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Repent! The Big One Is On Its Way

Thu., Oct. 30, 1997

This was not It.

In July, just as the stock market was reaching its peak, I donned my sandwich boards and wrote: “You’re going to see a correction one of these days that will curl your hair, followed by a year in the doldrums before the next recovery. … Repent! The end is near.”

Greed being what it is, I didn’t dump much after my own jeremiad, which is why nobody can hate me after the babyboomers’ babybust and bounceback.

But this was not a hair-curler. Instead, it was the shakeout of nervous professionals who were looking for some outside event to justify a rush to lock in the year’s profits.

Turmoil in the Asian markets, reflecting incipient deflation there, was the cathartic our traders were waiting for. America’s small investor, however, was not suckered by all the globalony. When market averages backed 10 to 15 percent off their highs, the little guy resisted all chickenlittling. Only the market, not the sky, was falling.

What explains the Nonpanic of ‘97?

It was not Treasury Secretary Robert Rubin standing on the steps of the Treasury Building saying “the fundamental economy is strong.” Such pronouncements by government officials smack of “prosperity is just around the corner”; they reassure nobody.

One reason for the nonpanic was that the media, which love anniversaries, have been reminding us for weeks of the 22 percent market break of ‘87, compared with which Gray Monday’s drop of 7 percent was not so terrible. “Selloff” was the preferred term of commentators; few used the scarier term “crash.”

A better reason is that the fundament is strong. Inflation and unemployment are down, and growth and profits are up.

Global domino effect? A worry but not a panicker; any drop in demand for our exports to Asia is not going to put much of a crimp in our huge national product. And Asian investors aren’t crazy; they’ll look for safe havens, of which there are no safer than U.S. stocks and bonds.

That’s why this week’s market turmoil is not It. Like Californians after a mild quake, we can say, “But this wasn’t the Big One.”

There is a good message in all the bouncing down and up, however, to be directed to the New Age, new paradigm new economists who waltz hand in hand with Goldilocks and Rosie Scenario.

That message is: There are other ways to go besides up. Just as the fluctuating nature of the stock market has not been fundamentally altered by the end of the Cold War or the beginning of the globalized computer age, economies will stumble and recover as they have in the past.

Just as markets breathe, economies breathe. That natural inhaling and exhaling, contraction and expansion, means that the business cycle has not been steamrollered into permanent flatness. Some day we will have a recession.

A market drop may not trigger a recession but a recession always harms the stock market. Reduced profits reduce tax revenues and increase the budget deficit.

Now, big lesson we can draw from this wake-up call. President Clinton proudly pointed to the shrinking of our deficit to the lowest level in decades. His economists see the deficit in the fiscal year that ended last month to be $22 billion.

But in February of this year, the Office of Management and Budget was predicting a deficit of $125 billion. It was off by $100 billion, plus change, not because of any spending restraint but because an economic boom produced greater revenues.

If we can be that wrong on the downside, we can be that wrong on the upside. As recession follows prosperity (as night follows day, and as market shakeouts follow run-ups), then all the optimistic budget agreements on which we base our spending and taxing will be knocked into a cocked hat.

The message this week is that markets have a downside, and that it is wise to keep a little cash on the side. Economies also have a downside, and it would be wise for our political leaders to treat as hogwash the predictions of the new era economists that the only way is up.

Hand me those sandwich boards. As I was saying about a market break before a real recession, Repent! The end is near.


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