Stock-pickers are a lot pickier nowadays. ‘Down with dot-coms!’ the market-makers declare – just as fervently as they used to hustle them to a naive and trusting public.
Yet some investors maintain a touching faith that overcomes fundamentals and facts alike.
Would you invest in a mature enterprise that had made a consistent loss on external sales of almost 30 percent a month? One that couldn’t generate internal capital for reinvestment but depended on the fickleness of the markets both to pay its losses and to reinvest? Even worse, one whose management have been claiming grossly inflated salaries for themselves, while making their staff work longer hours than ever, and paying them less than they were paid in 1989?
It gets worse. Management has been busy looting the treasury and handing out shareholders’ cash to a small number of elite stockholders, while engaging in massive spending schemes overseas. They’re currently investing in totally unproven technology, which has no perceptible customers and which has failed every test so far. The new CEO was recently elected after a bitterly contested knife-edge proxy fight, which had to be decided in the courts.
Now he’s engaged in a bitter proxy battle with foreign rivals.
Of course, you’d sell. Wouldn’t you? But actually it’s difficult to short USA.com. Not least if you live in the country.
When the planes hit on September 11, I was actually in the midst of logging on to the Department of Commerce web site to check on Uncle Sam’s current trade figures. A few weeks later when my phone lines resumed their fitful connections, the DOC announced July’s deficit to be $28.8 bn. The US had imported $112.6 bn in goods and services, and only exported $83.7 bn. It was a fairly standard month.
In 2000, the culminating year of what has been christened the American Century, there was a net inflow of over $1 tn in foreign direct investments in the US. The country’s own savings rate is now zero, so foreign cash has been fueling the American boom. Indeed, in a piquant historical irony, it is capital from former colonial master Britain that leads the way. (One of the causes of the American Revolution, apart from liberty and the pursuit of happiness etc, was the determination of Virginia planters not to repay the credits they’d had from London.) Of course the City of London has often behaved unwisely. Think of all those billions it gave Robert Maxwell. The blueness of a chip is in the rose shaded eyes of the beholders.
At the beginning of 2001, foreigners held $250 bn in US government bonds and a staggering further $2.7 tn in American private companies. One begins to speculate whether this flood of capital is a cause or an effect of the slower growth rates in Europe which were so often viewed as odious compared to American success.
While the position of manufacturing in the US economy is in decline, there’s one significant export success for American manufacturers – the printing presses of the US Treasury. USA.com exports billions of sheets of printed green paper across the world to Colombian drug cartels, Russian mafia gangs and Afghan terrorists. At the end of last year, $250 bn worth of US paper money was holed up abroad.
The rest of the world has buoyed up the dollar on a bubble of confidence, or maybe desperation, inflated because there’s nowhere else to go. It is perhaps lucky for the dollar and the world financial system that the euro is not yet up to unified speed as a currency.
When the euro was first announced, China, Hong Kong, Japan and several other major beneficiaries of the US trade deficit welcomed the chance to diversify their massive reserves. Just to show that everyone can always be wrong, the euro went down while most observers argued about how far it would go up. This does not help the American balance of payments, however, since it undervalues the currency of its major trade partner and rival.
In the immediate aftermath of the September 11 attacks, the euro surged. It may be an augury of things to come. If, for example, oil prices were euro-denominated, the US may have to sell actual goods to finance its energy deficit instead of bundles of virtual or actual greenbacks. In future crises, a strong euro, based in an even bigger economic bloc than the US, could well provide a conduit for a run on the dollar in the event of a major crisis, puncturing the American bubble in a way that would make the Southeast Asian currency crisis look like a tsunami in a teaspoon.
The US economic domination of the world may be eroding, but it is easily massive enough to bring the world temples of finance crashing down with it. Investors bear a distinct resemblance to lemmings when they rush over the precipice. We should all pray for a gentle touchdown for the overvalued greenback since the splash of a catastrophic fall in the dollar would drown everyone, euro-economies and all.
