macro picture:
I, too, have been thinking about the economic effects of the recent "exogenous shock", and come to the same conclusion. I think the effect will be to make the economic downturn more V-shaped. I now doubt we get a "disinterest bottom" in stocks, no long period of low prices, low volume, and low volatility.
The negative effects, over the next 6 months, from now till Spring/Summer 2002, will be to:
1. decrease consumer confidence and spending
2. decrease international trade
3. decrease capital spending by businesses
4. falling dollar
Offsetting this, is:
1. the Fed is stomping on the accelerator. The Fed Funds target rate went down to 3%, but they evidently intervened in the markets to drive it down to 1%, at least temporarily. They are pouring in liquidity, and, just like in the runup to Y2K, a lot of that loose money sloshing around will end up in stocks.
2. speaking of loose money sloshing around, the government is back to it's old tricks: borrow and spend, which is good for the economy (short-term). The Federal stimulus just doubled from $40B to $80B, and looks to go a lot higher. Everybody's got their hand out, from airlines to insurance. The military will get funding for anything they can think of. More moral hazard for the future, more debt for our grandkids to pay back (or make disappear with inflation), but no one is worrying about that any longer.
As soon as there is any excuse for it, I expect another 50% rally in the SOX. Almost certainly within the next 6 months. From today's level, that would bring us back to 650. I haven't decided whether I'm going to sell that rally. |
