A Crisis In Confidence
July 16, 2001
Could the Fed finally be willing to publicly face reality!!? The article I have posted below shows that at least ONE Fed member is admitting that the U.S. will not recover in the second-half, and indeed, the Fed will then have no clue when this slowdown will end. This waning confidence is seen in this Fed member's intimation that another rate cut probably won't even make a difference!!! (That sacrilegious scoundrel! - If he had only read my missive suggesting something similar way back in January or February.)
The crisis of confidence is evident everywhere, but nowhere is it more apparent than in the corporate boardrooms and the rampant selling by corporate insiders of their own stock. I have seen countless articles on this topic. This selling flies in the face of the cheery analysts that keep recommending that investors gobble up stocks NOW before "missing the train." Most of us did miss the train...and that was to sell, sell, and sell some more! What is even more tragic is that these same insiders are cutting jobs left and right at the same time they promote such actions as positives for their companies.
Anyway, I have spent numerous emails highlighting the negatives of our current situation. This has been because there was simply too much optimism being promoted in the popular press, by the analysts, and the policymakers - optimism that had little basis in reality. Now that all of these groups are slowly coming to earth, we are becoming front-row witnesses to a crisis in confidence.
However, the flip side of this crisis will be the building of a base for future growth in the economy. Just remember (if you are old enough!) how the US economy came roaring back from the 1990-91 recession. Companies began to "re-engineer" and invested in all sorts of new management and technological gimmicks to become better and stronger in the face of sour economic conditions and tough foreign competition. It is the same now. It is often painful, but this adjustment period is necessary, especially after the kind of excesses we just saw.
The latest good book on economic conditions that I have read is called "The Art of Contrary Thinking." I highly recommend it. In it, the author suggests asking "what is right" instead of always "what is wrong." This advice is well-timed for conditions such as these. In the answers you discover the next great investment opportunities while everyone else is bogged down as if the world is coming to an end.
No one really knows when the pain will end, just that it will (should?) eventually (you know MY best guess!). It is apparent that the pain is not over because we have not wrung out some of the remaining excess (read over-optimism): consumer spending in excess of income and bullish optimism in the markets (yes, believe it or not, even at given market levels, all indicators point to overwhelming BULLISH sentiment in the stock market). Corporate bullishness has long since been crushed, so when these 2 last rungs of the picture finally turn sour/negative, you will know the light at the end of the tunnel is finally upon us (unfortunately, it is also likely to feature a final crash in the stock market).
Finally, I know it must seem odd to most of you to talk as if things are even so bad now. After all, the unemployment rate is still at historical lows, and most of you have jobs and will not be losing them in this cycle. Your pay may have even gone up! However, the pain is out there and the conditions are out there for things to get worse. So, again, I send these emails not just to vent anymore, but also to give you a heads-up from my perspective.
Be careful out there!
As promised, another piece of the puzzle becomes clearer....
Sunday July 15, 2:09 pm Eastern Time
Fed Official: No Strong Recovery Soon