Comment
It is
all about buying time.
May 18, 2001
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You hear and read lots of discussions about how much the Fed should cut rates, earnings visibility, confidence and consumption, employment rate etc., But if you put everything together, there is only one main issue and one question to answer. 1. Everyone depends on the US. If it does not seem so now, e.g., China seems relatively unaffected. Just wait and see what happen if things gets worse. 2. The Fed is trying to buy time with record interest rate cuts, but the Fed cannot cure the economy, it must heal itself. We had put out several maps to explain this. We called the US economy "light", and indeed it was as you read reports of how earnings can decline rapidly in the New Economy. By the way, to avoid confusion, you know that our definition of this term includes the belief in the existence of the economic cycle. We have several maps to explain this and show how it may happen. In view of this, Greenspan a New Economy believer understand why rates must be cut so aggressively. Some time back, we suggested that we love bonds more than equities. Well, that is consensus for some time now. But we are also beginning to look ahead to see how the Fed will eventually have to take back most of these interest rate giveaways. Back to point two above, you have to make up your mind whether the Fed is capable of buying enough time. It is not easy, because the rate of capital investment will not return to former levels for a long time. The point here is that you need a miracle to deliver on investors' extraordinary expectation of 15 to 20 percent capital growth per year from the stock market. This is certainly not possible, but the downside could be limited because too many people believe in the long term wisdom of staying with stocks. The next two biggest worries which remain as imponderables are these. 1. The energy infrastructure crisis in the US. How it would cap growth, and therefore earnings. 2. The almost impossible task of getting Japan back on its feet without jeopardizing everyone else. It is correct that for Japan, things must get worse before it can get better. But can we survive it? Hope springs eternal for the upside, and no one wants to begin discounting what this could do to economies and the markets yet. Meanwhile, it is obvious why Warren Buffet is eager to participate in the power utilities industry. The beginnings of a "self-fulfilling" prophecy have started. The US will invest, and forget about the impact of greater energy use on the environment. The new economy "I" that is missing in the GDP equation would be substituted by old economy "I" building energy infrastructure.
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