It was not a tunnel. But a broad patch over which a bright sun held out for over 10 years. When the US economy sped non-stop. Now it is trapped in a blind alley. Ensuring the inglorious exit of the Fed Chairman Alan Greenspan. More so because Greenspan oversaw the record boom in US history.

It does not need much insight to realise that the US economy is tormented by every negative factor mentioned in the text books on the dismal science. Forget for a moment the rise and fall of Dow and Nasdaq that made half of the US households poorer. A sort of octopus-hold took possession of corporate America. Everything about it has gone bad.

The collapse of Enron, the energy behemoth, was no isolated event. Its example of manipulating accounts was followed by every other corporate giant. All of a sudden quite a few high flying brands are seen mired in corruption. Found in the tar pit are leading brokerage houses, accounting firms, corporate analysts and even the regulators – SEC included. The system needs a major surgery which will take a long time to occur. For the moment it is in a hopeless condition.

In the circumstances, US investors are avoiding stocks after a love affair with them for more than 20 years. According to one estimate, a sum of over $2 trillion is idle in the hands of potential investors. That much unused money could put the market easily back on a bull run. But it is unlikely as everything about the stock market is unexciting. Corporate earnings crashed by over 30 per cent in 2001. 

The psychology of the investor is not that hard to follow. With the interest rate at a forty-year low, increased money flow into the market should have been automatic. But the investors are seen to be happy with a single digit return on bank deposits. Which they say is better than holding a trunk-full of money loosing share certificates. 
The stocks were the second best investment after treasuries. Four years ago Standard & Poor 500 was traded at levels noted these days. Since then it attracted a total of $700 billion or more as new cash investments in equity mutual funds. The scenario now, however, is different. For a sustained rally there should be enough supply of stocks at prices to ensure a healthy rate of return. But the price earning ratios on Wall Street and Nasdaq are out of line with realities. So there is little scope for capital appreciation. 

During the decade-long boom, only a few overseas investors thought of liquid assets. Now the outlook has changed. The market wants good news everyday to perk up. Something difficult in a world where the industry has fallen on hard times. So the smart money people are not that keen to get back into stocks. No one is willing to take the risk so long as unexpected events could rock the boat.

There is also the talk of a “locust cycle” on the stock market. The metaphor is derived from the crop ravaging flying insect which goes into hibernation for seventeen years and then becomes active for another seventeen years. History supports locust cycle theory. 1929 Wall Street crash saw the Dow down 82 per cent. And it took 25 years to returned to the pre-crash levels. The feeling that the market will bounce back has been there even now. For the record, prices rose steadily for 18 years between 1982 and 2000 making the stock the greatest wealth spinners. Before 1982 the Dow was ruling below 900 points. Is the time therefore right for the next phase of the locust cycle. 
Not many so believe. For the two-year old recession have taken a heavy toll of profit levels. According to the commerce department estimate, corporate profits declined by 16 per cent in 2001 alone. It is one of the worst years since the second world war. On final estimates, the net combined earnings of large companies, making up the S&P index, last year fell by $208 billion, nearly half, to $225 billion.

That is not all. The big picture becomes bleaker when the massive write-offs are also taken on board. For most companies made excessive equipment purchases during the boom years. The huge write-offs are also unavoidable as many of them have now to get rid of the questionable accounting methods they followed throughout the 90s. That they did to inflate the profit. The conservative approach calculations decreed by the regulatory authorities is ominous. As result, the current earnings slate look far less impressive. 

As for the future earning too the picture is not optimistic. The black hole into which the corporate profits have fallen is so deep that it will take years for companies to come out of it. Consumer spending, even if it is upbeat, cannot, on its own, pump up the economy. Corporate spending is equally important. But there is no sign of its revival as the corporate honchos are more busy with cost cutting than outlining fresh investments. The fall in currency value of goods and services is another negative factor to be reckoned with. 

Even after sending home a good number of people, high labour costs still haunt corporate America. Even during and before the boom years, workers were pared systematically in the name of increased productivity and a lean look. That being the case there is little scope for saving in labour costs now.

As a matter of fact, since 1997 labour costs have gone up by 13 per cent. Given a buyers’ market, there is no way of passing them on to the consumers. On a rough estimate, the US companies were able to raise their prices only by 6 per cent. So the profit fall. 

Caught in the vortex of sinking profits are even companies boasting unbroken profit growth record for over 40 years. The recession ended that marathon. Now they are closing plants and chalking out programmes to shift factories to Mexico or China. They expect no rescue from the rut in the foreseeable future. 

The profit drought makes corporate America an idle hunting ground for a new swam of locusts. The consumer confidence flat lining the economy is the most unnerving. Making it worse are the reports from the stock markets. Half a million more people came into the labour market in April alone. Most of them could not find work. The unemployment rate thus rose to six per cent from 5.7 per cent a month ago. Now it is at its highest level than in nearly eight years. 

Other signals form the labour market are equally disturbing. For instance, the shortened average work week. Which indicates a weak demand for industrial goods and services. With average hourly earning rising only by 0.1 per cent wage gains are slowing. That means no sign of inflation in sight. 

Meanwhile the confusion over how the economy fared in 2001 was cleared by a report from the Bureau of Economic Analysis. It showed that the economy was not only weaker during the year than previously thought but, in fact there was a recession. Taking into account the revised figures on wages and other payments to the workers, the bureau came to the conclusion that overall personal income was less by $ 90 billion or roughly one per cent of the total. Earlier it was believed that the personal income, adjusted for inflation, rose by one per cent. Worst hit were states like California, North Carolina, Virginia and Massachusetts where high tech companies were lording it over most of the 90s. 

The latest squall to hit the market is the dollar’s perceived weakness. For long it was the greenback’s strength which underwrote the booming economy. Now the dollar is under pressure as it is being felt that the economy is not creeping out of the crisis that easily. So, foreign investors are not in the queue for purchasing American assets. There is a great deal of re-thinking on the wisdom on going back to the American market. Overriding is the fear of inevitable risk of getting paid back in cheaper dollars. Quietly all are pulling out from a place that offered for long the best investment opportunity. The “potential poison of dollar depreciation” is something no one can put up with. Cheaper dollar also means more inflationary pressures oozing out from higher prices of materials and services. 

Meanwhile the Bush administration is doing its best bit to play down the perils of dollar depreciation. It discounts the line of argument that the dollar is being dehydrated. For comparison its spin doctors point to the position in 1995. Since then, on a trade weighted basis, the real exchange rate of dollar rose 33 per cent to its peak early this year. A three per cent drop from that level is not something to be worried about, they insist while intoning their continued support for a strong currency.
The market, however, sees it in a different way. The greenback, in its view, is trading at a sixteen-month low against euro. It is the same story with the Japanese currency too. At around 123, yen is at a six-month high against the dollar. But for the frequent market intervention by Japan, dollar could have lost much more of the grit. 
The speculation is also is rife on the correct value of the dollar. As it is, there is no way of fixing a proper value of a currency. But many analysts stick to the view that the US currency is overvalued. And it is time for a correction. The confidence being noticed among dollar bearers is not considered unreasonable. Taking into view the US currency’s structural and cyclical weaknesses some monetary economists feel emboldened to predict its fall to $1.05 against the euro and 115 yen by as early as next year. More headache for Wall Street.

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