Accountants steal show from terrorists

Lim Say Boon, Director, OCBC Investment Research, The Straits Times, Asia News Network, Singapore

This would probably disappoint Osama bin Laden, but a handful of nondescript but dodgy American accountants have made a greater impact on the global capitalist system than al-Qaeda.

Looking back at the past 12 months, what is most striking is the strong element of continuity underlying global economies and markets despite the massive short-term disruption and tragic loss of lives caused by the al-Qaeda hijackers.

September 11 had a dramatic and lasting impact on the United States and the rest of the world. The flip side of the same coin is an almost crusade-like war against terrorism that polarizes the world into those who are either with or against the U.S.

It has also made the U.S. more willing to act unilaterally to protect its interests -- and, if necessary, without the imprimatur of supranational bodies such as the United Nations. So, the world has changed politically.

But the global economy and markets were knocked off their trajectory only very briefly -- to resume their course barely six months later. And indeed the manner in which they were temporarily knocked off their trajectory was surprising for its perversity.

Soon after Sept. 11, the initial fears were that the "peace dividend" had been destroyed and replaced with a terror risk premium. The impact would have been to make already overvalued stocks look even more expensive.

That would result in a deep and prolonged decline in stock prices -- something perhaps closer to the great market collapse of 1929 than anything ever seen since then.

Consumers were then thought likely to shut their wallets and lock their doors -- plunging an already struggling economy into something akin to the Great Depression. Conversely, there was the fear that the U.S. might end up bogged down in a war of attrition in Afghanistan, much as it was in Vietnam.

That, in turn, could result in a period of rising inflation -- with disastrous consequences for the economy and stock market.

Yes, Sept. 11 wiped out nearly 15 per cent of the rating of Standard & Poors 500 in less than a week. But what followed was almost perverse. The market bounced right back after the S&P 500 hit 966 points. With a new burst of energy, consumers resumed spending -- taking economic indicators generally higher.

And by the peak of this economic and market rebound, the S&P 500 was back to 1,173 -- scarcely the worse for the tragedy, considering its pre-Sept. 11 level was only 1,133.

Around the time of the S&P 500's peak at the start of January, the extent of the accountancy scandal that was about to hit the U.S. economy and markets was not yet apparent to the public.

Indeed, news of Enron's filing for bankruptcy had only broken a month earlier. And along with other scandals -- WorldCom, Tyco, Xerox and others on the roll call of the ugly -- it destroyed more than double the value wiped off the S&P 500 by al-Qaeda.

By the time the S&P 500 bottomed in July at 798 points, it had already lost nearly 32 per cent of its value from the peak in early January; just before the skeletons started falling out of corporate America's cupboards.

Indeed it could be argued that the renewed decline from January this year was simply a continuation of the secular forces already at work prior to Sept. 11. The terror attacks perversely knocked the U.S. economy and market off its downward path.

Remember that the forces at work prior to Sept. 11 included a historically overvalued equities market, over-capacity, lack of pricing power for producers, a sharp decline in business investment, and signs of consumer exhaustion.

The U.S. economy was struggling against deflationary forces. Those one to two quarters of reversal over, we are now witnessing the continuation of that battle with the forces of deflation.

If there were also tentative signs of recovery elsewhere, those same optimistic signals elsewhere are also reversing -- especially in Europe, where indicators emerging from a month or two ago are signaling at least a stalling of that recovery.

As for the equities market, the July-August rally started breaking down by the later part of last month. Indeed, a bearish rising wedge had been signaling an imminent breakdown for weeks.

Independent research house BCA Research pointed out recently that the S&P 500 had rallied by about the same amount as during two previous major bear traps -- in early last year and following the September 2001 low. Both times, the market rallied approximately 20 per cent.

So we are still struggling with the same fundamental forces prior to Sept. 11. The U.S. economy -- and the world economy -- is still finely poised between a modest revival engineered by a program of massive rate cuts by the Fed and powerful deflationary forces caused by adjustment to imbalances created by years of over-investment on borrowed money.

However, a wild card is the recent surge in oil prices. And to the extent that this phenomenon can be traced back to Sept. 11 and the U.S. new insecurity, this might be the only major disconnect from pre-September 2001 forces. But how that will play itself out is far from clear.

Now will the U.S. attack Iraq? Will there be a tidy regime change resulting in a sharp fall in oil prices? Or will it result in a messy, bloody conflict with oil surging beyond US$30 a barrel? But that is another story, for geopolitical analysts.