Goodbye
Budget Surpluses!
By Sy Harding, editor
Street Smart Report Online
It's
almost always a mistake to extend current trends in a straight
line as a method of predicting the future.
For instance, in Europe
in the late 1800s, the number of horse-drawn carriages on city
streets was growing at such an alarming rate that some city officials
projected, not entirely in jest, that within 50 years pedestrians
would be walking ankle deep in horse manure. It was a real problem.
Fortunately the Model T came along, allowing horses to migrate
back to the countryside, the trend was reversed, and the threatening
outcome was avoided.
A decade ago in the
U.S., economists were extending the trend of government budget
deficits (and the resulting rising national debt) in a straight
line into the future, to project that the U.S. government would
be bankrupt within a couple of decades.
However, over the last
few years the booming economy and stock market produced such
unusual profits for both corporations and investors, that tax
revenues poured into Washington at such a pace that not even
Congress could spend it as fast as it was coming in.
The result was that the previous frightening trend of budget
deficits reversed to a couple of years of budget surpluses.
So, not surprisingly,
last year Washington began extending that trend in a straight
line into the future, projecting that within ten to fifteen years
not only will the national debt be paid off, but various government
projects can receive higher funding, and we can all receive
generous tax cuts.
Federal Reserve chairman
Alan Greenspan warned Congress not to spend the money before
it's received, as conditions that produced the recent budget
surpluses might not last. But Washington, like the rest of the
country, was extending the trends that were in place at the time,
a booming economy and soaring stock market, in a straight line
into the future, convinced it was a new era and economic slowdowns
would not be seen again in our lifetimes.
I've been wondering
how long it would take for a new reality to set in now that the
economic boom, and bull market in stocks, has ended. And sure
enough, this week economist William Seidman, former chairman
of the Resolution Trust Corp., (set up to handle the bailout
of the troubled Savings & Loan banks in the early 1990s),
warned that the enjoyment of budget surpluses the last couple
of years is probably history.
The previous trends
of rising corporate profits, full employment, rising personal
income, and large taxable stock market gains, which combined
to produce the excess tax revenues, have all reversed. So continuing
budget surpluses, on which Washington has based so much of what
it promises to accomplish in coming years, are highly unlikely.
Expect some fancy footwork in Washington at the end of the year
trying to explain what happened.
Meanwhile, this week
brought still more evidence that the economy is in even worse
trouble than has been acknowledged so far, evidence that the
recovery Wall Street promised in the second half of the year
is looking less likely with every passing week.
On the corporate front, important companies continue to warn that they will not meet Wall Street's expectations for the current quarter, with most expecting their problems to continue for the rest of the year. The most discouraging aspect of this quarter's warnings are that there have been just as many as there were for the first quarter (more than 600), with many coming from companies that warned for the first quarter but expected to be in recovery mode by the second half of the year. Having guided Wall Street's expectations much lower with their previous warnings, they're now saying they won't even meet those lowered expectations.
That's not an encouraging picture for a stock market in which the S&P 500 is still selling at 26 times its earnings, a valuation historically associated with a booming economy and rising earnings.
Editor's Note: Sy Harding is president of Asset Management Research Corp., 169 Daniel Webster Hwy., Meredith, NH 03253, publisher of The Street Smart Report, 1 year, 17 issues, $225 (now in its 13th year of exceptional market research for professionals and serious investors) and The Street Smart Report Online at www.StreetSmartReport.com. Mr. Harding has been consistently ranked in the Top Ten Timers for years. He authored the book, Riding the BearHow to Prosper in the Coming Bear Market, $12.95. In Riding The Bear, Mr. Harding reveals that while many Wall Street pros urge investors to hold steady during market declines, these same Wall Street pros and institutions sell quickly at the first sign of a market turning. He explains in plain English how the market reacts, how cycles work, and how to take advantage of them to hold onto your bull market profits and actually increase them during a bear market. Available at most book stores, amazon.com, barnesandnoble.com or StreetSmartReport.com.
