Scribbles

[Old Frank P]

Don Coxe for this week:

"Primary Bear Market"

Real Media
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Scenario A, or worse

DONALD COXE -- Macleans Magazine

Reaction to the World Trade Center attack ranges from horror (most people) to fear (many people, including many investors) to, in some quarters, an odd satisfaction that the big, bad, bullying U.S.A. got a black eye from a small group of little guys. Although it may be too much to expect that the Yankee-bashers can be talked out of their prejudices, they should face the reality that more than Uncle Sam's vanity is at stake: the world's economy and markets, which were in weakened condition on Sept. 10, took terrible beatings on Sept. 11.

Anti-Americanism is remarkably widespread among people who otherwise seem rational, but this schadenfreude is surely misplaced. This is the most successful terrorist operation since Serbian nationalists killed Archduke Franz Ferdinand and his wife, transforming the world's longest experience with sustained peace and prosperity into the First World War. The 1990s were the longest period of good times since that era.

Today's terrorists still have a way to go to catch up to those Serbs. The suicide hijackers accounted for only 6,400 or so deaths (to date), a mere pinprick compared with the millions killed in the First World War. Nevertheless, they killed more Americans than died in Pearl Harbor and D-Day combined.

A back-of-the-envelope calculation says that global equity prices are down by more than $2 trillion (U.S.) since the boys of Bin Laden Air struck. Losses on stock markets abroad are on roughly the same scale as in the U.S., a point the anti-Americans should ponder. I don't know how much global stock prices fell in 1914, but you can bet your bottom dollar, loonie, euro, peso or Swiss franc that the Arabs have outscored the Serbs. Big time.

As to which terrorists did more harm to the global economy, I think today's generation has a good claim. GDP numbers for North America rose during the First World War, but this time they're plunging off a cliff. We could have a deep global recession or maybe even a depression, and the terrorists -- not George W. Bush, not even the UN -- hold the key.

H. W. (Woody) Brock is the American economist who has had -- by far -- the best forecasting record for the U.S. economy in recent years. Last week, he issued a revised prediction, using two scenarios.

Scenario A: "The terrorists have had their jollies, as the British say; they have shot their wad."

Scenario B: "The terrorists have embarked upon a series of attacks and disruptions of which the World Trade Center and Pentagon attacks were only the first."

Under Scenario A, a V-shaped recovery looms; the collapse of consumer and business confidence and damage to airlines and tourism ends after two quarters. Thereafter, a surge of optimism puts the U.S. economy back to its normal two-per-cent to three-per-cent growth. Under Scenario B, "GDP growth could easily drop to minus four per cent as all the components of GDP except for government spending are simultaneously sandbagged." (That would be the worst hit to the U.S. economy since 1973-1974.)

He thinks Scenario A is more probable, but admits that economists have little expertise for such forecasts. That the U.S. consumer holds the key to the entire global economy's prospects is conceded by most global economists and strategists I follow. So if Scenario B lies ahead, those Europeans, Asians and Canadians deriving satisfaction from the American "comeuppance" may have to re-examine their prejudices.

In assessing the near-term outlook, investors should consider the pressures confronting Saudi Arabia and the United Arab Emirates. These two OPEC powerhouses were committed to cutting production quotas if oil prices fell below the bottom end of their target range (approximately $22 a barrel). That may have changed, at least for a while. They were two of just three nations (along with Pakistan) recognizing the Taliban as Afghanistan's government at the time of the attack; they have since broken off relations. Moreover, several of the identified members of Bin Laden Air appear to have links with those countries. It is likely that Bush told the Saudi foreign minister when they met on Sept. 20 that (1) he understands why they cannot commit troops to an attack on the Taliban, but (2) they can help by letting oil prices trade in a lower range, thereby working to prevent the global economy from going into free fall.

The Americans and British must attack the Taliban quickly and decisively. Ramadan begins in November, and Westerners will respect Islamic sentiments against waging war during that holy period. Thereafter, winter will turn the Afghan landscape from difficult to impossible.

I naturally hope the West throttles Bin Laden Air, making Scenario A a reality, and discomfiting anti-Americans. We'll soon know whether the U.S. once again leads the good guys to victory, as they did in both world wars, the Cold War and Desert Storm. If they do, they should be thanked by everyone except terrorists. Fat chance.

Donald Coxe is chairman of Harris Investment Management in Chicago and Toronto-based Jones Heward Investments
http://www.macleans.ca/xta-asp/storyview.asp?viewtype=search&tpl=search_frame&edate=2001/10/....