Take Corning Glass, which makes the screens for flat screen TVs. In late 2008, big customers like Samsung informed Corning that they probably wouldn't have any new orders until late May or June.
Then in March 2009, Samsung saw an upturn in sales and asked their parts manufacturing supplier in upstate New York to resume production. There was only one problem: Many of Corning's most skilled workers were spending their furloughs deer hunting to put food on the table. Even though it was past the deer hunting season, the game wardens sympathized with the plight of the unemployed and opted to extend the season.
While the wave of layoffs in late 2008 and 2009 helped many companies maintain their bottom lines, the jury is still out when it comes to the long-term effects of the dismissals. The damage wrought on consumers' psyches boosted the national savings rate, but it also exacerbated state and federal budget deficits in ways that could prove lasting.
"U.S. consumers will be down for several years, though not for a decade," Fuss says. Demographic trends in America-the nation adds about 3 million people a year-aren't as ominous as in Japan and Europe. But our society is aging nonetheless, and unless they're buying Geritol, seeing old movies and going on cruises, "Old folks just aren't big consumers," he says.
Yellowstone's predicament isn't the only parallel Fuss finds to the current environment. "The economic picture looks a lot like the 1957-1963 period, when you had a recession, a recovery and then another recession," Fuss says. In the first quarter of 1958, U.S. GDP growth fell a stunning 10.4% and the weak economy emerged as a central issue in the 1960 presidential election.
"When the recession came, capital spending plans stopped," Fuss recalls in comparing the period 50 years ago to the present. "That created lots of unused capacity, and there was not enough recovery in demand so capital spending isn't kicking in."
One bright spot for the U.S. economy this time around is the potential for a surge in exports, as recent improving manufacturing data hints might happen. Surging demand from developing markets could keep this part of the economy percolating. Since consumption remains soft as Americans continue to deleverage, since low capacity utilization is hamstringing non-technology capital spending and since government spending is stretched to the limit, exports appear to be one of the few ways out of the current quagmire.
Fuss expects the demand for exports to remain strong through 2011, primarily because of continued economic strength in Asia. Foreign demand could prove to be the major difference between the current New Normal era and the 1957-1963 period that Fuss views as a distant mirror.
For example, auto sales in China exceeded America's last year and the Chinese market still has a miniscule level of penetration. Growth in Asia should continue to pull the U.S. economy along next year. "Tax increases will produce a temporary slowdown in [U.S.] growth, though it will help the deficit," he predicts.
The gaping government budget deficits afflicting most developed nations remain the 800 lb. gorilla in the living room. In America, what Fuss fears is that, while forward estimates of the federal government's borrowing needs are falling slightly, those estimates are largely predicated on record low short-term interest rates. Indeed, the cost of carrying each dollar of federal debt is still low, but "we're nearing the crossover point where it starts to accelerate. That's not good."
At some point, the government's need to continue issuing new bonds creates its own set of problems and begins to crowd out or raise the cost for private borrowers. It can also lead to some interesting anomalies. In the late 1960s, IBM bonds yielded less than Treasuries of comparable maturities.
Another trend Fuss expects to see result from intensified global competition is a widening gulf between strong companies and industries and weak ones. The financial markets "could see huge disparities in [investment] returns, based on cash, credit and earnings growth fundamentals," he predicts. "And credit fundamentals become more positive for companies that gain market share."
Inflation should make a comeback, but Fuss doesn't expect a replay of the runaway price increases of the 1970s. Big companies with dominant market shares often have the ability to turn inflation to their advantage, while second-tier rivals could see their margins get squeezed. This could contribute to an increasingly uneven playing field in the next decade.
Both equities and bonds are likely to encounter headwinds in the next few years as interest rates return to more normalized levels. Dividend yields on stocks, which at present look juicy in contrast to many fixed-income vehicles, are likely to face pressure if, as Fuss expects, price-to-earnings ratios come down in the face of rising interest rates.
Another trend likely to resurface as business activity returns to normalcy is a rekindling merger and acquisition market. What Fuss fears is that private equity firms will seek to do leveraged buyouts with precisely those midsize companies that are struggling to compete in the competitive global economy. "And look out, these are the wrong companies to leverage up," he observes. "They should be deleveraging."
All this points to a world that remains unstable-but in a way that is quite different from what we've just experienced. In short, just substitute specific risk for market risk, and the picture becomes clearer.