Sorry but bad news just keeps rolling in necessitating an updated estimate corrected downward. Corporate profits are down, consumer spending is down, construction is down, corporate investment is way down, and tax cuts at a time when revenue is down because the economy is down means that the government’s surplus is in jeopardy; that means pressure on interest rates down the line. US domestic growth would be negative this past quarter if not for an unexpected increase in government spending. There is also substantial economic weakness in Europe, Japan and emerging countries such as Argentina, Brazil and Turkey. Default in Argentina is just a matter of time even though the leadership is doing what it can to avoid it (it’s just that the system has been broken for so long). This is important because in earlier times the economies were not all performing badly at the same time and the markets were not as linked (ie: the day after Argentina defaults, hedge traders will dump Mexican holdings and attack the Hong Kong dollar). There is also social unrest in Argentina which should not be underestimated; severe economic hardship in Latin America will revive left-leaning movements that were thought to be diffused during the 80’s. Both Indonesia and Japan have reform-minded people at the top but they are given 35% probability of success due to internal obstacles.
It is very disturbing that after all the advertising and money thrown at infrastructure, only 8% of Americans have gone to broadband (meaning hi-speed internet connections). There is a significant percentage of the population everywhere that simply is not interested in Internet, cellular telephony and/or e-mail. Some of my good friends will never see this article because although they are “with it” in many ways, they fall into this category. One important way to solve this problem is to really open up local markets to competition; right now in the US there is no true competition for local broadband providers and, in the rest of the world, the same is true. I have broadband at home and in the office in Manhattan because I demand it and put up with awful service for a year from our local telco at a ridiculous price because I had no choice. True there were a dozen companies reselling DSL lines but they were all at the mercy of the local telcos which held up their orders for 6-8 weeks and which would leave you without service for a month if for some reason you switched companies or your provider went bankrupt.
I have not bought anything in equities for over a year and I don’t think I will be buying for now. Equities in technology stocks are still overvalued because they are still based on continued growth of earnings, something that is out of the question in the current environment. I expect markets to fall further over the next quarter.
