Greenspan Recants: No Catalyst, No Bull Market

by | Sep 4, 2001

Hewlett Packard buying Compaq isn’t exactly going to save the world. If that’s the best thing this market can come up with as a catalyst, we’re in a heap of trouble. About the only good thing you can say about the market right now is that the major indices have not made new lows versus […]

Hewlett Packard buying Compaq isn’t exactly going to save the world. If that’s the best thing this market can come up with as a catalyst, we’re in a heap of trouble.

About the only good thing you can say about the market right now is that the major indices have not made new lows versus their March and April lows, even while the news background has gotten vastly worse.

Earnings forecasts have gotten worse. The economy has gotten worse. The recession has spread around the globe. All those much-vaunted interest rate cuts haven’t made any difference. And yet the Dow is still higher than it was on March 22, and the NASDAQ is still higher than it was on April 4.

If you had the courage to buy right in the worst of the panic of last spring, you may not exactly be delighted — but at least you aren’t sorry. Of course if you missed the bottom by more than a couple days you’re only at a breakeven — if you missed it by more than a week you’re underwater.

That means that, right now, essentially everyone who holds stocks is a loser. Unless you bought right at the lows of October 1998, or right at the lows of March/April 2001, you’re holding the bag.

That means that now, as a terribly oversold market possibly struggles for a technical rally this week, there are going to be sellers everywhere. And in the absence of a catalyst to create a true change in psychology, a technical rally is all it will be and those sellers will squelch any significant upside action.

Without a catalyst, the best we can hope for is the world according to Cisco Systems, a world in which we are thrilled by the great bullish vistas opened up to our consciousness by the idea that business is stabilizing. But without a catalyst, we’ll know in our heart of hearts that just as likely is the world according to Sun Microsystems, a world of continuing slowdown and mounting losses.

And that’s the world of the HP/Compaq deal — two survivors of a sinking ship, huddling together for warmth in a lifeboat. That’s no catalyst.

We know there’s no catalyst coming from fiscal policy. President Bush shot his tax-cut wad with his pathetic back-end loaded cuts in ordinary income tax rates, which he was barely able to get by the Congress. Now with the federal surplus drying up — illusory and meaningless to begin with — it looks like the loaded back-end of those cuts will never materialize, and any hopes for capital gains tax reductions are completely dead. So here we are with the economy weakening day by day, and — astonishingly — the political consensus is for fiscal tightening, just when there ought to be loosening. It reminds me so much of the Great Depression it’s, well… depressing.

And we know there’s no catalyst coming from monetary policy. Alan Greenspan has given no indication that he has the slightest intention to anything to reliquify the parched economy. We’ll just have to be satisfied with the death of a thousand interest rate cuts. In a speech Friday, Greenspan gave no indication of a sense of urgency or mission — instead, he gave a rambling academic overview of what he used to call the “equity wealth effect.”

During Greenspan’s relentless tightening exercise in 1999 and 2000, he constantly justified his actions by citing his conviction that the great rise in the stock market had created an “imbalance between supply and demand” that would give rise to inflation. Now in Friday’s speech, he has decided that the “wealth effect” is largely chimerical — at least where the stock market is concerned. Instead, we should focus on the “wealth effect” arising from increased housing prices. That means that the one capital market that has not completely cratered over the last year and a half is now in Greenspan’s crosshairs.

No fiscal catalyst. No monetary catalyst. As far as I know there’s no international catalysts or technological catalysts either. So the only reason to think that the market will go up is purely technical — because it’s gone down a lot, and it’s “due.”

When the best you can hope for is stabilization, what’s the point of taking the risk of equities? There are a lot of people asking themselves that very question right now. And when the technical rally comes, they’re going to sell into it. Might not be a bad idea to get ahead of them. When and if a catalyst arrives, you can always get back in.


The views expressed within represent those of the author, and do not necessarily reflect those of Capitalism Magazine’s publishers

Don Luskin is Chief Investment Officer for Trend Macrolytics, an economics research and consulting service providing exclusive market-focused, real-time analysis to the institutional investment community. You can visit the weblog of his forthcoming book ‘The Conspiracy to Keep You Poor and Stupid’ at www.poorandstupid.com. He is also a contributing writer to SmartMoney.com.

The views expressed above represent those of the author and do not necessarily represent the views of the editors and publishers of Capitalism Magazine. Capitalism Magazine sometimes publishes articles we disagree with because we think the article provides information, or a contrasting point of view, that may be of value to our readers.

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