MAYBE THE ECONOMY IS NOT FUNDAMENTALLY SOUND

over the past few years one of the key mantras for many of the die hard believers in the stock market and the economy is the unsubstantiated statement that proclaims "the economy is fundamentally sound". so ambiguous and non-specific is the statement that it is unrebuttable and even more unrefuttable. at least today. looking out a bit, we may get some 'real' proof to back up this theory of soundness or we may get a rude awakening proving otherwise.

as i observe the economic landscape, there seems to be a number of 'unsound' things occuring in our economy that look alot like looming crisis rather than economic health. instead of broad brush statements, i will point out what i am seeing and why it is the farthest thing from economic stability or soundness.

currently, the airline industry is on the verge of a "domino" bankruptcy and reorganization. two of the 10 largest carriers are in chapter 11 bankruptcy and a third is going to file shortly. one of those already in chapter 11 is not far from a chapter 7 filing or liquidation. capacity, costs and management all need fixing. and anyone who blames this on 9/11 or the looming war is just using that for cover as the industry was in dire straits prior to these events. so to think that once the war is over it will be ok is just plain wrong and uninformed. the model is broken and the industry must reorganize and operate differently going forward, war or no war.

the auto industry is flooding the market with vehicles in order to keep production lines running. the model for success in detroit has become a model of failure as manufacturers are controlled by their costs and unions rather than supply and demand. the past two years has forced the issue for these american industry dinosuars compelling them to try and maintain demand when its really not there. the result will be similar to what happened in our steel industry where we couldnt compete and capacity vs. demand became so out of balance that the businesses implodded on themselves. add the pension problems to the mix and i see nothing healthy in one of the countries most important industries and employers.

in all economic downturns, banks get particular attention. for one thing they are the ones who hold all the notes from when things were booming. when the recession comes, their business slows as demand for money drys up and credit losses increase under the strain of the downturn. this past boom was unique for the banks which could potentially prove extrememly challenging for this industry. during the boomtime, banks became financial 'superstores' selling a whole variety of financial services, all linked to the health of the borrower and the economy, both of which are now struggling mightily. add to this the newly outted derivative concerns and this seems like a volatile mix of financial risk that has not yet manifested itself. when it does, the health of our banking industry will be in question.

previous industry leaders such as enron, kmart, worldcom, adelphia communications in addition to many other technology, telecommunications, and energy companies are all operating under the protection of the bankruptcy courts due to there mismanagement or fraud. these huge companies add to the financial challenges of the 'good' companies in their respective industries and forces unfair competition in an already difficult economic enviroment. when its one or two bad apples it can be worked through. when its a list as long as we have now, its unhealthy and unsound and puts even more strain on our free market system.

i would be remiss if i didnt give an honorable mention to the stock market. i know that it isnt an "industry" perse, but it has become increasingly more important to the health and well being of our previously vibrant economy. instead of a long dissertation about how important the equity markets are to our economic system, suffice to say they are very important. in fact, almost every financial projection and forecast is somewhat reliant on the stability and soundness of the stock market. since you dont need me to inform you that the stock market is in serious trouble, its fairly clear that this 'industry' too is in a very bad way and will continue to be if my observations are even a little bit correct. pension returns, insurance actuarial tables, retirement plans of all types, finacial derivatives, etc, etc, etc, all rely on 'returns' of those equities. returns, not losses, which have been prevalent for the past 3 years and now into a fourth, are intricate and vital to the financial system and without them, many financial assumptions and forecasts must be changed. and not in a favorable way. evidence in fact of further economic "unsoundness".

hopefully, you are starting to get the picture of how fundamentally distressed things are. i can pile on some more but i wont, at least not now. we are at a critical time in our country's economic history and it wont be looked back on with much nostalgia. we have been all but guaranteed that things will work themselves out with the help of our omnipotent federal reserve and some politically motivated tax breaks. i continue to argue that financial mechanisms that worked in the past will not work now because we are in a different time with structural problems that need to be fixed the hard way. unless we realize that and learn from what happened in japan (i know we are not japan, but our economy might be) the realizations that are sure to come will be that much harder to cope with and fix.

and just in case you were wondering, i dont think the economy is fundamentally sound.

have a grateful day!

larry