WEEKLY UPDATE FOR: September 15, 2001...
by Bob Bose...
As regular subscribers obviously have noted, our format
this week is different. We left out the market statistics,
simply because the market was closed for most of the week,
and also omitted the summary of the actual economic reports,
as the horrific terrorist attack on Tuesday, September 11th,
changed the economic landscape considerably. In economic
terms, it was an exogenous event - entirely unpredictable.
Prior to Tuesday, the economic data was softening some, not
dramatically, but softer nonetheless. And, this past week
the trend continued, with the large drop in the Michigan
Consumer Sentiment Index being rather important. But,
consumers continued to spend during August, so it was likely
more of the same - until Tuesday.
Everyone knows the details of the attack - all too well.
What we don't know is the economic impact, or the effect
on the financial markets, both near term, and longer run.
Rather then our usual format, my thoughts follow.
The rational response, everything else equal, would be for
somewhat lower stock prices. This is not to say one should
sell on Monday's open, as "gap down" pricing could quickly
bring prices to a rational level. My point is only that
uncertainty has obviously increased, and therefore there
should be a higher equity risk premium utilized to discount
future cash flows to a present value. So much for theory.
Practically, the "Greenspan Put" will be severely tested,
and it is highly likely, in my opinion, that if a near
term selloff is even remotely close to being severe, say a
few hundred points on the Dow, then the Federal Reserve
will lower rates - by one half point. They will not wait
until their early October meeting, preferring instead to
maintain the flexibility of an additional easing, should it
be necessary, and they must, institutionally, put a reasonable
amount of time between the reductions to avoid the appearance
of panic. So, the FRB will be ready to "help."
The economic question then becomes the consumer, and will
the consumer respond to lower rates, or "hunker down" as the
drop in consumer sentiment, if more widely confirmed, implies.
We simply don't know, especially given that the survey was
taken before Tuesday's cowardly attack. But, a "hunker
down" outcome is not foreordained.
First, the attack did not produce the panic that the
perpetrators were certainly planning on. The reaction of all
was simply an incredible show of courage, and calm behavior,
and all Americans coming together. The net result could be
a real lift in consumers' attitudes, not necessarily translated
into increases in consumer spending, but at least not a further
depressant. Perhaps I am reading too much into it, but when
calls went out for blood donors, a three hour wait resulted
locally, and then donors had to be turned away for the day.
To me that is an example of America at its best, not a belief
that "we" have to "hunker down."
Even without a "hunker down" mentality, though, the odds of
a recession have increased significantly - but in my view,
only as a technicality. Simply put, the disruption to
economic activity resulting from the attack will likely
have a short term negative impact on the third quarter,
tripping it into a negative GDP number, and either a soft
fourth quarter, or a revision to the second quarter would
then produce a technical recession. But, our view is still
that what counts for the financial markets is longer term,
2002, not the remainder of 2001.
Now, though, there is a different longer term "problem" for
the financial markets. As long as our high ranking elected
officials can be trusted, and I believe they can, America
is at war, thereby increasing uncertainty, and volatility,
but perhaps ultimately being quite positive. No surgical
strikes, no quick end, but a protracted campaign to "hunt
down" not only the terrorists, but also to eliminate their
bases of support - i.e. sovereign nations that support
terrorism, or provide safe harbors for terrorists.
In my view, this is a major step forward, if fully carried out.
To solve a problem, one must first realize what the problem is.
Relatively recent United States history has been unwilling to
"deal" fully with the problem. Former President Bush the Elder
did not follow through and eliminate Suddam Hussein, and while
former President Clinton had initiated air attacks against Osama
bin Laden, clearly he did not press the issue either. Those
failed approaches appear about to be changed.
But, the sanctuaries for terrorists are larger than just
Afghanistan and Iraq, so to fully implement a strategy of
eliminating their bases is essentially World War Three. But
here, the news is good - we will prevail, no doubt about it.
First, the democracies are united, even to the extent of invoking
Article V of the NATO Treaty - a strike against one is an attack
on all. And, Britain even went a step further in a display of
support by playing the United States National Anthem at the
changing of the guards at Buckingham Palace. Given the combined
power of these nations, the outcome is not in doubt, assuming the
will prevails. And, given the alternatives, the will should be
So, where does this all leave us? Obviously a rocky path near
term, but one I firmly believe will be a better world once we,
with some help from our friends, eliminate the scourge of
cowardly terrorists - remembering that they can "progress" to
biological weapons capable of even more massive taking of human
But even near term weakness in financial markets, has
historically passed rather quickly. Most political acts have
simply not had a lasting impact on the financial markets. In
other words, this too shall pass. And, I expect this time will
be no different.
The bad news is that it will be rocky for a while. The good
news is that given the forces now being aligned against
terrorism, the guys in the "white hats" will prevail. This is
not a chauvinist statement on my part, but simply an analysis
of the odds. I expect retaliation to our initial strikes, but
ultimately, combined with our allies, of which there are many,
our forces will prevail.
Bet on the "good guys." We will win, the democracies will
prevail, the world will ultimately be a safer place. It may
get ugly in between, but history is on our side, and financial
markets have historically responded positively to short term
disruptive events that are ultimately positive.
This time should be no different. Given the resolve of the
American people, and bi-partisan political support that lasts
for more than a few days, we will prevail.
If you have an investment horizon past the end of September,
my advice is to buy the dips. Stay tuned !
Current Weekly Calendar of Economic Data:
Monday: Business Inventories
Tuesday: Consumer Price Index
Wednesday: FRB's Beige Book
Thursday: Jobless Claims, Housing Starts/Permits