Hi Jay, I always enjoy your posts.
Please, first, review these old posts of mine (they aren't long), noticing especially the dates I posted them. I want to establish my credentials. I am not now, and never have been, Irrationally Exuberant:
7/30/98 Message 5357744
1/11/00 Message 12537987
And so, it feels odd to me, to read your post and conclude that you are being Irrationally UnExuberant, an equal and opposite mistake to the mistake you see everyone else making. I've been saying what you're saying (TheEndIsNear!Repent!), for a long time.....but now I'm not saying it. Now, I think the techs (maybe not the broader market) are within sight of a bottom. I think it's sideways or slightly down (slightly=no more than another 30% decline) for the Nasdaq, and then, at some indeterminate point in the future (a point I have no expectation of being able to anticipate), the Bull comes back (a quick doubling off the Bear Market lows).
Reasons:
1. Since the Great Depression, the stock market is up, 12 months after a Fed easing cycle begins. The current easing cycle is the fastest and sharpest of any in the current Chairman's long tenure. This is a very consistent, and very long-term, pattern.
2. For a long time, I was worried that inflation was going to limit the Fed's ability to cut rates, and therefore the Fed would at some point have to choose between recession and inflation. At that point, they would have no choice but to allow a recession to happen. This is the usual way recessions happen. The "red flag" threshold is 4% inflation. The Fed would not tolerate a level above that; historically, inflation above 4% correlates with poor stock returns. After the 1998 low, inflation doubled, and almost hit 4%. Then it stalled, and stayed right below that level, through 1999 and 2000. With unemployment hitting generation lows, it looked likely that inflation would become a problem. Most economic models say unemployment levels below 5% ought to trigger inflation. But it never happened. And now, it is clear that inflation is fast receding. Notice, that longterm bond yields (which track inflation expectations) have now turned down.
3. Because inflation is not a threat (the Greenspan's public remarks says he knows this), the Fed doesn't have to do it's usual careful balancing act. Instead, they can push the accelerator to the floor, and keep it there, as much and as long as needed, till the economy responds. If 3.5% Fed Funds Rate doesn't work, they can go to 3%, or 2%......or 0%, if that's what it takes.
4. the maximum effect of Fed rate cuts is 18 months after the cuts. They only begin to take effect in 6 months, and their impact slowly takes effect after that. So, the fact that we haven't yet seen much impact doesn't mean anything. The effect should be full in 2H02, and stocks should anticipate that in 1H02.
5. The employment rate is now 95.1%, just slightly off the generation-high of 96.1% employment rate reached recently. Mostly, this statistic is stated in a negative way (unemployment rate). The way things are said effects how they are understood. I've been worried about consumer debt levels. But, with interest rates coming down (in particular, mortgage rates), and with a historically high employment rate (which would still be at the high end of the LT range, even if it dropped another 1 or 2%), consumers aren't going to have a problem with current (yes, high) debt levels. The combination of falling interest rates (LT and ST), tax cuts, and falling energy prices, will, IMO, mostly offset the effect of falling employment levels. I'll bet you continue to be surprised at how well U.S. consumers keep spending and spending and spending.
6. You've been perseverating about the ComingCollapseOfTheDollar. I see two problems with your concern:
6A. First, the dollar has been very strong for a long time, and a decline in the dollar is merely a return to Normal, and has several good effects. By making imports more expensive, it will decrease the trade deficit (which has been huge for far too long), and increase the GDP, as more money stays in the U.S. A falling currency is just a normal and benevolent self-correction to trade deficits.
6B. you're forgetting the total lack of viable alternatives to the Dollar, and the FlightToQuality effect. To the extent things get bad in the U.S., they will (as you point out), get (more) bad elsewhere. There will be a modest decline in the dollar, but no chaos, no abrupt plunge. In times of uncertainty, with a global economic downturn (no safe areas to hide in, not Europe, not Japan, no not even China), with the possibility of economic stress translating into political and social stress, the U.S. dollar will be rewarded as the Big, Liquid, Stable, Safe "place to be".
7. When you look at the tech sector, conditions are now as bad as they have been ever. Worse than 1998, worse than 1990. You have to go all the way back to the 1973-4 recession, to find a time when capacity utilization, profit declines, etc., were as bad as now. I worship the Goddess called ReversionToTheMean. Things are at an extreme, and extremes don't last. Current conditions are so extreme, in fact, that they can't last long. Any more than the extreme conditions of 1999 could last long.
8. I agree fully, that there was a Bubble (in credit and stocks). I said so, at the height of the Bubble, and radically re-allocated my assets accordingly. And, I agree with you, we are now in the Aftermath of that Bubble. We disagree only on how close we are to the end of the Aftermath. Do you have any particular target, for the Nas, or for CSCO, for a bottom? Or do you just believe, "they'll keep on going down endlessly, I see no end-point"? Perhaps if you could be specific about the endpoints you anticipate, we could have a reasonable discussion. "No endpoint" is, IMO, not a reasonable position. I'm assuming you didn't post here just to pour salt on the wounds of Bulls.
I'm just trying to think this through, and I am not wedded to any of the opinions I have expressed above. |
