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Politics : Stockman Scott's Political Debate Porch -- Ignore unavailable to you. Want to Upgrade?

To: stockman_scott who wrote (3985)	8/6/2002 8:30:58 AM
From: Kip518	Respond to of 89467

Eerie Echoes Haunt Today's Market By Tero Kuittinen 08/06/2002 07:18 AM EDT URL: thestreet.com Is 2002 like 1987? Or is it more like 1974? What historical comparisons should investors consider? Inflation is low and productivity is high -- labor productivity has rocketed by more than 40% in a decade. Consumer spending during the summer has been solid, and car sales have been higher than expected, especially since there was a stock market wobble during the spring. U.S. Steel (X:NYSE - news - commentary) is reporting high capacity utilization rates. However, for some reason the Dow Industrials declined about 15% in early autumn. British investors have been pulling back, and short interest has hit a new high. But as everyone knows, foreigners tend to sell at the bottom, and high short interest is a bullish indicator. Moreover, there has been a sharp, weeklong rebound in share prices -- by more than 10%! This is clearly a bullish indicator, especially since there are signs of sharp, last-hour rallies during the days when stocks seem to be drifting inexplicably lower. OK, the most recent monthly data seem to indicate that companies have started pulling back on new orders, but only the most rash and foolish of investors would be willing to draw any conclusions from a single, isolated month. "Stay calm" is the message from Wall Street pros. The weak hands are being shaken out, and the real pros are buying. These conditions, of course, also describe the third week of October 1929. Slow Poison Drawing historical parallels to current markets is often derided as foolish and rash -- so it's hard to resist the temptation, especially since the factors that defined the 1929 crash are now being touted as positive signals: Low inflation. High past productivity growth. Foreign selling. High short interest. A sharp, five-day rebound of more than 10%. These are all features associated with the bottom that was so easily made in 1987. And they are all signals that proved to be so very deceptive in 1929. Of course, what poisoned the equity markets so badly in 1929 was the enormous overcapacity built up throughout the roaring '20s. That massive overcapacity came bundled with low inflation and high productivity growth -- and interpreting those two symptoms of deflation as positive signs was the most disastrous mistake an investor could have made in his lifetime. The overcapacity that was built up over the 1920s poisoned corporate profitability for years to come. It spilled over from the auto and electricity industries to the overall economy with a stunning speed once the contagion took hold in the autumn of 1929. The markets had been secretly worrying about overproduction issues for quite some time. Once the trigger month of clearly disappointing industrial activity finally arrived, the dominoes started tumbling. History does not repeat itself -- it only rhymes. The Nasdaq has been tumbling for two years, so clearly the current situation does not bear close resemblance to 1929, when the crash started less than two months after Dow peaked. But back in 1920s, America was the world's biggest creditor nation; now it is the world's biggest debtor. No doubt the global financial structure is infinitely more sophisticated and better regulated than it was 70 years ago, and some risks that did not exist then exist now, and vice versa. Perhaps the most crucial issue about the 1929 remains unanswered: Was the crash worsened by Fed rates that stayed too high for too long? The dilemma could be resolved easily. All we need is a situation where companies have badly overestimated future growth, built up too much capacity and created an overproduction crisis. If this 1920s-like situation is combined with a Fed willing to respond with an ultra-low interest rate climate, we could finally learn whether the 1930s Great Depression was inevitable. Unfortunately, running this experiment may turn out to be costly indeed.