Gekko

National Review, Sept 15, 1997 by John Dizard

WE'RE coming up to the time of year when the markets have tended to hand out some brisk reminders that there is a force of gravity. For the past several months, investors have been able to tell themselves that however high the market, bear markets haven't started until after interest rates go up. So buying on the dips in both the bond and the stock markets has been a pretty good strategy. But what happens when the Fed, along with market-driven interest rates, starts raising the cost of money? Would that matter any more, now that my self-indulgent boomer cohort has turned into big savers?

First off, let's dispose of the notion, now popular in CNBC commercials, that we've turned into a nation of savers. The savings rate is at a near historic low, below 5 per cent of disposable income. Of course, who needs to save when the stock market is doing your saving for you? Instead of buying generic toothpaste and eating at home, you just have to look up your mutual fund on its Internet page.

There's a reason for this overoptimism. It turns out that there is someone else's money doing the work for you. Along with our record highs in securities prices, special-prosecutor employment, and microprocessor speeds, we also have a record proportion of net foreign purchases of U.S. bonds and securities. Back when it was morning in America, in 1984, net foreign buying of our securities amounted to 2 per cent of our GDP. At the peak of late-Eighties hysteria about the Japanese buying up America, it hit 3 per cent, before dipping into net disinvestment between 1991 and 1994. This year, foreigners are buying U.S. stocks and bonds in amounts in excess of 4 per cent of GDP, and the proportion is still rising.

In other words, by this measurement we now inspire twice the confidence in the rest of the world that we did in the Eighties. And 4 per cent is a very big number. It is well over twice our budget deficit, for example. So we have been able to use their savings to pay for both the budget deficit and a lot of our recent capital gains.

In the old energy-boom days, Wall Streeters would ask promoters: "If it's such a good deal, why can't you sell it in Oklahoma?" Now foreigners might well ask: "If American paper is such a good deal, why can't they sell it in New York?" They might be more inclined to ask this question when the pickup in Europe becomes more visible. There is the beginning of a recovery in growth rates on the Continent -- a recovery, mind you, that will leave far too many unemployed. But it will start to require more capital, and we're going to miss that. A revival in Japan seems further off for the moment, but even now there's strong capital spending. Yes, there's financial disaster in the rest of Asia, but taken together the Asian tigers and China are only a third the size of the U.S. economy. Without realizing it, we have come to depend on others' weakness for our market's success. Foreign money is inherently jumpier than domestic. When the flows slow or reverse, we have a problem.

When I lived in Canada, the superiority of the public sector as a leading force in national development was demonstrated by the country's electric utilities. Thanks to central planning at the provincial level, and to cheap financing available because of the guarantees of a prudent government, Canadians had vast transmission networks and huge, gleaming, Canadian-made generators. In Ontario, those generators were safe Atomic Age wonders, not like the unclean weapons reactors we had in the insensitive, profit-maximizing States.

Little is left of this dream world apart from a pile of yellowing brochures and an even bigger pile of compounding debt. Despite a lingering fondness for Fidel Castro, the Canadians have had their attitude problem with the U.S. downsized over the past decade, so that you don't get lectures any more of the sort I had to endure over my years there. But the consequences of the overbuilt provincial utilities linger on. Investors should take note of a recent development. Ontario Hydro was forced to shut down 7 of the utility's 19 power reactors at a cost of C$6 billion to C$8 billion. That is a lowball estimate, by the way.

But that is the good news compared to another party favor at the taxpayers' table, one that is getting less play. There is also C$15 billion in additional decommissioning costs which these brilliant central planners did not put aside and which will have to be paid by the taxpayers or the utility ratepayers -- in short, by the public in one name or another. By the way, the "safe" reactors the money bought leaked like the Justice Department. Repairs and modifications will add billions more to the tab.

And given the new deregulated electricity market next door in the States, the high-cost centrally planned reactors are not going to be competitive. That means that provincial taxpayers/ ratepayers will be picking up perhaps C$50 billion or more in "stranded costs" for their electric utility. That's over C$6,000 for every man, woman, and child in the province. Thanks for the life lesson, guys.