Bears lurk in economic woods

Sure, things are tough. NASDAQ is getting trounced. There are signs the economy is slowing down. The U.S. still doesn’t have a president-elect. But everything will be okay in a few months, right?Well, maybe not. For the first time, we’re starting to hear some serious talk about the possibility of a recession in 2001. The odds still appear to be against it, but they’re shortening say some economists. The so-called “Goldilocks Economy” may be on a collision course with the three bears.

The 3 Bears

  • Bear number one has already chomped its way through NASDAQ and, to a lesser extent, the other North American stock indexes including our own TSE 300.

    In an analysis published recently, USA Today estimated that the U.S. stock market as measured by the Wilshire 5000 Index, the closest thing to a total market index that exists, has lost US$3.3 trillion in value since the peak on March 24. That’s an extraordinary disappearance of personal wealth in just over eight months.

  • Bear number two is what appears to be a rapid deceleration of the U.S. economy. The worrisome statistics keep piling up:
  • A srp decline in car sales
  • Plunging consumer confidence
    · Stagnant computer orders
  • The first decline in U.S. personal income in two years
  • Weak retail spending
  • Softer real estate markets

Not a day goes by without yet another worrisome report in the media to suggest that all is not well.

  • Bear number three is the continued spectre of inflation.
  • Oil prices remain stubbornly high
  • The energy squeeze is starting to pinch throughout the economy, from higher airfares to the cost of refilling a barbecue tank.

A few ultra-pessimists have resurrected the dreaded word “stagflation”, a paralysing condition that combines the worst of all worlds:

  • A stagnant economy with a rising cost of living.

We last saw it in the 1970s. Believe me, we don’t want to see it again!

What about interest rates?
But even without a rebirth of stagflation, continued high energy prices could make it difficult for the U.S. Federal Reserve Board to take the kind of decisive action needed to head off a tilt into recession next year.

The formula may call for a significant interest rate cut. But the official bias of the Fed is still towards tightening-although that could change at the mid-December meeting. Alan Greenspan has always been ultra-cautious about easing rates when inflation appears to be a clear and present danger.

Add to the three bears the prospect of a U.S. president without a clear-cut mandate and a deeply divided and increasingly partisan Congress. Positions on both sides are hardening as each becomes increasingly convinced the other is trying to steal the election. You have a recipe for trouble.

Economy is strong
Having said all that, the odds are still in favour of a muddle-through. The North American economy is strong and highly resilient and it will only take a few key pieces of good news to perk up investors and consumers.

But we should not dismiss out of hand the possibility that 2001 could be even uglier than 2000 has been. Look to your portfolios and be guided accordingly.

The Internet Wealth Builder is a weekly e-mail newsletter published and edited by Gordon Pape.