Its never happened before. At no other time in history has the U.S. stock market racked up gains of better than 20 percent in three consecutive years. And the 120 percent cumulative advance of the S&P 500 since the end of 1994 is the best three-year return since a long but deceptive dead-cat bounce in the depths of the Depression. Thats not all thats extraordinary about these fast-paced economic times. This March will mark the beginning of the eighth year in what could become, by the end of this year, the longest peacetime expansion on record.
Will it endure? Stress fractures can already been seen around the edges. Personal bankruptcies are at an all-time high, and the level of consumer debt ballooned $52 billion to $1.2 trillion last year. (Since the recession in 1991, consumer debt has increased a staggering 57 percent.) And retailers are at a loss to explain their third lackluster holiday selling season in a row, a phenomenon made all the more puzzling by sizzling job growth and percolating wage gains.
Despite the disappointing dollar volume of sales -- after all, consumers have been conditioned to hold out for bargains on everything from laptops to Lamborghinis -- corporate profits continue to edge higher, thanks to inflations extraordinarily quiescent behavior at every stage of the production process. Even the slight case of deflation besetting the economy now wont dampen profits as long as overhead falls more than revenue declines. Interest rates keep heading lower, and thats a big plus to the bottom line, since financing costs are the single largest outlay for most companies. Add to all this the strong likelihood of a budget surplus this year, a good chance for some sort of tax cut, and a palpable drop in crime and murder rates, and were talking about a society that makes the one depicted in Looking Backward, Edward Bellamys turn-of-the-last-century utopian novel, sound like an off-day at Esalen.
How can a nation that incessantly bemoans everything from the IRS to the heartbreak of psoriasis have achieved such an enviable list of economic accomplishments? Well, maybe its exactly because we worry so much. Thanks to the First Amendment and a citizenry with an insatiable appetite for controversy, just about everything gets a public vetting -- from the latest whisper number of a hot stock to the leftward parabolic drift of the first phallus. Last year at this time, investors were fretting over what Fed chairman Alan Greenspan labeled the irrational exuberance of the stock market, a sobering judgment he delivered when the Dow Jones Industrial Average was around 6,400. This year, with the Dow trading some 1,500 points higher, its Asian contagion thats got the swelling ranks of the moneyed class walking on eggs.
Disaster wasnt supposed to strike Asia, a region that had strong growth, high savings, top-notch schools, an enviable degree of social order, and long-term economic planning. After all, werent its emerging economic powers -- Malaysia, Indonesia, and Thailand -- called tigers? But all that double-digit growth concealed a lot of cronyism, bribery, corruption, and a seemingly bottomless sinkhole of bad loans. Add to that shaky political structures in South Korea, Indonesia, and China, along with an ingrained aversion to any sort of banking reform, and you have the makings of a global liquidity crisis. As long as the maladies were confined to the lesser-developed countries, economists were satisfied that Asias financial ills would trim no more than 0.2 percent from world growth this year. But that was before a host of bankruptcies and a virtual free fall of the currency and equity markets in Japan and South Korea inspired a hasty rethink. Now the experts reckon that Asias economic woes will shave at least 0.5 percent from world growth, but the number keeps creeping higher with every new failure or scandal. The truth, of course, is anybodys guess. Asia is not Mexico, a subservient client state with whom we share a 2,000-mile border. They do things differently over there; regulatory oversight is virtually nonexistent in Japan and Korea, where the banking system and equity markets are as entwined as braided bread.
So lets get the bad news out of the way straight off. First of all, Asia will be in recession for most of the year. Since the entire region accounts for nearly 30 percent of total U.S. exports, that suggests the U.S. economy will stumble and profit margins erode as Asia buys less of the stuff we export and sells us the goods it produces at fire-sale prices. That could keep U.S. stocks under pressure for quite a spell. That, at least, is the conventional take on how the Asian contagion will spread to these shores.
Our response -- and this is where we part company with the rest of Wall Street -- is that exports are a flimsy way to measure one countrys level of exposure with the world economy, asserts Joe Quinlan, a senior international economist at Morgan Stanley. A better measure is the sales that foreign-based U.S. multinationals make overseas which are not considered exports, and by this gauge, Americas commercial engagement with Asia is far less than many investors realize.
Even though the U.S. has been the world leader in foreign direct investment for several decades, pouring close to $85 billion overseas last year, the bulk of the stash is not where most people think. Its not in Mexico, Brazil, or China or low-wage countries that are often accused of robbing jobs from American workers, says Quinlan. Rather, by an overwhelming majority, U.S. multinationals are more interested in gaining access to large, wealthy nations. More than 70 percent of U.S. foreign investment is in the developed nations, with Europe accounting for half of all investment. Asia (including Japan) accounts for only around 17 percent of U.S. outflows.