The Washington Times
Sunday, Nov. 23, 1997
THE GREAT AMERICAN HOOVER
By Bob Djurdjevic
Can't you hear that great sucking sound of the Wall Street Hoover which was revved up in the aftermath of the crash of Oct. 27, 1997?
You can't? You don't know what the Wall Street Hoover is?
It's a giant vacuum cleaner. Its one end is attached to Wall Street institutions' bank accounts; the other to Main Street's mattresses, piggy banks, retirement accounts and mutual funds. The Hoover's function is to methodically vacuum out the latter suckers' savings.
How does it work?
Just as the combustion engine runs on a mixture of gasoline and oxygen, the Wall Street Hoover runs on a mixture of hogwash and greed.
Where does the hogwash come from?
From the White House. And other places. Like Wall Street, too.
And who provides the greed? The Main Street suckers, of course. The taxpayers.
For example, remember when President Clinton told us to remain calm; that the American economy is strong? And when Wall Street told us that the small investors' confidence in the economy had lifted the market after the crash? And that stock buybacks, like IBM's, were a sign of confidence - both in the value of the Armonk-based company's stock and in the market as a whole?
All three statements were pure hogwash. It's the Wall Street's version of high-octane gasoline.
True, the U.S. GDP was up 3.6% in the third quarter. And true, it also rose 3.3% in the second and 4.9% in the first quarter of this year.
But what does that have to do with the stockmarket? In 1991, for example, the Dow Jones Industrials Average rose 20% even though the U.S. economy was in a recession. Wall Street reflects the cashflows, not the "health of the economy."
As for the small investors' "confidence," gullibility may be more appropriate.
True, the number of American households which owned stock, directly or indirectly, increased from 32% in 1989 to 41% in 1995. In January 1997, 43% of American adults had some stock portfolios, according to a survey by Peter D. Hart Associates.
But what does that have to do with the health of the economy? The preceding numbers merely reflect a rise in the number of Main Street gamblers who are willing to risk their family's financial security in the hopes of making a quick buck. Such people provide the second important ingredient which fuels the Wall Street Hoover - greed.
Meanwhile, consumer debt has risen 50% since 1993. Personal bankruptcies are up 30% over last year's. Total inventories are at an all-time high. Which suggests that Main Streeters will have less cash available for future gambling.
Oops... greed, tempered by poverty? Bad news for Wall Street. No wonder the Wall Street Hoover is working overtime before the bubble bursts.
When will that happen? Maybe when Japan starts selling some of its U.S. securities. The big Japanese investors, including some ailing banks, owned $291 billion of U.S. Treasury bills as of July, or 8.5% of the total outstanding. That's up from 5.4% or $176 billion as of December 1994, according to a Wall Street Journal Oct. 29 report.
Why would the Japanese want to sell? To feed their own Hoover - the looming banking crisis whose ultimate cost to the Japanese Government may be 11% of GDP or about $500 billion. And to cover about a $150 billion in exposure to Asian countries which the Japanese commercial banks currently have.
This could make the notorious U.S. savings and loan crisis a child's play by comparison. The cost to the public sector of solving that crisis was "only" around 3% of the U.S. GDP.
Japan is now in line for "a truly world class banking crisis," a world authority on international finance told the Australian Financial Times (AFT, Oct. 30). Dr. Morris Goldstein, the former deputy head of research for the International Monetary Fund, now with the Institute for International Economics in Washington DC, told the AFT in an interview in Sydney, Australia, that problems with financial systems were "fairly widespread" among the major economies of North Asia - Japan, South Korea and China.
"But if you look at where systemic risk is largest, it's in Japan - there's no doubt about it, because it comes on top of other things that have happened there," he said.
A senior economist with Nomura Securities in Tokyo, Nobuya Nemoto, agreed that the crisis could soon enter an acute phase. "Another two or three banks will collapse this fiscal year, to the end of next March, and the Deposit Insurance Corporation is supposed to support them, but they have no funds left," he told the AFT. "The problem has become so big that it is politically impossible to use public funds to rescue them."
But in today's intricately interwoven global financial system, it is virtually impossible that a failure of the Japanese banking system would not affect other countries, including the U.S. We've already seen how a stockmarket crisis which began in Hong Kong had spread like a wildfire around the globe. Even if the fire seems to be temporarily under control now, we are evidently not out of the woods yet.
As for Armonk's latest stock buybacks, there is nothing new to IBM's throwing good money after bad.
True, IBM's board is trying to boost the value of its stock. Which homeowner wouldn't like his property to be worth more?
But how many homeowners would bid against the willing buyers to up the ante? Or gamble their hard-earned equity at a Las Vegas casino?
Yet, IBM has done both with its stock buybacks. Since January 1995, the Big Blue's board has authorized the spending of over $20 billion of its shareholders' capital without creating a single new product or job. By the end of the third quarter, IBM had spent $5.2 billion buying back its shares - more than it had invested either in new plants and equipment ($3.9 billion) this year, or in paying out the dividends ($600 million).
Meanwhile, IBM's equity dropped by nearly $2 billion since the start of the year; its debt jumped by over $3 billion during the same period; its net cashflow was a negative $1.7 billion, and the Big Blue's latest earnings were flat when adjusted for stock buybacks and tax rate reductions.
Yet, Wall Street has bid up the IBM stock by almost 70% since September 1996, celebrating such foolhardiness as "financial engineering."
More hogwash, more greed - more fuel for the Wall Street Hoover.
BOB DJURDJEVIC
TRUTH IN MEDIA
Phoenix, Arizona
e-mail: bobdj@djurdjevic.com