When I wrote The Perfect Financial Storm last July, I saw several storm fronts developing in the economy, the stock market, and the currency market that could, like the movie, lead to The Perfect Storm. In Tsunami I wrote about the credit bubble and the problems it presented for our economy. In Bear-o-metric Pressure, I warned of the dangers of an overvalued stock market. For the record, I wrote my Financial Sense Newsletter about the coming demise of the technology market in Trains, Planes & Dot Coms on January 2, 2000. In each subsequent Storm installment, I have pointed out that these various storm fronts were gathering momentum. For the first time in decades, there now exists the possibility of The Perfect Financial Storm to hit the United States’ economy.
Today, as I write this introduction, Wall Street and Washington are telling investors that things will improve by the end of this year. Fed Governor Laurence Meyers recently assured the financial markets that because of the aggressive rate cuts implemented by the Fed, economic growth will be back to 3.5 to 4% in a few quarters. Investors poured near-record amounts of money back into mutual funds last month because of the stock market’s rally. The market’s rise is based more on hope and hype than it is on fact. Companies continue to lay off workers at an accelerating pace. Hiring plans are at their lowest level in a decade. Just ask yourself how many people you personally know who have lost their jobs in the last twelve months. Companies don’t lay off workers if things are going to improve in a "few quarters." This past week’s economic reports show that new home sales plunged 9.5% in April, durable good orders fell close to 5%, the book-to-bill ratio has fallen for eight consecutive months to .42, GDP has been revised downward to 1.3%, and the trade deficit just hit another record. These reports resemble an approaching recession more than they do an economic recovery.
As for corporate earnings, that’s the subject of a future Perspective article. Suffice to say they are decelerating rapidly. The fact that companies are beating estimates covers up the real story. IBM beat estimates, but as Forbes has pointed out, they beat estimates through creative accounting rather than a change in the fundamentals of the business. Hewlett-Packard beat estimates and the stock rose 15% on the news. The real numbers show HP’s earnings fell by $600 million to around $300 million, a drop of 66%. The only thing that is accelerating is hype. We live in an entertainment-driven society. Much that is reported by the financial media resembles entertainment and fiction than it does reality. We live in a world of make believe.
How does one write about something that isn’t in the history books? Part 9 has been a struggle to write because the storm I see developing is unlike any other storm we have ever experienced. Because of the systemic risks that exist in the world’s financial system, a storm front in one market could quickly spread to another market. The contagion could spread much like a brush fire from market to market, economy to economy. Economic and financial storms could meet up with a monetary storm and we would have the equivalent of The Perfect Storm. I sincerely hope this is not the case. The possibility still exists. I’ll leave it to the reader to decide whether history’s greatest financial storms are repeated or man in his infinite wisdom has eliminated them. Man can forecast the weather, but he is powerless against nature itself.
With best regards,
Jim Puplava
“A word fitly spoken is like apples of gold in pictures of silver.” – Proverbs 25:11
