The Pre-Attack Economy

Adam Hamilton    September 28, 2001    3372 Words


Well, it is already happening.  Everything bad in the US economy and markets is now blamed on the horrible terrorist strikes.


In my emotional essay “Aftermath: Freedom Lives” which I wrote through tears a couple days after the attacks, I already harbored the sneaking suspicion that everything negative that happened in the US economy and stock markets after the terrorist hits that did not please the perma-bulls would be forever blamed on the events of September 11.  Here is a paragraph stripped out of that earlier essay…


“Second, I have an unpleasant feeling that Wall Street will shamelessly use this terrible tragedy as an excuse to justify further market declines later this autumn.  As we and other contrarian analysts have painstakingly documented since the NASDAQ crash in March of 2000, the US economy and financial markets were in serious trouble on September 10 before the attack and were already headed much lower.  Brace yourselves for a huge Wall Street PR campaign blitz blaming the terrorists for everything bad that happens in the markets from now until a long time into the future.”


While we were busy working on the upcoming October issue of Zeal Intelligence this week for our valued private clients, I noticed we had pages and pages of extra notes taken during September that described the state of the US economy and stock markets before the terrorists altered the course of history.  Not surprisingly, there were bigger fish to fry in the new issue of Zeal Intelligence, so some of those economic and market observations originally intended for our newsletter spilled over into this essay.


While it might not make for particularly compelling reading and certainly won’t stir any souls, I decided to hammer out an informal essay this week detailing some of these ominous economic and market trends and data that reflected the weeks prior to the vile terrorist attacks on the United States of America.  I really believe it is important as we plunge forth into this surreal era of unprecedented uncertainty and potential chaos that we as investors do not forget the US economic and market action prior to that second day that will live forever in infamy.


Back in August, patriotic American Congressional hero and free-market champion Representative Dr. Ron Paul of Texas ( penned the following words of wisdom which support the contention we have had all along that interest rate cuts following a supercycle bubble burst are rendered impotent (see “Bubbling Interest Rates”).  Dr. Paul wrote…


 “The Japanese economy provides a vivid example of the futility of manipulating interest rates.  Japan’s Central Bank began cutting rates more than a decade ago.  But the country remains mired in a stagnant economy.  Ultimately interest rates were cut to zero where they have remained for several years.  This rate cutting has failed to stimulate the economy however.  The Nikkei stock market average remains at the 1980s levels while Japanese unemployment recently reached 5%, the highest rate in decades.  The Japanese experience should tell us that prosperity cannot be created out of thin air by a central bank.”


Dr. Paul is right on the money.  If promiscuous central bank rate cuts did not do a demonstrable bit of good in the US before the attacks, why do the perma-bulls have great expectations of the rate cuts’ efficacy after the attacks?  If seven cuts and 300 basis points didn’t stop the stock market slide before the attacks, why will X more rate cuts for Y more basis points evolve into a miraculous economic elixir in the remainder of 2001?


Remember earlier this year when Dallas Fed President Robert McTeer made his impassioned plea to Americans to “be patriotic and go buy an SUV”?  Snicker.  McTeer once again opened his big mouth in early September and said the US would be in “bad trouble” if US consumers started acting rational…


“Americans have been doing something that’s probably irrational from the point of view of the individual consumer because they all need to be saving more, saving for retirement, saving for college and all that.  But we’d be in bad trouble if they started doing that rational thing all of a sudden.  We’re happy they’re spending.  We wish that they didn’t run up a lot of debt to do it.”


What a revelation!  Even before the attacks, the market manipulators at the Fed were declaring publicly that we were in a world of hurt if US consumers began to save and curtailed their spending habits.


Another Federal Reserve President, William Poole of the St. Louis Fed, made some comments in sharp contrast to McTeer’s sometimes maniacal rantings and ravings.  Poole, at a Bradley University dinner in early September, said that it was not the Fed’s role to try and influence asset markets since it is not up to central bankers to determine what stock activity is appropriate.  He also noted that if the Fed were to try and meddle in the stock markets, it would have to abandon its goal to keep inflation at bay, “Clearly, targeting the stock market might come at a high price.  Once the Federal Reserve compromises on its price stability goal, inflation and inflation expectations build up.”


Holy cow!  How did this guy who claims he respects free markets sneak under the Fed’s radar when they hired him?  The Greenspan Fed has specialized in market manipulation, whether it was tactical S&P futures purchases at precarious market junctures, the ongoing not-so-stealthy Fed’s role in the suppression of the global gold market, or more garden-variety in-your-face Communist command-and-control style short-term interest rate shenanigans.  Maybe Poole can talk some sense into Greenspan, who was once a brilliant economist who understood free markets AND history before he nurtured the biggest bubble the world has ever seen.


Poole’s comments are being proven correct in spades following the attacks, when Greenspan threw caution and prudence to the wind and carpet-bombed the US economy with over $200b of freshly created dollars, fiat funny money.  In total, the cash injected in the six days after the attacks was probably equal to over one half of the total MZM money supply expansion in the entire first eight months of 2001!  Inflation is coming with a vengeance, as Poole warned it would if the Fed foolishly targeted the stock markets.


In the days before the attacks, Bill Gross, the elite bond fund manager at PIMCO who runs the largest bond portfolio in the history of the universe, also agreed that substantially lower interest rates would not prove beneficial to the stock markets.  He said that a Fed Funds rate of 3% is the lowest the Fed needs to go.  (Greenspan slammed into that target with his third emergency 50 basis point rate cut this year an hour before trading resumed after the attacks.)  Bill Gross in a television interview said, “Stock markets do not need substantially lower rates, they are predicated on profits.  Until we see profits return, lower rates won’t mean much.”  Amen.  Profits matter, not Federal Reserve market manipulation!


Gross also said in that same CNBC interview, BEFORE the attacks, that the US faced several “slow” years ahead.


Well before the attacks, a man I used to admire, Charles Schwab, was the largest insider seller in his own company’s stock, Charles Schwab Corporation.  This is the same fellow who shamelessly runs endless television commercials telling people to “just relax”, that the markets are fine and those in for the long haul will do great.  If he really believed that drivel, why did he jettison over 1m shares, $25.3m worth of stock, in his own company while he persuaded the average American investor to do just the opposite through his TV ads?  (See Schwab’s insider trades for SCH at )  Schwab did not need the terrorists to scare him, he already knew the markets were heading south in a hurry way back in February, or else he would not have sold at the same time he was persuading his frightened clients to sit tight and hold.


Scurrying along to the consumer front, in order to spend, consumers had to savagely attack their last remaining large assets, their home equity.  Prior to the US terrorist attacks, home equity ownership as a percentage of the total value of US homes had fallen to its lowest level since WW2.  Imagine how this percentage will crater when the real estate bubble begins to collapse, yet mortgage debt outstanding does not!


Mortgage payments as a percentage of disposable income were already at an all time high of 6.5%.  Couple this with record installment debt payments as a percentage of disposable income (21.7%) and rising credit card balances and credit delinquency rates, and the US consumers were in deep trouble in terms of crushing debt well before the attacks.


Consumer spending was already falling before the 11th (it slowed by 16% in Q2 2001), which was gutting the profits of US companies.  As Bill Gross wisely pointed out, stock market prices are ultimately driven by earnings, so plunging consumer spending that was obliterating corporate profits was a VERY bad omen for the US markets prior to the attacks.


Even before the attacks, corporate earnings were being shredded, knocking the bottoms out of stock prices as valuation fundamentals crumbled further into the abyss.  Together, the 4000+ companies making up the NASDAQ alone had lost am amazing $79b in Q1 2001 and $36b in Q2.  This current quarter was already shaping up to be far worse prior to the terrorist strikes.  And this doesn’t even begin to tell the whole story of how dismal corporate profits have become!


Even worse, still before the attacks, six years and $160b that represented the total profits of every company in the NASDAQ composite index had already been wiped out by the summer of 2001.  Yes, you read that correctly.  The ENTIRE aggregate corporate profits and accumulated earnings of EVERY single NASDAQ company earned from April 1994 to June 2000 had all been lost since the middle of 2000.  Every last penny! 


If this devastating information is not enough to convince someone that the US stock market performance of the late 1990s was entirely a bubble, pure fantasy, nothing ever will.  The wizards running the companies listed on the NASDAQ over the last year managed to miscalculate so grievously that they lost enough money to wipe out every single penny of NASDAQ earnings from the great boom even BEFORE the terrorists crashed into the towers of consumer confidence!  Ouch.


Even before the final revision of Q2 GDP to anemic 0.3% growth on September 28, it was weighing in at an even wimpier 0.2%, hardly something to celebrate as it was hovering right over recessionary territory.  US economic growth since July of 2000 had been slower than any 12-month period since the 1990-1991 recession.  Before the attacks. 


On the day before the attacks, on Monday September 10, the NASDAQ closed at 1695, within shouting distance of its April low of 1638.  The S&P 500 settled at 1093, actually BELOW its April low of 1103.  The venerable Dow 30 closed at 9606, only a couple hundred points above its March lows.  The US equity markets were collapsing under their own overvalued weight even before the tragic events of September 11!


Just as a concrete example that lots of prudent contrarian investors strongly suspected that the April lows would not prove to be anywhere close to the ultimate NASDAQ bottom, here are a couple of paragraphs from our “Emergency Rate Cut Numero Dos” essay published on April 20, 2001 when Wall Street was merrily proclaiming that the bottom had been laid-in and a magnificent recovery rally would surge ahead through the end of the year…


“Now, honestly, does anyone out there REALLY believe that the bottom of a bear market after a Kondratieff bubble burst will happen ABOVE 1998 lows?  Will the biggest bubble in the history of the universe end after only wiping out two years of gains?  Not a chance.  ALL historical bear markets, especially after speculative manias, ultimately regress to ten to fifteen year bear market lows.”


“What’s a real NASDAQ low?  In 1990 the lowest daily closing level of the NASDAQ composite index was 325 on October 16.  REAL bear markets, especially after historic manias, wipe out over a decade of gains, not just a couple years.  The incorrigible perma-bulls who dream the NASDAQ can bottom above 1998 levels must be smoking some of that wacky weed they pass out on Wall Street.”


Not everyone believed the mania hype in April!  The US stock markets were destined to drift much lower on a fundamental basis WAY before the terrorist attacks.


The dismal pre-attack September 10 stock market action was due in part to the surprise unemployment report on Friday September 7.  US unemployment rocketed up to 4.9% in August.  Manufacturers laid off twice as many Americans in August as in July, the ranks of the unemployed were up 1.2m to 7m compared to August 2000, and the total number of Americans receiving unemployment benefits rose to 3.4m, its highest level since August 1992. 


To make matters worse, the specter of inflation was still present, with average hourly earnings rising even in the midst of a horrible jobs environment with a surplus of hungry labor.  Bloomberg reported on the unemployment surprise, “The US labor markets will deteriorate sharply, hitting consumer confidence, retail sales, and slamming the brakes on recovery.”  All this happened BEFORE the terrorist attacks and before Greenspan’s latest post-attack inflationary extravaganza.


One of the sacred core tenets of faith of the so-called New Era economic miracles of the bubbles was the productivity myth.  Even Alan Greenspan claimed he bought into this one, believing wondrous Information Age technology forever accelerated productivity growth for humanity.  Unfortunately, before the attacks, the mathematical slight-of-hand artists at the Bureau of Labor Statistics shattered this fantasy.  Almost criminally, the BLS unilaterally decided to revise its entire reported productivity statistics since 1996.


The BLS originally reported productivity growth from 1996-2000 at an average 4% annual rate, which was hyper-bullish for the New Era faithful.  Now, well after the fact when the catastrophic damage partly from false statistics had already been done, the BLS sheepishly said, “Whoops!  We misled you all.”  What a joke!  It took them FIVE years to discover they radically overstated productivity?!?  (slowly shaking head)  Whatever.


Now, the discredited BLS suddenly claims that annual productivity growth from 1996-2000 was only around 2.6%, a very non-miraculous number.  The BLS lowered the 2000 productivity numbers from 4.3% to 3%.  Is there anyone out there who believes that the statistical manipulators at the BLS will NOT revise 2001 numbers downward in the future?  Even before the attacks, the very same BLS that originally promulgated the “Productivity Miracle” myth through its false reporting and padding of statistics officially declared this myth dead.  Late 1990s productivity was nothing special, it was in line with productivity growth since WW2.


Then, on an otherwise lovely September morning, we all watched in utter horror as Islamic fanatics murdered thousands of Americans as they rammed their pirated jet into the second WTC tower live on television for the whole world to see.  Thanks to these merciless barbarians, America continues to languish in a downward psychological spiral.

Even after the horrific attacks, economic stats continued to emerge that applied EXCLUSIVELY to the pre-attack economy and markets.  Here are a few more thrown out for posterity’s sake.


August industrial production chillingly plunged again for the 11th month in a row.  It was the worst streak of declining industrial production since 1960, 41 long years ago.  The capacity utilization rate fell as well in August, to 76.2%, its lowest level since July 1983.  The crucial US industrial economy was painfully nursing deep wounds well before the terrorists left their atrocious calling cards of destruction.


August retail sales dropped 0.3%, hardly inspiring.  The University of Michigan Consumer Sentiment Index dropped from 91.5 to 83.6, a gut-wrenching plunge to its lowest level since March 1993.  The future expectations component of the index fell as well from 85.5 to 77.2.  Consumer confidence was falling months before that fateful day of September 11.  Lower confidence was reflected in housing starts, which plummeted 6.9% in August.  The terrorists have simply accelerated powerful forces that were already in motion and ravaging the pre-attack US economy and markets.


US exports plummeted $2.1b in July, the largest monthly decline EVER.  As our nation learned through great pain in the Great Depression of the 1930s, little proves to be more dangerous to the world economy than declining trade.  It was the collapse in international trade that was one of the key markers of the Great Depression. 


US leading economic indicators fell 0.3% in August, their first decline since March.  Expectations were only for a 0.1% fall.


Even the chronically parasitic and ever-expanding US government, which taxes its hard-working subjects to a far greater percentage of the fruits of our labor than even medieval peasants had to pay to their kings, announced an all-time record deficit of $80b in August.  It was the largest monthly gap in the history of the United States of America, shattering the earlier one-month deficit record of $53b in May 1991.  Analysts had “only” expected a $60b shortfall in August, but the cooling economy greatly reduced tax receipts.  The federal government reported that August revenue fell 11% from the same month last year.


The government spent $80b more than it coerced out of its populous in a single month!  Even before the attack?  Unreal!  Not long ago, those goofy politicians were making grand claims of surplus and spun happy visions of paying down our outrageous national debt.  More smoke and mirrors, typical big welfare-state government modus operandi.  Now, if we annualize $80b, the US government is spending at a rate of almost $1 TRILLION dollars per year more than it is milking out of its already overtaxed citizens.  God only knows how high these deficit numbers will rocket in the coming months after the terrorist attacks as government spending ramps up enormously!


Too bad the US government has not studied history and apparently doesn’t realize that nation-states that live beyond their means are ultimately crushed by the hard and unyielding laws of economics and finance.


The list of ugly economic and market stats apparent before the terrorist strikes goes on and on.


This essay hastily outlined a little economic and market data that transpired BEFORE the terrorists toppled the towers of American capitalism.  It is intellectually dishonest to focus on the current market events since the attacks and try to totally divorce them from dire economic conditions existing before the terrorist attacks.  The underlying negative trends buffeting the markets were already well established as the Mohammedan terrorists prepared to die for their god of war, those men just helped accelerate the trends a bit.


People on Wall Street who have seduced investors into riding the market straight towards the abyss and never, ever selling are going to increasingly use the horrible terrorist attacks as a convenient scapegoat.  Investors must hold the Wall Street hype-machine accountable and realize that the terrorists did not change any macro-strategic trends affecting the US markets and the US economy, they simply increased their velocity.  Even the crippled airline stocks had already experienced record slowdowns in lucrative business travel earlier this summer.  All major market and economic trends in place now were well-established before the ugly weeks following the attacks.


I believe it is really important to remember as we plunge into the acute uncertainty and dangerous economic and market waters ahead that every investor should maintain proper perspective on where the trends were leading prior to the attacks.  Without a proper perspective on where we have been, it is impossible to make prudent predictions on where we are going.  Denying the dire economic and market realities that existed before the terrorists struck is setting investors up for another big kick in the teeth and much further losses as those pre-existing negative trends intensify.


Make no mistake, the US economy and US stock markets were in poor shape well before the tragic events of September 11.  The terrorists simply augmented already negative economic and market trends with an added boost of acceleration.


Adam Hamilton, CPA     September 28, 2001     Subscribe