"Straight from the shoulder " by Toshio Masuda October 17, 2008
( Free of charge to the people I met)
(FYI: The following is the text from an installment of the newsletter sent out to clients receiving private consulting services from Toshio Masuda)
Just How Low Will Stock Prices Go?
The day after both the United States Senate and House of Representatives
passed the financial institution bailout bill hammered out by the Treasury
Department and the Federal Reserve Board (a measure calling for the use
of the equivalent of 70 trillion yen in U.S. taxpayer funds to buy up toxic
debt), stock prices soared. In no time at all, however, they headed south
once again. Then last week, when U.S. Treasury Secretary Henry Paulson
Jr. fell into policy line with his European counterparts in announcing
that 25 trillion yen of the aforementioned public funds would be injected
into nine major U.S. banks, stocks perked up again. Just like before, though,
they lost ground from the following day to the point of not only wiping
out their original rebound gains, but also plummeting even deeper than
before. This period promises to go down in history as spawning one of the
most violent fluctuations in market prices on record.
As I have noted before in my gStraight from the Shoulderh column, simply coming to the aid of financial institutions is not sufficient to rescue the U.S. economy, which continues to display increasing signs of recession of late. Financial institutions, as the very nomenclature implies, are institutions involved in the financing and circulation of capital. In other words, they are gauxiliary enginesh at best, and by no means represent the main drivers or units of the economy. For the U.S. economy to emerge from the jaws of recession will require resuscitation measure at the true core of the nationfs economic activity.
Simply stated, the trump cards for core economic growth are gconsumptionh
and gcapital investment.h Without expanded spending and private sector
investment in plant and equipment, the revival of the economy is a pipedream.
At present, both U.S. consumption and capital investment continue to tumble,
while the jobless rate is spiraling upward. Viewed by these yardsticks,
America is truly descending into a state of recession. The collapse of
the housing bubble has thrown investment banks, brokerage institutions
literally loaded down with bad loans, into financial trouble, with a serious
credit crunch advancing.
Though the U.S. government has acted with considerable speed in throwing
together the emergency measures outlined above, the market reaction has
been largely downbeat. This is because the marketfs take on these moves
is that they place excessive emphasis on rescuing distressed, high profile
financial institutions, while neglecting policies aimed at revitalizing
the critical core of the U.S. economy.
Over the weeks and months to come, in the absence of potent measures aimed at expanding public investment and employment in tandem with bold tax cuts for low-income earners, U.S. stocks are likely to continue their downhill ride. President George W. Bush talks a good game about public works spending for roads and other infrastructure, measures to stimulate employment and other action. But with no concrete proposals being submitted to Congress, the market summarily dismisses such rhetoric as mere lip service. With the U.S. presidential race now gearing up for the final stretch, it will be tough for either the government or the Congress to act quickly regardless of what type of economic reconstruction policies may be floated. Inevitably, such steps will need to be carried out from next year, under the leadership of the newly elected President.
Yet, the current realities are grim. It appears that perhaps half of all
housing mortgages are lapsing into bad debt territory, with the prices
of homes continuing to tank. A sustained slide in housing prices will help
shrink the hidden assets in family budgets, prompting a lowering of credit
limits. That promises to put a further damper on consumption. Less spending
convinces companies to restrict their supply streams, which in turn leads
to delays or rescheduling of capital investment. Declines in both consumption
and capital outlays will force the gross domestic product (GDP) into the
minus column, with the economy edging toward recession.
Without breaking out of this vicious circle, which sees the main economic
engines in decline, rebuilding the U.S. economy will be a mighty mission
indeed. As if it isnft enough to be in tough financial straits, as long
as tax revenues are used only to bail out financial institutions (clearly
the secondary locomotives of the economy) while disregarding measures to
resuscitate the essential core of economic activity, U.S. stock prices
can be expected to remain devoid of any serious upward motion for some
time to come.
I have no doubt, moreover, that the linkage between U.S. and Japanese stock
prices will eventually wind down, with Japanese equities rising to eclipses
all rivals. However, that transition is still somewhere down the line.
As things stand now, the New York Dow-Jones average may be heading toward
$6,000, while the Nikkei average could very well plunge to the 7,000 yen
level. The only viable option for investors at present, therefore, is to
hold onto the shares that you own, while fiercely resisting the urge to
change horses to stocks that appear more promising. If you have any surplus
funds on hand, meanwhile, you could average down your purchase costs by
adding to issues currently in your portfolio if and when the Nikkei does
fall into 7,000-yen territory.
Regardless of how long the central banks of the developed nations continue
to inject capital for rescue plans, the impact will be little more than
sprinkling a cup or two of water onto a dry sandy beach. Without stimulating
private sector demand, the economy will continue to retreat. In my view,
the alliance patched together by the major powers is moving in a totally
I repeat: At this pace, the stagnancy in stock prices is destined to drag
on long term.
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Toshio Matsuda Office at Sunraworld, Ltd. (Tel: 81-(0)3-3955-2121).