Some Tipping Economic Projections

by | Sep 28, 2000 | Archives

Dear International Friend,

Recently I recommended the book, “Tipping Point”, by Malcolm Gladwell. Let's look at how knowledge in this book can help us predict markets.

One of the points the book makes is that it is little things that causes an (social-economic-disease) event to tip. For example the book explains the “Broken Window Theory ” that says that if a window is broken and left un repaired, people walking by will conclude that no one cares and no one is in charge. Soon more windows will be broken and the sense of anarchy will spread from the building on the street on which it faces, sending a signal that anything goes. In short crime is contagious. As are bull and bear markets, stock values, etc.

The police in New York used this theory in reverse. By aggressively attacking simple crimes such as vandalism and putting graffiti on trains, and subway fare-beating .major crime fell dramatically. The point is epidemics can be started or stopped by tinkering with the smallest details of the environment. Throw two or three small changes into any environment, be it economic, social or biological and you move towards a tipping point.

We can use this knowledge to spot small things now that will make big differences in economics later.

Take for example the value of the U.S. dollar which has remained strong for several years. We can see several small trends that show us how a tip could be coming. The August 21 2000 edition of USA Today Money section featured an article entitled, “Shoppers Appear to Have Checked Out”. This story points out that retail shopping has dropped off dramatically. The extent is so noticeable that Target, Home Depot and Wal-Mart shares have slumped 16%, 13% and 12% respectively. There is concern this is a portent for a weak Christmas shopping season.

Strong retail activity has been one of the factors that kept the U.S. economy rolling during the stock market fall. Throw on top of this another leading economic indicator, the US housing market, has slowed.

Then consider an August 22 USA Today article entitled “Parties Begin Budget Surplus Shopping”. This article shows that as the federal budget has moved from deficit to surplus that government spending has risen from 535 billion dollars in 1996 to 618 billion dollars in 2000. The article also points out that any hint of fiscal restraint in either party is now gone. Whatever administration comes into power this November is likely to increase federal spending. A study released by the Cato institute last month says that federal spending is surging at the fastest rate in more than two decades and that the next administration is on pace to become the largest spending since the 1970s.

We can see two opposite trends meeting, a slower economy and hence less profits, tax, with higher federal spending.

Then throw in another front page article of the USA Today August 21 issue, “Loophole Draining Medicaid”. Medicaid is a $200,000 billion Federal-State program that according to top Medicaid officials could cost the Feds an extra ten billion from various loopholes. Add to this the aging of the US population and the fact that now more than half the population is dangerously overweight.

These factors create conditions that could cause the federal budget (and hence the value of the US dollar) to tip.

But ripe conditions are not enough for an epidemic. A salesman is required. With disease these salesmen are called carriers. In economics newspapers can do the job. Their continual expose on whether things are good or bad become self prophesies. This is why I pointed out articles from USA Today, the largest circulation newspaper in the USA.

These facts support my concern that we are headed for a weaker U.S. dollar (there are many other factors supporting this theory such as a reduced gap between U.S. and European interest rates and the weakening U.S. stock market and ever growing U.S. trade deficit).

I would like to hear your comments, questions and thoughts about this and the tipping point. Good investing!