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Strategies & Market Trends : Stock Attack II - A Complete Analysis -- Ignore unavailable to you. Want to Upgrade?

To: dennis michael patterson who wrote (24813)	11/27/2001 7:06:42 AM
From: dennis michael patterson	Read Replies (1) \| Respond to of 52237

Shiller in the WSJ today: A Recession Unlike Any Other By Robert J. Shiller. Mr. Shiller is professor of economics at Yale's International Center for Finance and author of "Irrational Exuberance" (Princeton University Press, 2000). Despite much negative economic news since Sept. 11 -- culminating in the National Bureau of Economic Research's declaration yesterday of a recession -- the stock market seems to be holding up well. Does this mean that we should ignore the scary stuff and be optimistic? The stock market is, after all, the most famous leading indicator. In two of the three recessions since 1950 where the market went up in the first six months, the recession lasted less than nine months. In four of the five recessions since 1950 where the market went down in the first six months, the recession lasted longer than nine months. Unfortunately, if we use the stock market as it has worked in the past to forecast recoveries, the evidence is not so encouraging. Given that the recession officially began in March, we are now eight months into it. If this were one of the shortest recessions, it would now be over. But look at what the market has done since the recession began. Despite the strong post-Sept. 11 rally, the Standard & Poor's 500 is down 3% since March, and 9% since May, when GDP peaked. If used as a leading indicator, the market performance since March or May would suggest that this recession will be longer than usual. But we should really conclude that this evidence from the stock market as a leading indicator is not very reliable. The business outlook for the coming year and beyond is unusually uncertain, because the two dominant events that put us where we are have never occurred together before. The first dominant event is the end of "irrational exuberance." The Nasdaq index rose six-fold from 1995 to 2000, representing the appearance of unusual expectations for the "new economy," and then fell by two-thirds, representing the end of these expectations. The only comparable example of such a dramatic bubble and its burst is the 1929 stock market crash. The second dominant event is the dramatic terrorist attack on Sept. 11, the germ warfare attack in the ensuing weeks, and the threat of more such attacks. The attack has created unusual uncertainty. It has launched a swell of patriotic feeling like that of a war, but we do not have the economic stimulus of a major military mobilization. Indeed, Congress has so far been unable to agree on any stimulus package. It is natural to want to consider the recession we are in now as another example in a long string of past recessions, and to look for patterns in these past examples as an indication of what will happen this time. But not only are recent events unprecedented, the venerable concept of a recession is also not always a good way to organize our thinking. The term "recession" (or contraction) was first clearly defined by Arthur Burns and Wesley Clair Mitchell in their 1947 book "Measuring Business Cycles." This book was very influential, and the recession dates we use today (from the NBER, which Arthur Burns once led) are just updates of Table 16 in that book. Since Burns was so highly esteemed for his erudite work on business cycles, he was a natural candidate for Fed chairman, a position he filled from 1970 to 1978. Burns was not a successful chairman. He made real interest rates sharply negative at the time of the biggest surge of inflation ever experienced outside of a major war. He was caught by surprise by a major oil crisis and a vicious cycle of inflationary expectations. These were unprecedented phenomena, and all his statistical analysis of past business cycles did not help him understand them. A new name became popular for the recession of 1973-74 and the period that followed: "stagflation," referring to economic stagnation at the same time as high inflation. Alan Greenspan has been smart or lucky enough to experience the opposite of stagflation. Ultimately, Burns's effect on inflation had to be undone by subsequent Fed Chairman Paul Volcker, at the cost of the steepest postwar recession ever, the recession of 1981-82. Thus, Burns presided over the biggest economic failure of any Fed chairman. His failure doesn't necessarily impugn the entire concept of "recession," but it should make us wary, at the least, of generalizing from past economic events to the present day. Every recession is different, and this one is really different. The NBER implicitly recognized this yesterday when it dated the beginning of the recession to the first quarter, when GDP was still growing -- something it has not done before in the entire post-war period. We face a big unknown today in how consumption and investment will evolve in the next few years. Will consumers further cut their spending in response to terrorist threats? Will they continue to cut back travel and vacations? Will they cut back their demand for housing, and reduce the price of housing, thereby further amplifying the downward wealth effect? Or will a spectacular victory over terrorism suddenly restore their mood? Will plain-old patriotic feeling ultimately encourage consumer spending? Will businesses become too pessimistic to launch new campaigns, sink money in new plant and equipment, and hire and train new employees? Will entrepreneurs be unwilling to commit themselves to new risky ventures that will drain their time and emotional energy in return for some uncertain possible reward in the future? Or will they find many new opportunities and exciting things to do at this time of great change? These are questions that cannot be answered by reference to patterns observed in past recessions. We are not doomed to repeat history. What happens next depends on the choices we make now. It depends on the kind of economic stimulus package Congress gives us. And it depends on our own individual decisions to get on with business despite the present uncertainty.