Issue # 73 March 16, 2003
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Prosperity just around the what???
Which Corner?
There was a very interesting article that passed through our inbox on Wednesday morning of this past week. It proclaimed that "Budget Gaps Could Derail Economy - UCLA". The story went on to say that although the war will have an impact, there's an even bigger mess, in the form of the ballooning state budget deficits that are popping up with alarming frequency around the country.
Of course, some of it is real and some is not.
This week, we'll look at the numbers and the methodologies and try to reach some sort of conclusion about what path the economy will take as it continues to defy gravity, logic, quants, and common sense, in no particular order.
Finding the Corner
Ed Learner at UCLA, author of the report from the Anderson Business School at the university, says how states handle things short term will determine how the economic recovery fares for the next year and beyond. But about that elusive recovery which we keep hearing about? That's just not going to happen.
Whoaa!!!! Here's one of the most telling markers we see as we sink further into the Second Depression: the incorrect belief that "prosperity is just around the corner". Even if you have read very little about the Depression, you should have run into the phrase "prosperity is just around the corner." It wasn't then, of course, and it's not likely to be right now, either.
The first use of "prosperity is just around the corner" seems to have happened on the front edge of the Depression, specifically in the 1932-1933 area. As the country sank into the secondary depression, 1936-1938, another wave of optimism rolled across the great Country. The notion was so popular that it even spawned a movie title. Directed by Irving Cummings, the movie is described by AMC this way:
"There were breaks in the clouds of the Depression in 1938 and prosperity must have seemed just around the corner once again. There could be no more hope-filled movie than this. Little miss sunshine Temple convinces a stingy millionaire to come across with jobs, just in time to save her janitor father from despair. Shirley's fourth outing with "Bojangles" Robinson. Songs include "Just Around the Corner," "I'll Be Lucky With You," "I Love to Walk in the Rain," and "Brass Buttons and Epaulets." http://216.239.53.100/search?q=cache:uwXXzY1zik0C:www.amctv.com/show/detail/0,,1778-1-EST,00.html+%2Bprosperity+%2B%22just+around+the+corner%22&hl=en&ie=UTF-8
If you'd like to read a more detailed description of the movie, click over to http://216.239.53.100/search?q=cache:yvbww2r3c2sC:www.san.beck.org/MM/1938/JustAroundtheCorner.html+%2Bprosperity+%2B%22just+around+the+corner%22&hl=en&ie=UTF-8
What falls into focus this week are really two things: First we have the notion that "Prosperity is just around the corner" being repeated in more modern terms by economic puppets of the Bush Administration. Not that this is a good thing or bad, it's just the way it is. The government, with the possible exception of Paul Volker's jawboning a few years back about inflation, seldom has much to gain from telling people how things really are. Government is expected to fan the flames of optimism. So, we see this pretty clearly in how the "recovery is just ahead" talk amidst the predictions that "we've turned the corner."
The second thing that comes into focus is just how clearly the bad boys of the 1920's were replayed by the drug lords of the 1990's. Are the infamous Drug Cartel people, the Escobars and such, the modern analogs of the Capone's and Lucianos? More than likely.
A snip from "The American Century" puts it this way:
"Most important for the role of the United States as leading world power were the psychological implications of this Great Depression. The sudden change from pros- perity to poverty, the loss of everything in a few days time shocked many Ameri- cans. Where was the stability prophesied for the world if it followed the American model when it did not even work in ‘God’s own country’ ?
Could the United States still serve as a role model for the world? Was the Constitu- tion still appropriate for an industrial, interdependent world? Had the American nation really developed the most advanced and best society, when Communist Russia did not suffer from the virtually world-wide depression but the United States’ praised democracy went down on its knees? " http://www.fortunecity.com/victorian/picasso/50/amcenBV2b.htm
Now let me give a little "hats off" to the Montgomery County Public School District up in Maryland. On their website they offer a delightfully short summary of how the US chose to fight the first Depression in the early going:
President Hoovers Plan
What any child can see, at least one that's been to school in Montgomery County, Maryland, is that the Bush Administration continues to do its dead-level best to repeat Herbert Hoover's mistakes. As the recent headlines prove beyond doubt, the Administration has been predicting that a recovery will be here, gosh, any minute. So point 1 of the textbook lesson is certainly in place. So is the burden-shifting from the federal government to state and local government for welfare and job creation. And, I certainly don't have to remind you which party was swept into power by the promise of more tax relief. The Bush Administrations proposals to reduce taxes at a time when states are headed for the budget rocks is a real calamity, indeed.
To forecast what's ahead, we need only look at what the modern analogs of the 1920's banks and the 1920's railroads are, in order to figure out where the money will be spent in a few years bailing companies out. Could it be that the financial services businesses, such as brokerage houses could be the bailout targets this time? Might we see the government really pour a ton of money into the internet and communications infrastructure once we see that this is really a second depression? Perhaps it's too early to tell, but if I had to place a bet today, it would be that the new version of the "Reconstruction Finance Corporation" will pour money into the pockets of the "usual suspects.", thus maintaining a fine tradition of deficit spending that seems to work.
The forecast that a recovery is just around the corner has been going on for quite a while. In fact, a December 2001 CBS News year-ender piece noted:
"Many economists project the Fed's aggressive action will help bring about an economic recovery by the spring."
http://216.239.53.100/search?q=cache:jQOI-vkYyRYC:www.cbsnews.com/stories/2001/12/19/national/printable321831.shtml+%2Bprosperity+%2B%22just+around+the+corner%22&hl=en&ie=UTF-8
You know, of course, that they (and we) are still waiting. Of course, CBS isn't alone. The EE Times, which is the voice of Electrical Engineers in the US, published an article in 2001 asking "How Could The Semiconductor Industry Tank So Fast?" in which the following observation was made:
"Nearly across the board, industry forecasters remain confident. Once the inventory draw downs have been completed, most see "prosperity just around the corner" in the second half of 2001 or early 2002. Whether this will occur will depend on the health of the economy as a whole."
Http://216.239.53.100/search?q=cache:C-zJF-QBZkcC:www.chipcenter.com/eexpert/bmcginty/bmcginty050.html+%2Bprosperity+%2B%22just+around+the+corner%22&hl=en&ie=UTF-8
Once again, of course, the answer is: Prosperity ain't around the corner yet. Fellows like Harry Dent, who's "The Roaring 2000's" sounds like "Prosperity is just around the corner" seem somehow inappropriate reading right now, compared with Didier Sornette's work.
The Miami Herald noted in an article last fall (10/27/2002) that the papering over of just how bad things really are can be seen in how Mutual Funds are quietly merging their increasing number of loser funds into more profitable ones.
"In fact, the number of funds that were here 2 ½ years ago but are now gone, which is 1,590, is getting close to the total number of funds that disappeared in the previous 18 years that Morningstar has been tracking mutual funds. That total is 1,907. Morningstar says 5,931 mutual funds are in business today." http://www.miami.com/mld/miamiherald/4371474.htm
Almost as if to prove that fund mergers and liquidations are going wild, a check with www.morningstar.com this morning yielded the report that Evergreen funds are playing shuffle the investors...
Tiny Evergreen Offit Mortgage Securities F0021D and Evergreen Offit U.S. Government Securities EOUSX will merge into $667 million Evergreen U.S. Government EUSAX."Evergreen Funds will merge several funds, pending shareholder approval, according to an SEC filing.
Among notable mergers, $593 million Evergreen Small Cap Value ESQAX will be absorbed by a smaller fund with a better performance history--$405 million Evergreen Special Values ESPAX. And $522 million Evergreen Value EGVAX, a large-value fund, will become part of $651 million Evergreen Equity Income ETRAX, a mid-cap value fund.
Other funds to merge include:
- $160 million Evergreen Select Balanced ESAIX will merge with $994 million Evergreen Balanced EKBAX.
- $102 million Evergreen Select Small Cap Growth EVSIX will become part of $452 million Evergreen Growth EGWAX.
- $10 million Evergreen Tax Strategic Equity ESTAX will be absorbed by $1.48 billion Evergreen Core Equity EISCX.
http://news.morningstar.com/doc/news/0,,87929,00.html?fsection=Comm5
If you own mutual funds, I keep urging you to read Don Christensen's book, "Surviving the Coming Mutual Fund Crisis" or click over to Amazon and pick one up used for as low as 50-cents. Best 4-bits you'll spend this year. Surviving the Coming Mutual Fund Crisis:...
To sort of wrap up this week's observations, the UC-Anderson School report is just another one of what I call limited vision articles. It tells you a little bit about what's going on, but not the whole picture. Yes, it is true that state budgets are in trouble, but they are only really in trouble if you look at them from a "what's projected" standpoint. As the CAFRman notes,
State Governments Have $667 Billion of Your Tax Money That They Are Not Using.
That Equals
$2,369 for every man, woman, and child in the
U.S.A. or $9,476 for a family of 4.
http://www.cafrman.com/Introduction.htm
The delta being the budget howling is largely based on projections that include increases for most state offices. When the projected increased funding is not available, the bureaucrats put up such a howl, and lay off people who don't play the bureacratic game, that you might think the world is coming to an end. However, if you're one of the few people that actually reads the Comprehensive Annual Financial Report" issued by state and local governments, you will quickly see that they are only telling the part of the story they want, in order to worm their way deeper into your pocketbook.
Write when you get rich!