The Barnard Observer

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Home  Picks  Figures  Great Investors  Vault  Contact              c2003-04 Thomas Barnard

The Twin Towers

The twin towers have had a huge economic cost.  The insurance tab estimated at $50 billion was the worst disaster in history, roughly twice the damage of Hurricane Andrew which was the next worst disaster at $25 billion.

But that $50 billion pales when compared with the Iraqi war, which has run something like $140 billion.  And this on top of reduced income tax receipts has generated the largest deficits in history.  A swift change from the hard won surpluses of the late 1990s.

But deficits don’t matter, that’s what Dick Cheney allegedly said he learned from the Reagan years.  And I guess that’s what we are going to find out.

The twin towers I am referring to in this piece are the twin towers of the Budget Deficit and the Balance of Trade Deficit.  The dollar has suffered about a 30% decline against the Euro, but may well drop some more.  Certainly, Warren Buffett who has written in Fortune about it, and moved billions of dollars into other currencies because he feels we have been irresponsible.

The Budget Deficit shortfall has been made up by borrowing from the Social Security Trust Fund and by selling new bonds, principally from China and Japan.  As their largest market, China and Japan have a vested interest in keeping the American market buying.  At what point does the dope dealer quit selling to the addict?  Suffice to say, we think that certainly one place there could be crack in the damn is in the sale of bonds.  If Japan or China needed to repatriate some money for internal purposes, and a new bond issue was only covered with bids equal to one times the bond issue instead of the usual twice the bond issue, we think there could be a breakdown.

Review of the recent events:

Walmart's back to school numbers were same store sales increase of 0.5%.  They attributed it to the lack of last year's tax refund.

Intel reduced its sales expectations for the current quarter from $8.6 billion to $9.2 billion down to $8.3 billion to $8.6 billion.  They also thought they would lose a couple points of gross profit margin.   Also, concerns about inventory buildup.  Comment was that this is no longer a growth story, but a macro economic story.  Same thing that was said about Microsoft.

Auto sales were down across the board.  Two days less to sell in, but Ford saw a 26% decline in car sales, offset by increases in trucks making for a net loss of 13%.  Cost of gasoline was cited, but it could also be that consumers have become numb to incentives.

Software sales have already been cited as weak.  Intel and the auto companies are scheduling cut back in production.

I think all of this is a sign of the exhaustion of incentives - tax incentives, auto dealer incentives, low interest rates on homes.

Job creation is anemic.  CNBC reports that there is no chance now for Bush to remove the stigma of being the first president since Hoover to have ended up with a net job loss.  August generated 144,000 jobs, up from 32,000 jobs in July, and 78,000 jobs in June.

My personal view is that the dramatic measures the administration took to get re-elected will have unhappy consequences.  We think that the administration should have let the economy cool off until there was real end-demand, pent-up demand, unemployment of 7-8%.  Now we think unemployment will go to European levels of 10-12% unemployment or higher.

In the short run, I think there could be bounce.  The Dow Transports have confirmed the Dow Industrials, signaling a buying opportunity.  It is a maddening time to invest.  I don't have a lot of faith in such a buying opportunity, and view it with a jaundiced eye.  We shall keep an eye out for signs of strength.

September 3, 2004