The Argument Against Gloom
SAN FRANCISCO -- Although it pales in comparison to the human tragedy, the assessment of the economic impact of Tuesday's events continues. Obviously, it's pretty easy to make a bearish case right now. This column attempts to provide a contrary view -- not because it's my job to provide uplifting commentary (as a handful of misguided readers seem to think). Rather, this column has always strived to provide an alternative to the so-called conventional wisdom, which is understandably dire regarding the economic impact of recent events.
But "my view is that unless we react in a very poor way to this horrific event, it will not have a material impact on the course of the economy," said Edward Leamer, a professor of economics, management and statistics at the University of California at Los Angeles' Anderson School of Business.
Note, Leamer is no economic Pollyanna. Late in 2000, he forecast the U.S. economy would experience "slight negative growth" in the second and third quarters of 2001, and believes the economy is currently in recession.
But the professor compared Tuesday's tragedy to disasters such as the
Other IssuesMany observers expect "climatic selling and climactic fear" when equity trading resumes, now scheduled for Monday morning at 9:30 a.m. EDT, as Bernie Schaeffer, president and CEO of Schaeffer's Investment Research in Cincinnati wrote Wednesday. But while others expect such selling to trigger the much-anticipated capitulation bottom, Schaeffer believes 'the ultimate bottom remains a good distance down the road in time and in price." Another scenario being considered is that an injection of liquidity by global central banks -- which have already added more than $100 billion in liquidity into the financial markets -- combined with a sense of patriotism among U.S. investors will buoy stocks early next week. Additionally, the Securities & Exchange Commission is considering making it easier for companies to engage in stock buybacks, which would also stem losses in specific issues. Regardless, the short-term fate of equities is "not critical to the path of the economy," Leamer argued, because the market is now acting mainly as a vehicle for the trading of existing assets rather than as a funnel for capital into new ideas. Unlike when IPOs were coming at a record pace in 1998-99, Wall Street is not at the center of the economy, he said. It's probably heretical to many investors, but the stock market "could be suspended for some considerable period without doing damage to the economy," Leamer suggested. The fate of the dollar is another area of concern for investors and economists. Leamer frets the dollar is overvalued but believes, as do many, a prolonged but steady depreciation will be economically manageable. Thus, he was heartened by the dollar's strength vs. other major currencies Wednesday and Thursday after it stumbled Tuesday in the wake of the disastrous events. Dollar bears contend the currency is merely being propped up by a coordinated effort by the world's central banks. Such efforts and an unspoken agreement among traders to not profit from the tragic events will prove fleeting, the bears expect. Following impeachment, a contested election, 18 months of a steep bear market, economic malaise, and now attacks on our financial and military centers, it's not hard to see why some believe America's prestige has been weakened, with negative implications for the dollar. But "speculation the dollar could be vulnerable is wrong," according to David Gitlitz, president and chief economist at DG Capital Advisors New Jersey. He argued central banks, including the Federal Reserve, are meeting demand for increased liquidity, not propping up the dollar. Furthermore, Tuesday's terrorist attacks will most likely result in a "higher aversion to risk," particularly by foreign investors, which will foster investment in dollar and dollar-denominated assets, Gitlitz said. This week's sharp rally in Treasury securities, which on Thursday left the yield on the two-year note at 2.98%, its lowest level since 1958, is a prime example, he said. The yield on the benchmark 10-year note fell to 4.62%. Still, like Leamer, Gitlitz is not sanguine about the U.S. economy. He believes the Fed needs to ease by 100 basis points but isn't sure if they're "willing to go that far." Fed fund futures are pricing in an increased likelihood of another rate cut before the Fed's next scheduled meeting on Oct. 2, but 100 basis points seems unlikely. Still, after the extensive easing already enacted, in addition to the $1.2 trillion tax cut, represent a potentially powerful stimulus to the economy. Additional rate cuts could further spur the recovery, which may come sooner than many observers currently dare contemplate.
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