come out of its
collapse for years, as in 1883-5 and 1929-32. That would be a "hard landing".

Full article at: http://www.marxist.com/Economy/boom_gloom_doom.html

Louis Proyect
Marxism mailing list: http://www.marxmail.org

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