Walking around mid-town New York in December is always a chore. And the 15-block section of Fifth Avenue south of Central Park is the worst of the lot. Last year was no exception. Despite the creeping economic gloom of the past 15 months, despite the huge personal and economic costs to New York of the attacks on the World Trade Centre in September, there were still hordes of Christmas shoppers crowding the streets.
Inventory was certainly shifting. But the mood was a little different this time.
A closer look revealed that the sales were already on. In fashionable Manhattan 0% finance is available for many goods, a leather jacket that used to sell for $200 now costs you $69, or $99 for two. And a lot of sales are closing-down sales.
It’s classic recession stuff. But the stock markets would tell you otherwise. The Nasdaq Composite and the Dow Jones Industrial Average are way above their lows of September 21 2001, convincing some that we’re at the start of another bull market.
There is even evidence of another stock market bubble in the US. In November the S&P500 tech sector traded at a p/e ratio of 43.2%, which is getting awfully close to the 47% level in March 2000, just before the crash. It could simply be that investors feel analysts are too conservative now, but it could also be another liquidity-driven bubble.
Stock markets are often seen as leading indicators of recessions and recoveries. But the truth is, no-one can be sure where the US economy, which alone accounts for 35% of the total GDP of all the OECD countries, will lead the rest of the world in 2002.
Federal Reserve chairman Alan Greenspan had built up an aura of infallibility and invincibility during the latter half of the 1990s. But at the end of 2000, the Federal Open Market Committee that he chairs, all-powerful as it then seemed to be, pronounced that it saw little immediate danger of a recession. By the end of last year it had cut interest rates a stunning 11 times, and was taking no chances in its outlook for 2002: the outlook is still weak.
There are plenty of commentators who expect the US economy to rebound to a decent level of growth, meaning 3% or more, by the end of the first half of this year – the V-shaped recovery, if you will. There’s certainly some positive news. Consumer spending is still robust, housing sales, and prices, have remained solid all year, auto sales – helped by attractive financing terms – are doing well. And there is a potential built-in stimulus package as a result of the cash generated by lower energy prices (oil is now at $18 a barrel, roughly half its mid-2000 level) and lower mortgage costs for those who have refinanced their loans after the rate cuts.
But unemployment continues to rise, companies are not investing and are still reporting disappointing earnings, default rates are on the increase. The investment-grade bond market in the US enjoyed a new-issue boom last year, fuelled by those interest rate cuts. But it all suddenly slowed in December. Could that be a signal that corporations see little prospect of earning a return on new investment above even such low costs of capital?
Meanwhile world trade grew by a meagre 1% last year. It remains to be seen whether the US-led global political coalition against terror will reduce trade barriers and further globalization.
What does it all mean for investment bankers? If you work in fixed income, prepare for leaner times. Interest rates don’t fall for ever, and there’s no obvious new candidates to binge on excessive borrowing. Forget about-debt-financed M&A as well. If you work in equities, be cautious. The capital markets have revived, but how many rescue rights issues will investors lap up? Let’s hope the markets haven’t got ahead of themselves already.
Happy new year.
