Donald: I am not really that pessimistic. If we have a defaltion that means prices decline by less than 2% over let say the next year or two, thi is not catastrophuc, it is actually good for the stock market. If we have a deflation in which prices decline by more than 5%, then we are running the risk of a defaltionary induced depression.
I think that the current malaise in the rim is temporary and not an intrinsic long term problem. Some of these economies have suffered from governmental "intervention" dictating in essence what is important to the "national" interest and as result major resources where allocated not according to market forces but according to government dictum.
We had a very similar situation that brought about our own debacle with the saving and loans and the banking industry. Our tax system was biased to benefit investments in non productive assets. Unfortunately, the giovernment suddenly changed the rules (without grand fathering in existing investments) and as a result the real estate bubble collapsed leaving all of us to pay for it. Yet, we did not go into a major recession. After absorbing the hit, we got back on our feet and on our merry way. I think that the rim's economies will absorb the hit as well, overcapacity in various "natinonally important" industries will be closed and supply and demand will come back into balance.
Once thathappens, the major economic trend in place, namely the creation of a very large new middle class in Asia (led by China) will add, in my opinion, some 200 million new "consumers" to our market. Similarly, within five years the former soviet block's countries in eastern and central Europe will also add another 50 to 100 MM consumers to world demand. This will create a new engine of growth (which may eventually also bring to overbuilding of capacity when miscalculating the rate of this growth), but basically, this will create above average growth rate of the world economy.
I view the current malaise as only a hic-up in the general development. Yes, this hic-up may result in a solid down turn in our stock market (but for whatever reason, I do not see much more than 6200 on the dow as a bottom) until the weak sisters are forced to go under and thus take off line some excess capacity, once this process is half way completed, the market will perceive the benefits of this contraction and discount the few quarters of pressure on earnings.
Because the recent overcapacity is heavily concentrated in the semi sector, I see this sector suffering the most and draggin with it significant parts of the high tech.
However, the deployment of wire less communication netwroks and the further development of the internet and its infrastructure will continue, first at a somewhat reduced rate and then (probably within thre quarters or so) as if nothing happened.
From a nadir in the low 6000 (if we get there) I see an advance within 12 months of the through to levels above the last highs and possibly to 9000 or so on the Dow within 12 months of the bottom. That will be, IMHO a move that no bear should miss.
Zeev |
