Is it 1973 Again?


Stocks greeted the New Year with a nice rally. January market strength traditionally forecasts an up year for stocks although the misadventures of the past two years have left investors skeptical of tradition. Even though there will be further misadventures, I believe that economic recovery will boost stocks into another decent year.

The strength of the recovery is an increasing concern. In his New York Times column, Paul Krugman likened today’s economy to that of 1937 when the Roosevelt Administration decided that the Great Depression was over. It cut back spending and tightened monetary policy, plunging the economy back into a slump that didn’t end until the massive spending brought on by the war.

We can expect to see blips of good news in the next few weeks but Mr. Krugman points out that the growth of the last decade was driven by a housing boom and accompanying overly enthusiastic consumer spending. Widespread housing vacancies mean neither will be back soon.

Fortunately, both Federal Reserve Chairman Bernanke and Christina Romer, head of the President’s Council of Economic Advisors, are scholars of the Depression years. They are therefore unlikely to repeat the error of tightening monetary policy while the brakes are still on.

Interest rates will thus remain near zero for the immediate future but recovery will be difficult without an additional economic stimulus that will bring jobs. Over the last ten years, this country, still the world’s leading economy by far, had a new job creation rate of zero. Small wonder there were reports over the holidays of small children asking Santa Claus to bring mommy or daddy a job.

We need 10 million new jobs to get us back to the levels of just two years ago before the beginning of the recession. Some of these will come from innovative, export-oriented companies like those mentioned here. Investing in greener technologies, alternative fuels and improved infrastructure will help. So will winding down two wars that we cannot afford.

The traditional American advantage in public education is slipping. There is much talk about the need to improve this vital sector while state and local governments are closing libraries and firing teachers. Mr. Krugman argues that a second round of federal economic stimulus spending will be badly needed to avoid a rerun of the mistakes of 1937. We shall see.

For those fortunate enough to own stocks, there is still money to be made. In a shaky economic recovery, stocks like IBM (IBM-$131) should be rewarding. It’s reasonably valued, operates globally, should be able to grow earnings at 10% annually and yields almost 2% from a regularly increasing dividend. Among other activities, it is expanding in environmental infrastructure areas. (AMZN-$134), Apple (AAPL-$214) and Google (GOOG-$622) are all growing nicely. They’re a bit expensive after the recent stock market rally but they always will be more highly valued than less innovative companies. There is much current      braying by the chattering classes about rivals to Apple’s iPhone but global demand for mobile communications provides plenty of room for growth.

Once almost a novelty, mobile phone subscriptions have grown from 500 million ten years ago to almost 5 billion today. In rich countries, they outnumber the population and are even more than half in poorer countries. England-based Vodafone (VOD-$23) is a big global provider with a 4.6% yield from a regularly increasing dividend.

China’s government is not shrinking from further stimulus and its economy is growing with vigor. (CTRP-$76), its leading travel company, is growing at a 50% clip. Investors should not forget 1937 nor fail to look ahead to 2037 when China will probably be the world’s largest economy. Whether it will be the most innovative is up to us.


Tony Crowell manages stock portfolios for individuals and their trust and retirement accounts with CROWELL•ROBERTS Investment Counsel, a registered investment advisor in Laguna Beach since 1993. (949)-494-1376/(800)-697-2622;

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