Column

THE RECOVERY IS NIGH

After two years of bad economic news, there is now scope for optimism

DONALD COXE August 11 2003
Column

THE RECOVERY IS NIGH

After two years of bad economic news, there is now scope for optimism

DONALD COXE August 11 2003

THE RECOVERY IS NIGH

Column

After two years of bad economic news, there is now scope for optimism

DONALD COXE

THIS COLUMN has been running for exactly two years. By magazine standards, that is roughly entry level and no occasion for a retrospective. However, these have been unusually eventful years for the economy and financial markets, so a column about our shared experiences may not be amiss.

The inaugural column discussed a theme that I have oft returned to—the end of the rule of elites in the financial markets and the economy. Nobody—not even Alan Greenspan—is in charge, any more. The great delusion of the anti-globalism demonstrators is their conviction that the world’s economy is being run by a cabal of governments, the World Trade Organization and capitalist businesses. In reality, the rapid expansion of world trade is being driven by a concatenation of competitive forces, led by the unruly new juggernaut, China.

That leftist delusion continues. The Maude Barlows and their allies who forced Canada to spend hundreds of millions of dollars to make last year’s G8 Kananaskis meeting safe are today’s economic conspiracy theorists. We’ve always had them. In the 19th century, the Luddites believed machines would destroy the working class. During the 1920s, Henry Ford was the most conspicuous of the believers in a Jewish conspiracy to rule the global economy. During the 1960s, JeanJacques Servan-Schreiber (The American Challenge) was the most conspicuous of the believers in an American conspiracy to rule the global economy.

In reality, the elites that people should be upset about—the leaders of the U.S. technology industry and their shills on Wall Street—have been nearly immune from attacks by the prominently paranoid. The violent demonstrations labelled “The Battle for Seattle” were not aimed at homebrew Bill Gates and his friends and competitors. The enemies were free-trade advocates who promoted investment in the developing world, companies engaged in expanding food output through biotechnology and the big names of the traditional American businesses

listed on the Big Board—not on Nasdaq. (Although when you bring in an anarchist mob, things can get out of control: some Starbucks outlets were trashed.)

Two years ago, the U.S. was in a recession caused by the tech elites, Enron and their Wall Street co-conspirators. The “New Economy” craze, the most disgraceful financial bacchanal since the birth of stock markets, attained Felliniesque scale with sustained absorption of Greenspan-distilled hooch. Had the Federal Reserve not detonated liquidity explosions by furiously printing money, the exaltation of technology would not have become a sustained orgy.

However, the basic blame for the high-tech mania, the looting of peoples’ savings and the recession lies with Silicon Valley and Wall Street. Drunk drivers who kill people

THE HIGH-TECH craze, the most disgraceful financial bacchanal since the birth of stock markets, attained Felliniesque scale

shouldn’t get away with claiming their bartenders made them do it.

With the end of the Cold War, it briefly became fashionable to believe that the business of managing the world was largely a matter for business, investors and workers, with government confined to spectator, supervisory and redistributive roles. Baby boomers believed their time to bring Aquarian joys to managing the world had come. Bill Clinton encapsulated their optimism about the future and their skepticism about the need for a big military establishment. That benign belief was blown away on Sept. 11. Since the Tower of Babel, whenever humanity has been gripped by a shared faith in the inevitability of human progress, some shock or horror has come to restore our collective sense of vulnerability.

Over these two years, the columns have discussed the decline of inflation as a threat and the emergence of the possibility of outright deflation. Although central bankers keep telling us they will save us from deflation, the most reassuring evidence that we will not emulate Japan’s experience is the persistence of high commodity prices, particularly for oil, gas and gold. We have roughly 1,000 years of price history, and there has never been a period of sustained deflation in which commodity prices—particularly gold and fuels—rose. My recommendations to buy oil, gas, gold and mining stocks reflected my belief we would escape deflation for raw materials, while experiencing it in the price of manufactured goods. Asia, led by China, has become an engine of global deflation in the price of finished goods, and that pattern looks durable.

A major theme of mine has been the Triple Waterfall, a three-stage price collapse of technology and telecom stocks, led, of course, by Nasdaq. Triple Waterfalls are spectacular punishments for spectacular capitalist sins. We have entered Cascade Three of the Nasdaq collapse, which will last for at least a decade. From time to time (like now), there will be brief intervening rallies, as investors delude themselves that the good times have returned. Those bear market tech stock rallies will be followed by plunges to new lows. Nasdaq is, in fact, performing exactly the way the Japanese stock market performed after the Nikkei entered its collapse in January 1990.

History teaches that when big business behaves badly, voters demand a return to greater government involvement in management of the economy and markets. Since the tech stock mania was history’s most egregious assault on the principles of fair treatment of investors, bigger government is coming back to stay.

Will the next two years be better—for investors and for the people of the world generally? I think so. There may yet be a happy ending for the sad stories of Afghanistan and Iraq. Dividends, dull and reliable, have become fashionable in the formerly manic U.S. stock market. A global economic recovery should be just around the corner.

Prediction: happier columns in the next two years. [¡fl

Donald Coxe is chairman of Harris Investment Management in Chicago and of Toronto-based Jones Heward Investments. dcoxe@macleans.ca