Sobering up after Nasdaq party

FINANCIAL commentators have been whimpering for more than two years over the dangerously overheated American economy and the iniquities of the Nasdaq gambling den.

Now the US engine is throttling back. Mom and Pop on Main Street are buying fewer cars, and refrigerators, and the love affair with technology stocks has turned into a squabble over alimony.

But are the soothsayers happy? No they are not.

Worry remains their drug of choice. The de facto president of the United States, Alan Greenspan, has increased interest rates six times since the middle of last year. His intention was to knee-cap an economy running out of control and he has done it. Nobody should have been surprised. The Nasdaq nightmare has seen something like $2.5 trillion disappear into thin air. Actually, and this always happens at the end of a mania, the money has been returned to its original owners, who are investing it in boring companies with long records of profitability, that do odd things like pay dividends.

The ubiquitous economist David Hale of the Zurich group, has put out a thoughtful report to clients titled Will the Correction in American Technology Stocks Produce a Global Recession? His conclusion is that it will not. Instead, we will likely get “a sub-cycle of slower growth during the next few quarters.”

However, he says it is no longer possible to dismiss the risk of a recession completely. Hale rightly points out that the latest economic expansion has depended far more upon equity prices to drive consumption and business than any other in American history. At the peak in March last year, the US stock market capitalisation was 181% of GDP. Even after the latest pullback. it is around 150 per cent.

One man who is in no doubt that we are all headed down the tubes, is Yale University professor Robert Shiller, who is turning up all over the world to promote his book Irrational Exuberance – which hit the stands just as US share prices were hitting the skids.

Naturally he has been elevated to guru status.

Shiller takes much the same line as Hale, but he is more blood-thirsty about it – and downright rude about the punters.

He says the US market got so high thanks to “the indifferent thinking by millions of people, very few of whom perform careful research on the long-term investment value of the aggregate stock market and who are motivated substantially by their own emotions, random attentions, and perceptions”.

Shiller warns that US stocks could nose-dive to the levels of the mid-1960s and says “the losses could be comparable to the total destruction of all the schools in the US.” Some educationalists consider that would not be altogether a bad thing.

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