It takes real doing to be the worst major market in the Free World. But that’s where Wall Street is headed coming down the homestretch for 2005. It’s worth looking at why we’re bringing up the rear of the Earth’s markets, because in my business, past is most certainly prologue. Our single-digit declines for both the S&P and the Dow are truly pathetic when matched against the double-digit gains whole regions and even continents have racked up this year. Nitpickers might say, “Wait a second, how about those Slovenian and Jamaican markets, down 9 percent and 9.4 percent, respectively?” Then there’s the Chinese market, which can’t rally to save its life; that’s down 12 percent. The Chinese, for all their growth, run their companies’ books the way Mao ran the labor camps—lotta “sloppy” paperwork. Oh, and I did say Free World, which still doesn’t include communists.
After so many years of holding our own, how could we become the world’s Big Loser? How could we have fallen 21 percent behind the usually woeful Mexican stock market and 14 percent below the perennial cellar dweller, Brazil, let alone some 16 percent behind the French and Germans?
First, Alan Greenspan’s year-plus rate-hike program has been scaring the pants off people who invest worldwide. They recognize that the Federal Reserve chairman’s blunt instrument of raising short-term cash rates, though certain to derail the economy, won’t do much to stop the real causes of inflation: energy and housing. Higher short-term rates don’t produce more oil, and low long-term rates (mortgages), not the daily rates the Fed controls, fuel the housing bubble. Greenspan’s relentless increases, investors fear, will brake, if not break, the American economy as inventories become too expensive to finance with short-term credit and businesses become fearful of a Fed-induced recession. As our country is the only one on Earth with a central bank that’s taken up rates eleven times in lockstep, with no end in sight, we have become a pariah for international stock pickers. You’d think the global finance community would respect the Fed’s vigilance. Instead, the money just goes to nations where the central banks are either more pro-growth or more worried about an oil-related recession. No wonder the market reacted with the best rally in a year last week when President Bush named the younger, more open-minded Ben Bernanke to replace Greenspan come 2006. Assuming Bernanke doesn’t turn out to be Greenspan Jr., he could help turn things around. But he won’t be steering the ship until late January, and rate cuts, assuming they happen, take time to have an effect.
The second reason for our lack of performance is oil, or, more precisely, our lack of it. Unlike other nations that need to import oil, we’re doing nothing to conserve or diversify away from fossil fuels. The markets that are handily outpacing us either have plenty of oil (Mexico, Russia, Canada), strict conservation strategies, or a grudging acceptance of other means of energy, including nuclear power, as is the case with most of Europe, especially France.
And it’s not just our lack of petroleum. We are in a worldwide bull market for anything of value that comes out of the ground: gold, diamonds, nickel, copper, silver, lithium, natural gas, and fossil fuels. With the exception of coal, however, we have either used up all of our natural bounty or we can’t dig up enough for ourselves to be a net exporter of raw materials. In a world where the Chinese are bidding up everything that can be used to power or create finished goods, our companies have little to offer. That’s why resource-rich economies like Canada’s and Australia’s are en fuego and why even the historically underperforming African, South American, and Asian marts that are rich in natural resources are easily topping our returns. At a time when just about everyone seems terrified of inflation, these hard-asset markets are all better hedges than our largely financially based market.
Sure, people still want our intellectual property, as well as our high-margin finished goods, like technological and pharmaceutical products. But demand is soft enough and supply plentiful enough that you can’t expect the world to clamor for the S&P 500. Global money managers right now favor markets selling goods in tight supply; there’s no shortage of Coke or Frito-Lay or Windows or Pentium from what I can see. Only Apple’s iPod makes that cut, which explains why that stock is one of the few U.S. issues that’s been a regular new-high fixture among the world’s superstar equities. What we really need is an energy and conservation policy that shows we’ll be less of a hostage to the whims of the oil-producing countries and more in charge of our own destiny. But that’s unlikely, given the passage of that mealymouthed sop to the petroleum interests known as the energy bill.