We've had a bull market that has been on a tear basically since '92 -- it was time for a breather!
And I think I said it before, but low interest rates means nothing if you don't have real earnings. We had a particularly good few years where real technological innovations that actually helped the bottom line of companies were made (supply chain management, information systems etc). These combined with low interest rates and cheap money was the thing that powered the boom. Cheap money also creates lots of speculative companies (witness the dot coms) that have no business existing except for the fact that there is cheap money available and they can soak it up. A lot of the boom also had to do with the cheap money being used to do more buying that was prudent (witness Cisco's hoarding of semiconductor parts). As soon as the cheap money went away, companies had to start cutting back on purchases since it wasn't earnings that was fueling the purchases in the first place. And the more speculative companies vanished outright.
The thing that will help the stock prices is earnings and we are seeing lower earnings growth right now. Low interest rates and free flowing money supply in the absence of earnings (which really means products that people want to buy and are willing to buy) will only create inflation.
Of course, then the reasoning goes, Al should lower interest rates -- make more money available and people will buy and earnings will go up. But here is what happens -- for example, Cisco was selling all this gear and had great earnings. But the money was coming from a lot of CLECs that were being funded by this cheap money. It looked like real earnings -- but no one was buying from these CLECs! *They* had no real earnings and when the spigot was turned off, they died. That should hurt Cisco's earnings. Cisco was buying chips in excess of what they needed because they were predicting higher growth than they got because the CLECs went away. In the meantime, PMCS suddenly has more inventory because they'd been seeing all this demand but all their chips are sitting in Cisco's storage. Now the excesses are being worked off . . .
And the across the board tax cut that Mr. Bush is proposing . . . think about it this way -- if I was running a company creating basic goods (things like utilities, gas, food etc) that everyone needs, I have a pretty good idea of what percentage of people's weekly earnings come to me every week. So if there is an across the board tax cut, I know exactly how much more money everyone has -- and what percent of that I can legitimately expect to come to me if I raised prices. Instant inflation. And if the deficit starts to rise again, forget lower interest rates.
The whole thing is supply/demand -- but this time it is supply/demand for money.
It has been a learning experience . . . my first boom/bust cycle. I'm sure there will be more.
-A
P.S. Wow, that was a lot of writing! I hope it made sense -- I was in free flowing form <g> |
