Zeev, you suggest that "waiting with rate cuts and just supporting the market with 'words' is the right thing to do." That conclusion would only have merit if you believe, as Mr. Greenspan apparently does, that keeping inflation down is job #1 at the Fed. To assume that the Fed can have that much control over inflation is debatable, and attests to the arrogance of the Fed. To assert that the NASDAQ and S&P 500 are well above historic levels is not very meaningful, since an AVERAGE PE ratio of an index says very little about the details.
On your first point, one may ask, "Where's the inflation?" Even after a humongous increase in crude oil and natural gas prices, and a drop in unemployment to a level near 4%, inflation is almost nowhere to be seen. I do not call a rate of inflation of even 3.5% inflationary. Furthermore, the reason inflation is so low is due mainly to continuing increases in productivity. A cut in rates does not, as you suggest, risk reinflating the bubble. A growth rate of, say, 5% might be too high, but the current growth rate of barely over 2% is certainly much lower than need be.
Second, if one believes in conspiracy theories, it is far more likely that a portion of the U.S. oil industry conspired to raise natural gas prices. It is unlikely that any group of U.S. oil executives could have enough influence to drive up world oil prices. But natural gas is a bit different, since it is transportable mainly through domestic pipelines rather than being shipped worldwide in tankers. The excuses being given for lack of natural gas, and lack of electrical generating capacity due to maintenance of certain plants (including, oddly, some plants running on natural gas) sounds contrived. Are natural gas prices sustainable at their current $7 to $8 levels? I really doubt it, but while they're up, domestic gas producers will do extremely well. The extra costs transferred to consumers have already put a damper on consumer purchases, particularly of durables such as autos (apparently no dampers yet on SNDK flash memories). That damper caused by high fuel prices is more than enough to justify the Fed lowering interest rates. I think it will happen not in March but in JANUARY.
As to engineering an economic slowdown to make it look like you're doing something right over the next four years, such a tactic could only impress die-hard conservatives, who must look with envy on the last eight years of low unemployment, the lowest levels of unemployment in history for blacks, hispanics, and women minorities, and the highest prolonged period of economic growth in history. Rather, it is more likely that in hiring Paul O'Neill as Secretary of the Treasury, Bush wants to take advantage of O'Neill's close friendship with Greenspan in order to persuade the Fed to loosen up a bit, and soon. After all, only with a vigorously performing economy would Bush have even the slightest prospect of getting serious consideration for his various tax cut proposals. A slowing economy could not produce enough tax revenues to warrant the size of the cuts he has promised.
As to the specifics on pricing stocks like SNDK, I fail to see how anyone could consider it overpriced, no matter where the other NASDAQ and S&P components are priced. I do find numerous instances of certain stocks being overpriced, owing to basic fundamentals, such as, they're not making any money and they have far too much debt. That's a problem for those stocks and not for companies like SNDK that have their debt, cash flow, and earnings growth well in hand. If you think stocks like AMZN are overpriced (I do), then you simply avoid those stocks and buy ones like SNDK.
Art Bechhoefer |
