Hi Sally, At 13:57 27/11/01 +0100, you wrote: >Here's a remarkable quote from the Nov. 24 Globe and Mail (A4) , saying >things out loud that aren't often stated so baldly. Sally > >Headline: Signs of optimism abound in U.S. despite downturn
My take on this may seem a simplistic one, but it is a basic one I believe. This is that the price/earnings ratio of equities in all developed countries is still far too high and will have to correct itself sooner or later. For something like 150 years, the average return on shares has been about 7% -- that is a p/e ratio of about 14/15. No matter how high or low this ratio has wandered, sometimes for very long periods, it has oscillated around this figure. There is no economic or governmental law which says that the ratio must be around 14/15 but this is the historical record. At around this figure, then investment in industry and commerce proceeds in orderly fashion. Any departure from this average bespeaks an economy severely out of kilter in which either investors (and these days these include our pension funds) are piling into risky projects in an over-heated economy or they are refusing to invest and hoard their money for safety in a recession. The IT mania of the last few years has probably blown itself out and, in doing so, the p/e ratio has come down from about 40 in the US (about 100 in Japan!) and is now about 27. But there was still an overheated economy for several years before that and recovery from this still has to take place. It would be foolish to guess whether a recession is imminent or whether Bush can keep up present levels of consumer spending up by further handouts for a few years longer so that it will be delayed. But a return to a normal historical balance between spending and saving is inevitable in my view. My guess is that a recession is imminent because the average consumer in the US (and the UK -- I don't know about Canada) has huge credit card debts and if he's not frightened already, he will be quite soon as unemployment mounts. Which brings us back to the matter of this discussion list. If we have a recession then we'll have the usual declarations from right-wing politicians and economists that there are too many "rigidities" in the labour force. The working man (if he is still at work) ought to be prepared to take lower wages, to change jobs, to move from where he is to somewhere else where growth sectors are taking place (which occur even during recessions). This is correct in principle and, in fact, this is what happened -- or was beginning to happen -- during the Great Depression of the 1920s and 30s (even though it took a World War to finally cure it). But the composition of the labour force is now a great deal different today from what it was then. The "worker" of the 30s is now a minority of the working population. We now have a far higher proportion of professional workers -- in the traditional professions, the new service professions in marketing, finance and communications, the civil services, academe and so on. All these sectors have swelled enormously since the 30s. It is quite a different picture with substantial rigidities at both ends of the workforce. What was sauce for the goose is now sauce for the gander -- or will be when the next recession takes place. Best wishes, Keith > > "Whether the United States is in a full-blown recession, or at the >beginning of a recovery (as most observers agree), the era of steady >employment is definitely ended. > 'The unemployment rate is guaranteed to rise much further,' Ian >Shepherdson, an economist at High Frequency Economics in Valhalla N.Y. told >reporters this week, 'but this will not prevent a recovery.' > Economists expect large-scale layoffs to continue through 2002, a >prospect that is a cause for optimism among investors. Most stock indices >saw impressive rallies this week, spurred in part by corporate promises to >trim work forces. > Unemployment [in the U.S.] is now at 5.4 per cent, up from 3.9 per >cent a year ago, with more than 400,000 jobs disappearing each month since >September. These are the worst U.S. jobless levels since the early 1990s, >and possibly since the deep slump of the late 1970s and early 80s. > But layoffs aren's what they used to be. Many workers have simply >switched to part-time or contract employment, and consider this period a >well-earned break [NB No data are presented to document this statement]. >The current wave of layoffs has been heavily concentrated among part-time >and temporary workers. Companies have built their businesses around much >more flexible, and disposable, work forces since the last recession, >allowing them to react more quickly to declining fortunes. > There are some signs of deeper malaise. A record 1.5 million >Americans are expected to file for persona; bankruptcy this year, up 22 per >cent from 2000, a study says." > >Anyone have any comments on this? > > > > > > > ___________________________________________________________________ Keith Hudson, Bath, England; e-mail: [EMAIL PROTECTED] ___________________________________________________________________
