24 Mar 2006 It’s A Bird, its A Plane, No It’s Super Bull
The airplanes of September 11th, the tech-bust of 2000, the corporate scandals of 2001, the wars in Afghanistan and Iraq, the relentless credit tightening of the Federal Reserve, spiraling oil prices, and increasing global Islamic unrest, separately or combined have failed to stop this economy of ‘steel.’ Will virus infected birds finally accomplish what the prior challengers have been unable to wreak? The predictions range from not at all, to a total global depression.
The International Monetary Fund, in a report released March 13th, said the potential effect of an avian influenza pandemic on the global economy and financial systems could be severe but brief. The report says disruptions could occur in transportation and tourism, trade and utilities, and that already financially vulnerable businesses may face bankruptcy. But, countries that are financially stable and have strong plans to continue basic business operations would be less vulnerable, it says. At the briefing, IMF official Sandy MacKenzie said the most likely global economic effect of a pandemic would be high worker absenteeism as employees stay home to care for sick household members and avoid exposure to the disease in the workplace.
On March 15th the Federal Reserve Board and three other U.S. federal financial and thrift institution regulatory agencies advised financial institutions and their technology service providers to become more aware of the threat of a pandemic influenza outbreak and its potential effect on the delivery of critical financial services. Major financial centers such as Tokyo, London and New York especially need to consider how they would continue functioning without disruption to basic operations due to temporary high absenteeism, Charles Blitzer, another IMF official, said at the briefing.
Reuters reports that U.S. stock markets and other financial services should operate normally if an avian flu pandemic hits. Alton Harvey, who heads contingency planning for the Securities and Exchange Commission said “we really believe that with proper planning, the markets can stay open, even with the most severe pandemic. We think this is doable,” he told a conference organized by the Center for Strategic and International Studies. “Because we have to — we have no choice — we will work it out. The markets will trade.” Stephen Malphrus of the Federal Reserve Board agreed. The Federal Open Market Committee, which setsU.S.economic and interest rate policy can meet by telephone if necessary, he said. “The financial sector is generally out in the lead,” Malphrus said.
The truth is no one really knows how bad the avian flu could get or whether it could effectively migrate to humans. However most scientists studying it suggest it will. The predicted outcomes are as vast as the number of predictors. They range from little global impact, such as the severe acute respiratory syndrome (SARS) outbreak of 2005, to a global pandemic which might wipe out half of the world’s population. That range leaves a huge middle ground of what-if’s.
Businesses are left to grapple with yet another major uncertainty as they plan their budgets. No doubt, the potential risk of H5N1 now ranks among higher interest rates, higher energy prices, protectionism, and global unrest as major threats to the health of the global economy. Uncertainty about the economic future causes managers to refrain from investing in new ventures or capital expenditures beyond what is necessary to maintain short-term business demands.
While we have noted for weeks that the stock market would likely move sideways until the Fed completes its tightening cycle, it may be that the stalemate may be prolonged by H5N1. That’s not to say that there will be bright spots and investment opportunities, just that they will be harder to find, and likely more short-lived.
Ironically, a related threat to the pandemic is globalization itself. With all of the promise it offers, the world is finding out how painful the process globalization is. France, a fierce cultural holdout, provides a good example of how difficult it is to integrate economies without sacrificing unique cultures. Last night French President Jacques Chirac stormed out of an EU summit after the French head of an EU-wide business group began to address the assembled leaders in English, what the speaker referred to as “the language of business.” According to the Wall Street Journal, the hegemony of English has long been a bete noire of French politicians – “should all the world speak only English and drink only Coca-Cola?” is a frequent refrain.
Just now it is reported by Bloomberg that Prime Minister Dominique de Villepin has failed to arrive at a compromise with the country’s most influential labor unions to thwart a nationwide strike in retaliation for a new labor law designed to make the country more competitive in today’s global economy. Last year,Francefailed to adopt the European Union’s constitution, effectively harpooning the process.
In this country, a clarion of globalization, politicians running for re-election are increasingly touting protectionist rhetoric. They hope to appeal to a segment of the voting public that has either lost a job to the global economy or one that fears it could happen to them because of the same. Unfortunately, protectionism is an economically devastating policy. A powerful example is the 1930 enactment of the Smoot Hawley tariffs in this country that were designed to protect American farmers. The result was a global economic shutdown when other countries retaliated with their own tariffs.
One has to look no further than 2004 to realize that we have learned little from history. To the surprise of our trading partners and especially Republicans, Mr. Bush in 2004 announced that import duties would be imposed on select foreign steel to protectU.S.producers from what was deemed unfair dumping by offshore steel companies. When the World Trade Organization rejected the U.S. appeal to preserve the tariffs the European Union threatened with its own retaliatory tariffs amounting to $2.2 billion. The tariffs were quickly dropped. The earnings and the stocks of American steel companies have since doubled in the two years following. Competition is better than protectionism.
Does one of these villains possess enough kryptonite to conquer our Super Bull? Wouldn’t it be nice to tune into next week’s exciting episode to find out? Unfortunately, it will take months or years to answer these questions. In the meantime life and commerce will go on. As our friend Jim Cramer says, “there’s a bull market somewhere and I’ll help you find it.”