The bad news hasn’t sunk in yet

By John Cunniff The Associated Press
Tuesday March 20, 2001

NEW YORK — For people who’d turn blue were an errant wind to blow away a $20 bill, investors seem remarkably detached, even blase, about seeing more than $4 trillion in equity assets disappear into the air. 

Yes, the consumer surveys say that confidence has plunged, but the actions do not confirm it. People are buying houses and cars, relaxing on cruises, flocking to casinos and generally spending more than they earn. 

The “consumer schizophrenia,” as economist David A. Wyss describes it, is causing a great deal of confusion among those who are accustomed to relying on the surveys, and perhaps even concern at the Federal Reserve. 

It leaves the Fed, for example, with the dilemma of determining whether consumers have had enough punishment and are deserving of lower interest rates, or if they still are a somewhat irrationally exuberant. 

Attitudinal plunges reflected in consumer confidence surveys cannot be ignored; the recent declines, Wyss points out, bear similarities to the declines that preceded the most recent four recessions. But neither can consumer actions be discounted – not when consumers borrow to buy. 

A possible clue may be contained in the suggestion from the surveys themselves that while people are increasingly concerned about the future economy, they may not as yet have experienced the painful effects. Jobs remain plentiful, inflation is in check, mortgage rates low, a tax cut is coming. And the future is a long way off. 

Yes, and it’s hard not believe that after nine years or so of rather good economic times, recessions are mere abstractions to millions of people rather than something they must deal with personally and painfully. They may not as yet have read the quarterly reports from their 401(k) plans and their mutual funds, but soon they will, and most of the reports will make poor reading. 

So far, the popular rational for dealing with the unpleasant facts is to say, “Oh well, I’m in it for the long term.” But that response ignores the fact that all people live in a timeframe, and that timeframe, as for retirement, may not coincide with the long term. 

Inherent in the long-term view is that the future that will be better, no matter what the consumer confidence surveys suggest. Stocks have always come back, or so it is said, and they will again, or so it is believed. 

Alan Greenspan, the Fed chairman, is still a hero to millions, and there is confidence he’ll not do anything further to hurt them. He may have created this thing, and he will see that the correction causes the least pain. 

Greenspan’s obligation, however, is not primarily to stocks but to the overall economy, and while the stock market is an important part of economy, so also are such matters as inflation, government spending and the trade deficit. Difficult as it might be to accept, small investors are on their own, as they’ll realize it when they face the realities and total their losses. Sadly, they tended to be invested in the stocks that took big falls. 

The five most popular stocks among investment clubs, according to the National Association of Investors Corp., are Cisco Systems Inc., Intel Corp., Lucent Technologies Inc., Home Depot Inc. and Microsoft Corp. Cisco alone is held by 15,480 clubs. 

In trading Monday, Cisco was down about 76 percent from its 52-week high. Intel was off 66 percent, Lucent down 85 percent, Home Depot down 39 percent and Microsoft down 53 percent. 

The reality makes hard reading. 


John Cunniff is a business analyst for The Associated Press