Another stock market bubble, just waiting to pop
Sunday, June 22, 2003
seattlepi.nwsource.com
By PAUL KRUGMAN
SYNDICATED COLUMNIST
The big rise in the stock market is definitely telling us
something. Bulls think it says the economy is about to take
off. But I think it's a sign that America is still blowing
bubbles -- that a three-year bear market and the biggest
corporate scandals in history haven't cured investors of
irrational exuberance yet.
Or, to put it another way: It's hard to find any real news to
justify the market's leap. Instead, investors seem to be
buying stocks because they are rising -- which is pretty
much the definition of a bubble.
Before the Iraq war, optimists attributed the economy's
weakness to prewar jitters. They predicted a great postwar
economic surge: Oil prices would plunge, reassured
consumers would open their wallets and businesses would
start investing again.
We're still waiting. Oil prices are off their prewar highs, but
they're still higher than they were last fall. Consumers
seem to be spending a bit more, but we're talking about
fractions of a percent. And businesses are still more
interested in cutting costs and laying off workers than
buying new capital goods.
There have been some pieces of good news -- a not-too-bad
manufacturing survey here, a pretty good housing-starts
number there. But there has also been bad news,
especially regarding employment. Payrolls are still
contracting; since the U.S. economy has to create 80,000
jobs a month just to keep up with a growing working-age
population, the already miserable job market continues to
get worse.
Don't tax cuts and low interest rates create the conditions
for an economic rebound? Well, interest rates have been
low for a while. And everything that has happened since
2001 suggests that Bush-style tax cuts -- which, because
they are targeted on the very affluent, basically give people
with plenty of cash to spare even more cash to spare --
provide very little employment bang per deficit buck.
Meanwhile, desperate state and local governments are
continuing to slash services and, in a growing number of
cases, raise taxes, undoing much or all of the stimulus from
the federal government.
Does the collective wisdom of the investor class perceive an
imminent, vigorous recovery that is invisible in the data?
The market isn't always right. It wasn't right when it sent
the Nasdaq to 5000; it wasn't right in the fall of 2001, the
summer of 2002 or the late fall of 2002 -- three would-be
bull markets that fizzled. And selling by corporate insiders
hit a two-year high in May.
Meanwhile, the average stock is selling at 31 times
earnings, twice the historical norm. And if you take into
account pension liabilities and the cost of stock options,
that number goes above 40.
A few months ago, some analysts began to argue that
because interest rates were so low, even today's very
expensive stocks were a good buy. I don't agree, but that's a
long discussion. What's clear, however, is that investors' big
move back into the market has been driven not by careful
comparison of returns, but by the fact that stocks are rising
-- and the fear that if you don't buy stocks, you'll miss out
on a good thing. The new bull market isn't forecasting
anything; it's just feeding on itself.
Could the story I'm telling be wrong? Of course. Maybe a
vigorous, though still invisible, economic recovery will
deliver the sustained, double-digit earnings growth that
analysts -- apparently not chastened at all by recent history
-- are once again predicting.
But even if that happy scenario comes to pass, it's hard to
justify current stock prices -- because if the economy
booms, the low interest rates that might conceivably make
stocks worth buying at 30 times earnings will soon go away.
If and when businesses start borrowing again, they'll have
to compete for funds with the federal government, which
will be running $400 billion-plus deficits as far as the eye
can see. Meanwhile, foreigners won't keep lending us $500
billion each year; in fact, private investment inflows into the
United States have already dried up.
Oh, and the banana-republic policies now being followed in
Washington won't just drive up interest rates; they'll
probably generate a full-blown fiscal crisis one of these
years. That can't be good for equity prices.
In short, the current surge in stocks looks like another
bubble, one that will eventually burst.
Paul Krugman is a columnist for the New York Times. Copyright 2003
New York Times News Service. E-mail: krugman@nytimes.com |
