Indiana Jones takes on priests of 'Temple of Doom'


My favorite bull, Wall Street economist Edward Yardeni, is still singing happy tunes about the economy, saving his occasional discordant notes for the nameless naysayers he calls "the high priests of the Temple of Doom."

Mr. Yardeni, who does his Indiana Jones bit at Prudential Securities, has for several years held a more positive long-term view of the economy than most of his peers, and his predictions have been closer to the mark as well.

Much of the support for his views has come from a positive interpretation of U.S. demographics: a horde of aging "baby boomers" will save mountains of money as they sock away funds for their kids' education and their own retirements, generating mountains of capital needed to fuel economic growth, erase government budget deficits and help restore us to fiscal health at the same time.

Whether you share this longer-term optimism, Mr. Yardeni's departure from much common wisdom also applies to the near-term outlook.

With the stock market still within 50 or 100 points of its all-time high and consumer confidence moving up to levels high enough to support an economic recovery, you'd think everyone was becoming a bull.

But this is the same economy that is so sluggish that repeated interest-rate cuts by the Federal Reserve seem to have stimulated scant new activity, save for bringing back the arcane exercise of trying to decipher money-supply shifts.

Fed Chairman Alan Greenspan seems to be delivering his economic "fix" every few days now, appearing before some government forum to literally beg banks to loosen up, make loans and ease what the Bush administration has taken to calling "the credit crunch."

The fine distinction here is that it's not a capital crunch; nope, the Feds are doing a heckuva job making sure there's enough capital to support a healthy economic recovery. A credit crunch, on the other hand, can be gently blamed on the banks and their regulators, thus deflecting some heat from Washington policymakers.

Are you totally confused? If so, let's get back to Mr. Yardeni. He's not confused at all, especially about the sermon being delivered by the high priests of the Temple of Doom, which he describes thusly:

"Brothers and sisters, during the roaring '80s, we all lived beyond our means. We used our credit cards to buy a lifestyle we could not afford. We speculated in real estate. We committed unforgivable financial sins. In the 1990s, we must atone for those sins. We must pay for those sins. We must suffer for those sins! Only a very long and severe recession will cleanse our society."

"These preachers are right," Mr. Yardeni continued in a newsletter written earlier this month. "There was a borrowing binge in the 1980s that fueled excessive speculation. Of course, a borrowing binge can only occur if there is also a lending binge. Now the speculative bubbles are bursting. Many borrowers are in trouble and so are their lenders. But why are the preachers so sure that unwinding the excesses of the 1980s will be so troublesome for the economy?"

Mr. Yardeni looks at, and largely rejects, several commonly accepted elements for an unpleasant "unwinding" process -- sick balance sheets, the credit crunch and the awesome burden of corporate debt.

C* Balance sheets. Non-financial debt averaged about 1.8 times our gross national product (GNP) during the 1980s, up sharply from the 1.4 ratio that held during the 1950s, 1960s and 1970s. With GNP at about $5 trillion in current dollars, Mr. Yardeni figures the amount of "excessive" debt at $2 trillion (four-tenths of $5 trillion, with the four-tenths being the difference between the 1.8 and 1.4 debt ratios).

"Let's assume that 25 percent of the excess debt of the 1980s goes bad," he reasoned. "That amounts to $500 billion. That is a huge hit to the financial system and the economy. However, it isn't big enough to cause the kind of apocalypse predicted by the high priests of the Temple of Doom."

* The credit crunch. Troubled financial institutions may not be lending money, but Mr. Yardeni looks not to the supply of credit as the culprit but the demand for loans, which he feels has disappeared.

"We believe that the Persian Gulf crisis caused an inventory panic in the business community. The crisis and the resulting plunge in consumer confidence convinced business managers to batten down the hatches. They cut their inventories and their payrolls very quickly. . . . Such a significant slowdown in inventory investment clearly reduces the borrowing needs of businesses."

The recent rise in consumer confidence should put Mr. Yardeni's view to a quick and effective test.

* Corporate debt. Despite pessimists' concerns that excessive corporate debt would deepen and extend the recession, Mr. Yardeni looks for a revival of business activity, fueled by the Fed's aggressive move tolower interest rates and the related turnaround in junk bonds.

Corporate interest expense during the 1980s was "remarkably steady" at about 35 percent of operating earnings (earnings before taxes and before making interest payments), he said, compared with a ratio of about 20 percent during the 1970s.

Although this is a substantial increase, Mr. Yardeni feels it's not the crushing burden the high priests portray. "Relative to total revenues, as measured by the gross domestic product of non-financial corporations," he added, "the net interest burden is only 4 percent."

"The doom-and-gloom crowd base their dire predictions on faith," Mr. Yardeni said. "We are in the heathen crowd. We doubt that the problems are so overwhelming that only a refreshing depression can make things right again."

Mr. Yardeni has always made me want to believe in his message. But, at least this time around, it is his predictions that may need to be taken on faith.

Although the emanations from the Temple of Doom are not terribly worrisome, logic doesn't point so much toward a vigorous recovery as it does to a weak upturn, at best, followed by several years of mediocre economic performance.

Copyright © 2019, The Baltimore Sun, a Baltimore Sun Media Group publication | Place an Ad