September 27, 2002

Autumn... a time when not only leaves fall

Autumn is not the most propitious time for equities and this year the outlook is further clouded. The broader market no longer holds out the hope of guaranteed gains and ever-greater prosperity that a generation came to believe was the natural road to easy wealth. The burden ahead for this generation will be how to finance the massive accumulating debt that allowed them to purchase things they did not need with money that they did not have. Simply borrow the money or use a credit card or withdraw some equity from one's home by refinancing the mortgage at a lower rate - so went the generation's answer to how to finance a lifestyle that one otherwise could not afford. Should the economy enter an extended recession - Depression - we suspect that the now comfortable standards of living will become a haunting memory for many.

The Federal Reserve Open Market Committee met this week and elected to leave the Federal funds rate unchanged. The decision was probably the best that could be expected in view of developments over the past few months. The index of Leading Economic Indicators decreased for the third consecutive month and the Fed needed to leave some leeway to lower rates at the next meeting (or intra-meeting) when the need to instill confidence in a fledging economy may be greater than it is at this time.

September 16 , 2002

AMIDST THE RUBBLE THAT LIES AHEAD

Equity markets reflect a growing sense of doubt regarding the strength and vitality of the business recovery. This is accompanied with a growing belief that the economy is contracting despite the happy faces that the Wall Street crowd and the administration have been varnishing with each release of statistical data. In the real world, it appears that business activity, after a brief reprieve, is once again contracting, i.e., the economy is experiencing a double-dip recession. Ever-higher consumer debt and the growing burden that it imposes are combining with a paucity of decent employment opportunities to create the major sources of worry at this time. We suspect that these stresses overhanging the economy will prevail until the administration's plans on Iraq are either executed or abandoned. In either instance, any action would lessen the degree of uncertainty and worry now impacting stock prices.

With the trumpets of war now blaring domestically and internationally, erstwhile allies, albeit unreliable, are unlikely to actively oppose America's march into the abyss. On the other hand, they are unlikely to risk either blood or treasure in this dubious adventure. Regardless of noble words from Tony Blair offering British support for the war, America will stand the brunt of the causalities and nearly all the expense - now estimated at between $100 billion and $200 billion. Administration cost estimates were $50 billion just a short while ago.

The broader market no longer holds out the hope of guaranteed gains and effortless prosperity. Decades of prosperity and a rising stock market have programmed investors to expect ever-higher prices and to disregard logic and reality. Returns from investments of anything less than double-digit makes investors believe that something is amiss. We suspect that the individual's dependence on double-digit returns to finance the massive accumulated debt may well be what is amiss.

Traditionally, the market has been a savings vehicle. Should interest rates rise significantly and/or real estate prices (the sole pillar of economic strength today) decline significantly, the economic environment could worsen in short order. If real estate, the driving force behind consumer spending were to crumble, the stock market would follow the economy into another downward spiral. The result could be an extended recession - a condition normally referred to as a Depression.