Before You Buy The Cruise Lines, Consider This…

• December 9, 2002
• Peter Navarro

Market
Trend: Down

Market
Outlook: Neutral to Bearish

Macroplay: Short the Boat

The Broad Market Outlook: A Confederacy of Dunces

The stock market won’t fully recover until the
economy does. The economy won’t fully recover until an inept Bush White House,
a temporizing Greenspan Fed, and a dysfunctional “Republicrat” Congress realize
that the old non-cooperative ways of stimulating recovery won’t work in the new
“Bin Laden” economy. 

Consumers account for two-thirds of GDP
growth. They have been our economic bulwark, almost entirely because of a home-refinancing boom. Most consumers in the “re-fi” brigade have not lowered their
mortgage payments but simply pulled more equity out to spend. But as mortgage
rates now drift back up and home prices soften, this party is over! Our malls,
auto parks, and realtors will soon feel the pinch.

Business executives started the recession.
After spending like drunken sailors in the 1990s, particularly on new tech
doodads, they now make ostriches look gregarious. The problem may be traced to
a deep-seated lack of confidence —- and growing fear! —- of incompetent government
policies.

It started with Bush tax cut. It didn’t work
because it was never designed to be a short-run stimulus.  Instead, this
redistributive tax cut has become the catalyst for chronic budgets that will
eventually raise interest rates and crowd out business investment.

Our fiscally irresponsible Republicrat Congress
is ultimately to blame. It has dramatically increased defense spending to fight
the war on terrorism but refused to cut any “butter” to pay for the “guns.”

The failed Bush tax cut, coupled with Congress’s
lack of fiscal restraint, has done more than chill business investment. It has
morphed Fed Chairman Alan Greenspan into a temporizing Hamlet. For
almost a year, Greenspan kept asking himself “To cut interest rates or not to
cut?”  Until recently — too little and too late — he was never able to say yes.

Greenspan has a very legitimate concern that
an over-stimulative fiscal policy will eventually give birth to a 1970s-style
stagflation. But he is even more worried about the impact of the war on
terrorism on the single most important brake on inflation and engine of growth,
namely, productivity.

As the Federal government is eventually
forced to cut the “butter” of education, health care, and infrastructure to pay
for war, productivity will suffer. To the extent that business executives
substitute protective capital like fences and guards for the productive capital
of new machinery, productivity likewise will take a hit. This is the “Bin
Laden” tax, and it is one that this nation has yet to fully acknowledge — much
less come to grips with.

On top of a faltering consumer, frozen business
executives, and fiscally irresponsible politicians, there are growing global
economic and political uncertainties.

World oil prices began to spike as early as March
of 2002 when the Bushites started beating the Iraqi war drum. Higher oil prices
are highly contractionary as they quite literally “tax” the global economy. 

Not
coincidentally, Germany is falling into a funk that may drag down Europe. Japan
remains the basket case of Asia. The result is falling US exports, and a rising trade deficit. The resultant weakening
dollar has undermined the stock market as foreign investors withdraw because of
currency risk.

The final barrier to economic recovery is terrorism
itself. It’s not just that war with Iraq is all but inevitable and the outcome
is uncertain. Seemingly every day, the Jihadists open a new front — from
heavenly Bali to the Hell of an AIDS- and corruption-wracked Africa.

The worst
part of all of this is that the US is
using a very old model to wage its economic wars. Instead of a far-too-loose
confederacy of a White House, Congress, and Federal Reserve operating
independently and in competition with one another, we need a new model of
coordination and cooperation that can rise above the parochial chains of
politics. That’s a tall order to ask of our short-sighted politicians. But
what is equally true is that we are in a new, far more uncertain and dangerous
economic world, where the old ways will no longer do.

Macroplay of the Week: Short The Boat

You may have gotten tuned in
earlier to this one, based on a
previous column. It is anything but too
late.  This is because the trials and travails of the cruise-ship industry
have now reached their Jay Leno phase — as well as gained editorial cartoon
stature, e.g., the HMS Dysentery in the

Los Angeles Times. 

Not surprisingly, the stocks of Carnival
(
CCL |
Quote |
Chart |
News |
PowerRating)) and

Royal Caribbean
(
RCL |
Quote |
Chart |
News |
PowerRating) have both taken small hits since Nov. 7, BUT more to the point, their technical characteristics have deteriorated
significantly. Down the road, this industry is looking at lower earnings

both because of cancellations and steep discounts that are being offered to
entice folks back on the low seas. Gotta be a nice short somewhere. Use any
broad upward market bounce to time your entry.

If you have a favorite macroplay
or stock you would like us to consider in this column, send an e-mail to

peter@peternavarro.com or go directly to

https://www.peternavarro.com. We’d love to hear from you.