The Gloom of Consensus

Looking into the screen at all the info that's coming in, it's kinda hard to be optimistic. The news on the housing front, if confirmed, will make a consumer cave-in all but inevitable. So then we must look to the other, business investment side. And it's looking at this that makes it hard to be an optimist. Stephen Roach started the ball rolling in Beijing:

The overall sentiment of this group of investors made me look like a bull. They conceded the downside to virtually every gloomy forecast I tossed out, whether it was GDP growth, prices, or profits in every major region of the world. And this wasn’t a group of cyclical bears -- most of them were caught up in the grips of more secular perils. Mainly Asian specialists, augmented by a sprinkling of European and US-focused investors, the assembled group had lived through many a boom-bust cycle. A majority came from bubble-prone Hong Kong, where despair is deepening by the day. The prewar upswing in world equity markets did little to whet their appetites. Long bruised and battered, these investors viewed rallies as selling opportunities -- not make-or-break entry points. Macro was dead (again) and stock selection was seen as the essence of investor survival.
Source: Morgan Stanley Global Economic Forum
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Then Morgan Stanley's Robert Alan Feldman chipped-in his sixpennny worth: investors have become interested in, of all things, Japan. But here's the rub, they're interested in order to see what may be in store for Europe on the one hand, and how to make pickings from the carnage, on the other:

At a recent Morgan Stanley conference of global investors in Beijing, the gloom of the consensus was overwhelming, as Stephen Roach described in his piece “Pondering Two Worlds in China” (Global Economic Forum, March 24, 2003). At that conference, however, there was an interesting sub-theme for those who invest in Japan. In contrast to other recent Morgan Stanley conferences, there was huge interest in Japan, which took two forms. One was an interest in the pathology of Japan’s weak performance over the last decade. The second form of interest concerned allure -- i.e., identifying winners in Japan -- which heretofore has been routinely dismissed as an oxymoron. Not so with this group.

In the pathology department, the key element was how investors could learn from the financial system disaster in Japan in defending themselves against potential problems -- particularly in Europe. Indeed, one Europe specialist likened investment in European insurers to playing Russian roulette with five bullets -- a sentiment very familiar to those who have invested in hopes of recovery of Japanese financial institutions. Asset mismatch, the pension hole, and poor accounting practices -- all themes familiar in Japan -- were trotted forth. For investors in Japanese assets, the question is whether emerging problems in Europe will have direct effects on Japan. While recognizing the interconnections of all financial institutions, it seems that Japan is probably not nearly as exposed as in earlier years. Japanese financial institutions have been reducing foreign involvement for some time.
Source: Morgan Stanley Global Economic Forum
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And now, today, the Financial Times brings to our attention the fact that business sentiment is, guess what, gloomy. Now the income that isn't consumed is saved. And the income that is saved, and isn't spent by others buying property, needs, in the final analysis, to be invested, because if not...........The only way out of all this is an investment lead boom, but making that investment a reality depends on whether winning the peace is going to be easier than winning the war. Meantime I guess we'd all better become experts in that little known variable, the velocity of circulation of money. Because if, in the worst case scenario, consumption falters, and investment doesn't materialise, then deflation and declining velocity of circulation are waiting, johnny, just around the corner for you. Beware the ides of March!

While stock markets have pitched queasily with the shifts in sentiment over the war in Iraq, businesses have continued to watch and wait, much as they have done for the past few months. The word from corporate leaders is that while the long hoped-for recovery in business investment may have been set back by the war, an end to the war may be a necessary condition for an upturn, but it is not sufficient in itself. Last year there was clear evidence from the US, Japan and Germany, as well as hints from the UK and France, that the decline in investment that began in 2001 was starting to slow. As war approached, those hopeful signs faded; and many businesses have linked the two developments. In the UK, the Engineering Employers' Federation, which represents many capital equipment manufacturers, has revised sharply downwards its growth forecasts for 2003 from its expectations of three months ago, attributing the change to political uncertainty. Two thirds of chief financial officers polled last week by Financial Executives International, the US lobby group, and Duke University's Fuqua School of Business, claimed they were spending cautiously or delaying investment because of geopolitical concerns. The worry now is that the uncertainty is unlikely to be dispelled very soon.

Fears that the war will drag on may or may not turn out to be justified but businesses are concerned that the broader tensions will persist after the war is over. As Pehr Gyllenhammar, chairman of Aviva, Britain's biggest insurer, puts it: "Some more stability will make a difference but will that necessarily come after the war is over? That can also take time." More fundamentally, many economists warn that economic conditions unrelated to the war have had and will continue to have a more significant influence. Ken Goldstein of the Conference Board, a New York-based business research group, would rank Iraq no higher than third as a concern for companies: behind the lack of pricing power that is squeezing corporate profitability, and the persistent overcapacity that is a legacy of the investment boom of the 1990s."There has been an awful lot of talk on Wall Street about the end of the uncertainty once the war is over, but not on Main Street," he says. "The idea that an end to war would ever have caused a big recovery in investment was putting too much emphasis on it." In the motor industry, for example, there has been short-term crisis planning. Some have stockpiled parts to guard against disruption to supplies while others, including Honda and Toyota in the US, cut advertising as soon as war broke out. But longer-term decisions seem to be based more on generally negative assessments of the economy. Ford cut production plans for April, May and June by 17 per cent before the invasion while General Motors, the biggest carmaker, will produce 10 per cent fewer vehicles. The financial position of companies has improved worldwide: in the US, for example, a financial deficit (negative cash flow) of about 4 per cent of gross domestic product at its peak has fallen to less than 1 per cent. That should signal that the outlook for investment has improved. But Binit Patel of Goldman Sachs expects that corporations will still be reluctant to spend. "If you look at any capital spending model, the key driver has been consumer spending, and we expect consumer spending to slow. When capacity utilisation is already low, companies are just not going to get the feeling that they need to invest."
Source: Financial Times
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