Okay. I will post ! Barrons piece on economy since 9/11/01.
September 9th, 2002
Aftershock
Sept. 11 gave the economy a surprising jolt; the stock market is still reeling
By JONATHAN R. LAING
Jonathan Markowitz was sitting in his firm's conference room on the 85th story
of World Trade Center's North Tower when the first airliner slammed into the
building some eight floors above his office.
The sound of the impact remains etched into his memory. He describes it as
having had the concussive quality that one hears and feels standing near two trains
passing at high speed.
Then the building shook violently in seeming indignation over the rude breach in its
massive frame. A shower of shredded papers and office supplies soon wafted by
his window like confetti suspended in the air during a ticker-tape parade.
Thus began a harrowing
hour-and-a-half during
which he led some 30
employees of SMW Trading
to safety through
fire-engulfed corridors and
down several sets of
smoky, crowded stairwells.
The descent from the 85th
floor alone took an hour.
Markowitz and his group
weren't yet home free when
they reached the World
Trade Center underground
mall and began making their
way north towards the
Fulton Street exit. What he
describes as a "shock wave
of dust and debris"
suddenly began rolling
toward him from the South.
He and several employees
had only seconds to escape
by taking shelter behind a
Smoothie stand. Only later
did they find out that the wave represented the seismic backwash of the collapse
of the South Tower.
These days, though, things are back to normal for Markowitz. His Chicago-based
commodity-trading firm has moved its New York offices to a location just a block
and half away from the World Trade Center site. He still spends his customary
one week or so a month at the New York office. And, oddly, he looks back on his
9/11 experience as more transformative than traumatic. "I was and remain stunned
by the grace, courage and cooperation people displayed both during that terrible
day and in the months that followed," he observed recently.
Markowitz isn't alone. A set of national telephone surveys by the National Opinion
Research Center at the University of Chicago done immediately after Sept. 11 and
again earlier this year show that Americans in the main have coped well with the
tragic events. In fact, most Americans queried evidenced fewer symptoms of
anguish and anxiety in the immediate wake of the attacks than were registered
during a similar NORC survey done just after the 1963 Kennedy assassination.
And in the follow-up survey this year, 11 of the 15 stress indicators that the
survey tracks had declined materially from just after Sept. 11. For example, 21%
of the respondents said in the follow-up that they had cried in the last week or
two, compared with 60% in the first survey. Only 30.9% of those polled reported
sleep problems, compared with 51.2% in the first round. The number of
Americans claiming to feel "numb and dazed" also fell dramatically. And 37.9% of
those surveyed said they were suffering from no adverse symptoms, compared
with just 9.6% of the sample group in the first round.
Patriotic feelings and faith in U.S. institutions like the military soared in the
immediate wake of Sept. 11 and remain at elevated levels. For instance,
confidence in the military soared from 40% before the terror attacks to around
80% during both NORC surveys. "Unlike after the Kennedy assassination, the
grief and anger triggered by 9/11 was galvanized into the rescue effort, site
cleanup, national blood drives, various other altruistic acts and finally the war on
terror. There was nothing to mitigate the grief after Kennedy's death," avers Tom
W. Smith, a social scientist at the University of Chicago and the director of
NORC's general social surveys.
Nobel Laureate economist Paul Samuelson has witnessed plenty of geopolitical and
economic crises during his 87 years. His family suffered large financial losses in
the Florida real-estate bust of 1925, for example, and his front-row seat for the
Great Depression helped mold his passionate Keynesian views. To Samuelson,
Sept. 11 stands as a watershed event in U.S. history. "It represents the passage of
the U.S. and perhaps the world out of an age of innocence," he explains. "Modern
technology and the easy access to potentially lethal materials and information now
allow a small group of fanatics to wreak unimaginable havoc. A demented
small-town boy like Timothy McVeigh in years past might have set a few fires or
poisoned some farm animals, rather than be able to mix nitrogen fertilizer and fuel
oil in a truck and blow up an entire downtown federal building."
It was widely feared that U.S. productivity, or output per man hour, would suffer
mightily in the wake of 9/11 because so much spending would be redirected into
"nonproductive" uses, such as enhanced security. And some observers worried
that transportation bottlenecks would play havoc with tightly calibrated,
just-in-time inventory systems and force companies to lay in extra inventories to
keep production and distribution systems smoothly functioning.
This never came to pass, however. Spending on security guards and barriers at
key buildings has proved to be trivial. The backups at U.S. border crossings have
been reduced. Inventories stand at lean levels as a percentage of total sales. The
productivity boom of the mid-'Nineties has continued during the past three
quarters despite the laboring U.S. economy.
"Let's face it, a $10 trillion economy can absorb a lot of extra spending on security
and the like," observes Edward Yardeni, chief investment strategist at Prudential
Securities. "I notice in traveling around the country that in a lot of cities you can
walk into buildings unchecked, and airport security isn't nearly as onerous as
people like to claim. We're a long way from Israel, which has heavily armed
guards at every shopping mall and major commercial establishment."
Likewise, the widely held conviction that the shock of Sept. 11 would surely tip
the U.S. economy into recession was somewhat wide of the mark. True, the crisis
proved to be a catastrophe for airlines, hotels and other players in the travel and
entertainment industry. But it turned out that the U.S. had been mired in recession,
albeit a mild one, going back to March of 2001. At least that was the verdict just
after last Thanksgiving of the six independent economists from the nonprofit
National Bureau of Economic Research who are the official arbiters of U.S.
economic cycles.
Moreover, Robert Gordon, an economist at Northwestern University and also a
member of the bureau's Business Cycle Dating Committee, says the committee is
likely to move the official beginning of the recession to late 2000 and declare an
ending date of late last year. In other words, the official recession probably lasted
about one year.
In the immediate aftermath of Sept. 11, Barron's predicted the attacks would
probably benefit the then-lumbering economy by unleashing enormous fiscal
stimulus ("Act of War," Sept. 17, 2001). This indeed has come to pass.
Economist David Hale estimates that the federal deficit this year will run to more
than $160 billion, compared with a surplus of more than $220 billion in fiscal
2000. The deficit is likely to expand to nearly $200 billion next year.
The Bush tax cuts and plunging tax receipts account for much of this dip into
deficits. But government spending, which has kicked into overdrive, also plays a
large role. According to Hale, the U.S. defense budget will soon reach $500 billion
-- $100 billion larger than just a year ago. All federal discretionary spending is
increasing at a torrid 9% rate. The taboo against invading the Social Security
lockbox and the latter-day orthodoxy of fiscal austerity both met their end in the
post-Sept. 11 emotional convulsion.
An even bigger engine of economic growth is consumer spending, accounting for
roughly two-thirds of total economic demand. Here, too, the 9/11 calamity may
have helped spur the surprising strength that consumer spending exhibited last fall
and so far this year. At least that's the contention of Morgan Stanley strategist
Byron Wien. Patriotism as much as cheap financing has perhaps played a part in
the consumer splurge on new vans, cars, home furnishings and other big-ticket
consumer goods.
But he speculates that some are buying like there's no tomorrow because of
concerns that, well, there may be no tomorrow. "The threat of more terrorism
may have encouraged some consumers to live for the moment and make their
home nest as comfortable as possible," he elaborates.
That theory may not be that far-fetched. A number of studies done during the
Cold War, when nuclear oblivion was more than an idle concern, showed that
consumer-savings patterns -- the flip side of spending -- often dropped during
periods of increased global tension. For example, the U.S. private-savings rate,
after rising steadily in the early 1960s to 11.5% of disposable income in the first
half of 1962, fell to 10.9% during the next 12 months before resuming its upward
climb. During October 1962, of course, the U.S. and indeed the world stared into
the abyss during the Cuban Missile Crisis.
"We were able to show through careful surveys that waxing and waning war
tensions were an important independent variable influencing people's spending
rates during the Cold War," says Bruce Russett, Dean Acheson Professor of
Political Science at Yale University. "So, by extension, I would surmise that
contemporary expectations of additional terrorist attacks should logically diminish
savings and increase consumption these days."
The Market's Dark Specter
In last year's 9/11 cover story, we cited a then-just-completed study by Ned Davis
Research that showed how the stock market reacted to crises going back to
World War I. The 28 events examined by the study included Pearl Harbor, the
outbreak of the Korean War, the Cuban Missile Crisis, the JFK assassination, the
1973 Arab oil boycott, the 1980 Hunt silver crash and the Russian
ruble/Long-Term Capital crisis of 1998.
The Davis study
concluded that
the reaction to
such events
was typically
violent but
short-lived. The
average length
of the market
panics was
slightly more
than two
weeks, peak to
trough, with
prices falling an
average of
6.5%.
Thereafter,
stock prices
generally
recovered,
largely
recouping their
panic losses in
the first three
months and
moving to
higher price
levels by six
months out. A
subsequent
Davis study
showed that a
year after these
event-driven
panics, stocks
enjoyed even
more robust
gains, rising an average of 17.3% from the crisis lows.
The reasons for such behavior are several. Panics purge the stock market of
"weak and nervous" holders and spawn emotional extremes. Additionally, the
authorities invariably panic as a result and flood the financial markets with liquidity
for months after the crisis to bolster confidence.
Sept. 11 proved little different from past panics -- at least initially. On Sept. 21,
just 10 days after the attacks, the Dow Jones Industrials closed at 8236, or 14.3%
below their Sept. 10 close. That decline, while steep, was exceeded by the 18.5%
drop during the panic following the Arab oil embargo, the 15.9% decline triggered
by the Hunt silver collapse and, of course, the 34.2% drop during the 1987
stock-market crash.
In the six months that followed the Sept. 11 attacks, the market hewed closely to
the recovery pattern of other crises. Three months after the Sept. 21 low, the
Dow had bounced back 21.2%. On March 19, the Dow topped out at 10,635 --
29% above the low reached six months earlier.
Other benchmarks also recovered. The Standard & Poor's 500 index rose 21.4%,
to a high of 1173, and the Nasdaq rose a startling 44.7%, to 2059 -- both on Jan.
4 -- and remained near these levels well into March.
By summer, however, the stock market was no longer following the Davis script.
Stocks plummeted in June and July, weighed down by growing revelations of
corporate-accounting fraud and executive self-enrichment, a deteriorating earnings
picture, continuing limpness in capital spending, sliding consumer confidence and
slackness in job growth.
On July 23, the Dow sank to 7702, 6.5% below its panic low of Sept. 21, while
the S&P, which closed that day at 798, was 17.4% below its Sept. 21 level of
966. By early August, the Nasdaq had hit a low of 1206, 17% below its September
nadir of 1423. And even with the spirited rally that followed in late August, both
the S&P and Nasdaq are trading well below their September panic lows, while the
Dow sits nearly even with its Sept. 21 close.
Such under-performance a year after a crisis isn't unprecedented. A year after the
Arab oil embargo of late 1973, a severe secular bear market had pushed the Dow
25% beneath its embargo low. And the deflationary bust following World War I
pushed the Dow 17% below where it had stood a year earlier, during the sharp
selloff triggered by the September 1920 bombing of J.P. Morgan's office building
on Wall Street.
But according to Davis, other circumstances argue that, a year after Sept. 11,
stock prices should be higher, rather than lower. For one thing, the market has no
recessionary headwind to contend with, as it did in 1974. In fact, the recession
probably ended late last year, and economic recoveries are usually periods of
strong stock-market performance.
The market also has had the benefit of aggressive interest-rate cuts by the Federal
Reserve. According to Davis, two consecutive interest-rate cuts almost always
lead to higher stock prices a year later. This time around, however, the Dow was
8.9% lower on the one-year anniversary of the Fed's second rate cut Jan. 31,
2001. The only other exceptions to this rule came in November 1930, on the cusp
of the Great Depression, and in Japan in 1992, as air continued to escape from
that nation's bubble economy.
Davis sees dark import in the stock market's current funk. "My conclusion is that
this isn't a normal bear market and soft economy, but rather that some dark forces
like overvaluation, too little savings, record levels of debt and record trade deficits
continue to hover over the market," he says.
The World From Here
We contacted George Friedman, a political scientist and head of the Austin, Texas
intelligence firm Stratfor.com, to get his assessment of the geopolitical situation.
Friedman was the subject of a Barron's cover story last October in which he
discussed the likelihood that al Qaeda "sleeper cells" in the U.S. would mount
follow-on operations on American soil in the months ahead ("The Shadow CIA,"
Oct. 15, 2001).
He expressed relief that he and other experts who "cried wolf" have so far been
proven wrong. The bombing of the synagogue in Tunisia, which killed 21 people,
is the only attack that has been tied directly to al Qaeda since Sept. 11, and despite
the lamentable loss of life there, it was comparatively low-tech and small in
magnitude. "The anti-al Qaeda campaign in the U.S., Europe and elsewhere in the
world has been far more effective and coordinated than I or anyone else might
have imagined," Friedman avers. "Cells have been rolled up, funding networks
eliminated and, most important, planned operations like the holiday bombing in
Strasbourg, France, foiled."
There's still a chance al Qaeda will try to pull off a major attack in the near future,
Friedman worries. Maximum public-relations value would be achieved by an
operation around the anniversary of Sept. 11 or before the U.S. November
elections.
Moreover, a Friedman source inside the U.S. intelligence establishment has
reported a notable increase in message traffic between suspected al Qaeda
operatives in recent weeks, similar to the communication buildup before Sept. 11.
He also notes that Arab illegals have been showing up in greater numbers of late,
trying to sneak into the U.S. from Mexico. The Canadian border used to be al
Qaeda's preferred entry point, but security there has been tightened.
As for bin Laden, Friedman suspects he is either dead or seriously incapacitated,
despite claims by sympathetic sources that the leader is merely lying low and will
surface after al Qaeda's next successful operation. "The clock is clearly ticking for
al Qaeda, and the morale of its cells around the world has to be at a low ebb,"
Friedman theorizes. "All bin Laden would have to do to fire up the organization
again is drop another tape of himself off for broadcast by Al Jazeera. The fact he
hasn't done so is significant."
Friedman concedes he was overly pessimistic last fall about the difficulty of
subduing Afghanistan. The U.S. has surely succeeded there in its basic mission of
unseating the Taliban and robbing al Qaeda of its government-protected sanctuary.
Nonetheless, he insists Afghanistan could still prove something of a tar baby for
U.S. foreign policy. Friedman expects Taliban and al Qaeda attacks on U.S.
personnel in country to pick up. Afghan President Hamid Karzai has been guarded
by U.S. troops after his vice president was assassinated several months ago. With
good reason: On Thursday, Karzai survived an assassination attempt by an Afghan
security guard. And the various warlords who dominate the country, such as
Abdul Rashid Dostum, are about as trustworthy as Mafia dons and are capable of
unspeakable savagery, Friedman contends. Fortunately, says Friedman, the U.S.
has been smart in keeping its presence in the country to a minimum.
Friedman is less sanguine about the Bush administration's chest-thumping over
Iraq. In his view, the White House is being disingenuous in claiming that it wants
to unseat Saddam Hussein because of his avidity to obtain weapons of mass
destruction. He believes those claims are merely an attempt to give an idealistic
gloss to what, in essence, is a power move to instill fear in other radical Islamic
nations. "We figure the Arab street hates us anyway, so why not change the
geometry of the Islamic mind by going after first Iraq and then other states in that
region we don't like," he observes. "The only problem is that none of our allies
seems moved by either our professed or real justification."
Any campaign against Iraq might prove more difficult for the U.S. than the hawks
in the White House and Pentagon imagine, however. An Afghanistan-style attack
relying on razzle-dazzle air attacks supplemented by Special Operations troops on
the ground won't work in Iraq, according to Friedman. There are no nasty
warlords with large armed forces available in Iraq for our special operations to link
up with. And what if the Iraqi Army and Republican Guard don't crumble as they
did last time, forcing the U.S. to take Baghdad in house-to-house fighting?
"Democracies shy away from taking the heavy casualties city assaults entail,"
Friedman explains. "Don't forget that even the Israelis refused to enter Beirut
during their invasion of Lebanon in the early 'Eighties."
The U.S. would no doubt triumph eventually in Iraq. Then comes the problem of
unintended consequences. Would currently friendly regimes such as those in
Egypt, Saudi Arabia, Jordan and Pakistan be swept away by a tsunami of Islamic
extremism? And, more than likely, the U.S. would be in for years of
nation-building in Iraq with its welter of ethnic and religious groups.
This anniversary week of Sept. 11 will see any number of tributes and
commemorations. Patriotic feelings will swell. But truly Sept. 11 was, as
economist Paul Samuelson notes, yet another passing of an American age of
innocence. The 'Nineties economic boom, triggered by the supposed peace
dividends from the end of the Cold War, seemed like it would go on forever.
Unfortunately, Sept. 11 taught us otherwise.
Copyright © 2002 Dow Jones & Company, Inc. All Rights Reserved. |
