12 - 18 July 2001
Issue No.542
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Al-Ahram Weekly Online 12 - 18 July 2001 Issue No.542 |
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IT blues
Dreams of freeing the market from its apocalyptic boom-slump cycle are fading as the ripples of yet another devastating Wall Street crash reach Europe, writes Faiza Rady
Wall Street appears to be jinxed these days, and especially so on Fridays -- the day witches brew their potions and cast their spells. On Fridays, bad stock market karma seems to pollute the air.
Last Friday seemed to drive this point home as disaster struck an otherwise bright and promising summer holiday weekend. The composite information technology (IT) index, the Nasdaq, slumped for the fourth day in a row, falling about three per cent to hit 2,012.29 points. Industrial stocks did not fare much better. The Dow Jones industrial average dropped 225.10 points -- more than two per cent -- to close at 10,254.42.
Ominous profit fall warnings have been spelling disaster for the future of the hi-tech sector for some time now and the current malevolent market spell seems to confirm that the big one is still coming. The "mind-boggling" and "revolutionary" IT sector was until recently touted as the phenomenon that would break the capitalist market's boom-slump cycle, but today it seems that the only thing the technology boom heralded was a potentially long period of stagnation.
US IT stocks fell from grace last year when the Nasdaq slumped under 2,000 -- the point which demarcates the dreaded bear territory defining a market slump. Since then, the stock market has not managed to recoup. Witnessing a period of doom and gloom, the IT market seems to have spiralled into an indefinite slump.
But all is not lost yet. The good news is that Interstate Bakeries landed on the market's upside. The maker of Twinkies and other snack foods announced that its earnings per share more than doubled in the last quarter. It may be high time for investors to switch to the junk food market and forget about the evanescent hi-tech mirage. The IT market is definitely jinxed.
The hi-tech boom soared to ever-dizzying heights in the mid- to late-1990s and speculative fever hit Wall Street like there was no tomorrow. But the inevitable crash loomed ahead. When the crash finally hit the fan, the landing was anything but soft and the industry was devastated. And there is no light at the end of the tunnel, at least not yet. Indeed, dire profit fall warnings by more than 80 hi- tech companies foretold and precipitated last Friday's crash.
The US Labour Department reported that the US economy has registered virtually no growth since April. Earnings for the second quarter are expected to be the worst in a decade. Giant hi-tech corporations like the data storage company EMC, prominent chipmaker Advanced Micro Devices and BMC Software all announced profit losses, along with ever more stringent austerity measures. This translates as retrenchment of the companies' investment and workforce.
The job market has been hard hit. The US economy had already lost 165,000 jobs in April and another 114,000 jobs in June -- the latter representing almost three times the 43,000 job-cut forecast. And more heads will roll by the hundreds of thousands in the near future. Nortel Networks, for one, is projecting to slash a total of 30,000 jobs over the coming few months.
Across the Atlantic, ripple effects of the storm finally reached the EU following a charmed grace period of about six months. Although the European IT stock market has been shielded from US beatings until recently, profit fall warnings reverberated on the continent this week. As a result, shares in the IT sector plunged. The British telecommunication equipment manufacturer Marconi took the steepest fall: a 54 per cent loss per share. Shares in the Techmark 100, the UK's version of the Nasdaq, fell by 10 per cent, while the FTSE Eurotop 300 technology sector plunged by 12 per cent. Spreading like a plague from the US to Europe, it looks like the IT market slump is here to stay.
How does the bad karma spread? Some analysts peddle a pure "jinx" theory, claiming that the market moves in its own mysterious ways. More polished analysts, however, dismiss the mystifying "blind market" claims as economic mumbo jumbo. They essentially regard crashes as "stock market events": the result of an accumulation of over-valued shares with a potential dumping risk.
This, however, does not in itself account for discreet and separate stock market mechanisms, divorced from the "real" economy. Unemployment levels, for example, have a significant effect on the stock market's performance. Falling unemployment may cause a drop in share prices because corporate shareholders believe that increased employment is inflationary, as demand for labour tends to push wages and prices upward. In this sense, the "real economy" has a direct impact on the stock market's performance, which in turn affects other market mechanisms.
Thus, a large-scale boosting of stocks accompanied a global assault on organised labour in order to minimise labour costs and maximise productivity and profits. In Asia, and the US in particular, the economic boom period of the '90s that preceded the crashes was contingent on weakening organised labour. This was realised in the wake of a successful global union-busting campaign.
The much-touted market boom was thus achieved at the expense of the working class. It entailed a massive increase in exploitation, generating huge profits at the cost of the nervous and physical exhaustion of workers, who had no alternative but to toil long hours for low wages under dire conditions. In the US, the working week has gone up from 40 to 50 hours over the last 20 years, while real wages remained stagnant over the same period.
Rising productivity levels were thus generated through intensified exploitation: relentless pressure, speed-ups and just-in-time production. The problem is that, like with everything else, productivity squeezes eventually reach their natural limit. In 1999, labour productivity in the EU increased by approximately 1.9 per cent, down from two per cent in 1998. In Britain, productivity is actually falling. "After all," comments economist Alan Woods, "there are only 24 hours in the day and the ability of the workers to produce more in less time eventually comes up against a physical limit."
This physical limit signals the breaking point of the magical boom cycle. Falling productivity levels will lead to rapid divestment, followed by profit fall warning bells and the inevitable stock market crash. A structural feature of the market economy -- the virtuous boom-evil slump cycle -- is here to stay. For the time being we are jinxed.
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