Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : The New Economy and its Winners -- Ignore unavailable to you. Want to Upgrade?

To: 16yearcycle who wrote (20956)	5/31/2004 8:41:58 PM
From: 16yearcycle	Read Replies (1) \| Respond to of 57684

ECONOMIC LIFE Three good reasons to be rationally exuberant By Charles Stein \| May 30, 2004 Investors are a nervous lot, and for the past two months they've had a list of things to worry about that's longer than John Kerry's chin. The list includes higher interest rates, higher inflation, $2 a gallon for gasoline, bad news from Iraq, possible terrorist attacks, an uncertain outcome in the presidential election, and fears that the Chinese economy could go bust. From early April until last week, the stock market sagged badly under the weight of all that angst. The number of investors who describe themselves as bullish declined dramatically, and the ranks of bears swelled. As a natural-born bear I am uncomfortable saying what I am about to say, but I honestly think it is true. The pessimism has been overdone. While there is plenty to worry about, there are far more reasons to be optimistic about the economic future. Not convinced? Let me give you three reasons why the pessimists are probably wrong. Reason one: Some of today's bad news is really good news. The biggest negative hanging over the market is the prospect of higher interest rates. The Federal Reserve may raise rates as early as next month. More rate hikes are sure to follow. In this case, higher rates are the price we have to pay for prosperity. Interest rates got to ridiculously low levels because the economy was weak and the Federal Reserve genuinely feared a Japanese-style deflation. Rates are rising to more normal heights because the economy is returning to normal. ''Higher rates won't wreck the recovery because the economy has too much internal momentum," said Nicholas Perna, an economist based in Ridgefield, Conn. The story with oil is similar. Oil prices are high, largely because the global economy is enjoying a strong and coordinated rebound. Countries that traditionally have not used much energy -- China and India -- are using more as living standards rise. Like higher rates, higher energy prices may slow us down a bit, but should not derail the expansion. Reason two: The worriers are ignoring an awful lot of good news. ''If I had to rate business conditions on a scale of one to 10, with 10 being the best, I'd say conditions today rate a nine," said David Sowerby, chief market analyst for Loomis Sayles. Personally, I'm more comfortable with 7.5, but Sowerby has a point. The economy is growing at better than a 4 percent pace, corporate profit growth is at a 40-year high, the job market has come back to life, productivity is robust, factories are busy, spending on high-tech equipment is surging, and home sales and prices are holding up well. James Paulsen, chief investment strategist at Wells Capital Management, points out that over the past year the economy grew at the fastest rate in 20 years. So why don't people feel better? ''We've been through a near death experience the past few years," said Paulsen. ''It is hard for us to get back a sense of well-being." Reason three: The system worked. Again. All of us have short memories. Investors have particularly short ones. As recently as March, there was a widespread fear that something was profoundly wrong with the economy. Although many indicators were signaling recovery, the job market was stuck in recession mode. Was outsourcing diverting all our jobs to Asia? Had businesses figured out a way to grow without adding new workers? Apparently not. In March and April, the United States added 600,000 jobs, enough to convince many people that the comeback was for real. It took more pushing and shoving than usual to get the economy moving this time around. The Fed had to cut rates aggressively; Washington had to cut taxes; the private sector had to cut costs. But the bottom line is it all worked. Four years ago economist Michael Mandel wrote a book called ''The Coming Internet Depression," in which he predicted the economy was headed for a bad fall. He was right. This month he published a new book, ''Rational Exuberance," a much more upbeat look at our economic future. America, writes Mandel, ''sucks in new ideas and smart people from all over the world. That accelerates innovation, produces new jobs, and creates a competitive advantage that other countries cannot match, no matter how low their wages are." I have a hunch Mandel has the story right this time, too. Charles Stein is a Globe columnist. He can be reached at stein@globe.com.