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A Buying
Panic?
By Michael Alan Hamlin
January 07, 2002
If e-stock guru Peter S. Cohan is
to be believed, the first quarter of 2002 will be characterized
by panic, which sounds pretty much like 2001. Except that in Cohan's
view, panic is going to be a pretty good thing, because it will
be a buying panic. "The first two trading days of 2002 are
making me wonder whether we are at the beginning of a buying panic
that could drive the major indices up very quickly over the next
three months," he wrote to those of us on his e-mail contact
list last week.
That list includes quite a few folks in the Philippines,
where Cohan has made a couple of presentations, most recently last
August at the 2nd Philippine Wireless Technology Symposium. During
an exclusive lunch briefing for local CEOs, Cohan was asked how
low he thought the Nasdaq was likely to go before it reached bottom.
His response, "around 1100," provoked a collective gasp
and frozen smiles.
What's changed since August? In my view, and I don't
know if Cohan agrees, the tragedy of September 11 probably accelerated
the downward trajectory of the economy (See my column of October
1, 2001) and provided a V-shaped rebound considerably short of 1,100,
rather than a drawn out catharsis. And the momentum didn't stop
there, thanks in part to US$60 billion the US government poured
into humanitarian aid and airline bailouts aside from spending associated
with the war in Afghanistan.
Cohan has his own ideas about why investors will start
flying back into the market. First, interest rates are at 40-year
lows, making banking cash unattractive. Second is greed. Me-too
investors don't won't to be left out. Third, the US economy may
actually be improving, as evidenced by signs of recovery in semiconductors
and other tech stocks such as EMC, Cisco, and Microsoft. Fourth,
surveys show that corporations will increase spending at least somewhat
this year, and fifth, purchasing managers are reporting increased
demand.
Other observers agree with Cohan, more or less, including
Federal Reserve chairman Alan Greenspan, who believes that technology
will once again lead a market revival and surge in productivity.
The one dark horse on the horizon, although Cohan doesn't discuss
it, is consumer debt, which reached US$7.5 trillion in the third
quarter of last year. Unlike in earlier recessions, low interest
rates haven't encouraged consumers to stop spending; in fact, they've
taken on debt. So the question is, when does it have to be paid?
And, how higher can it go? Or maybe, will it be paid? Personal bankruptcies
are at an all time high.
That's a scary thought. But Cohan believes there are
at least three months of crazy times ahead, before it's time to
pay the Piper. After that, if a buying panic does take place, he
believes a rapid sell off is likely in April, something called,
aptly enough, the April Effect, when investors cash in to lock in
gains and raise cash to pay their income taxes.
Whether growth returns after that sell off, if it happens,
will depend on a number of factors, including how close the personal
debt bubble is to bursting. In Greenspan's view, the danger of personal
debt can be alleviated by higher productivity and efficiency, which
in the short-term increases unemployment but in the medium and long-term
generates new opportunity. He believes the bull economy of the 90s
demonstrated that effect, and that there's no reason why it won't
happen again. After all, there's no reason the sequel can't be better
than the original.
Indeed, there's no reasons why it can't be, but sequels
aren't usually better than the originals, and don't seem a very
safe bet. A better bet, however, can be made that is much more encouraging,
and that is the cyclical bet. During the 90s boom, it became a popular
pastime to speculate on whether the technology and productivity-driven
growth economy had made business and economic cycles a fixture of
the past. BusinessWeek magazine began talking about the New Economy,
and among the things that distinguished it from the Traditional
Economy was the, fabled as it turned out, quality of growth lasting
forever.
There's still a lot to the notion of a New Economy,
but not as a new set of economic rules. But rather, as a set of
qualities that distinguish it from the Old Economy, such as in the
way people communicate and interact with each other for entertainment,
fulfillment, and profit. That of course that doesn't mean that cycles
aren't still just as much a fixture of the economy as they ever
were.
Being a fixture of the economy, however, doesn't necessarily,
and probably doesn't, mean the same quality of fixture. While cycles
are cycles, their nature can be different. In what way, you ask.
Specifically with respect to their length. How long do they last?
How quickly do they turn? And most importantly, how quickly do they
come back?
It seems pretty clear to me, and Asia is a superb example,
that cycles, like product and development cycles, are increasingly
compressed. Whole regions of the world develop in a quarter century
to a level other regions took a century, or much more, to attain.
But that's another story. The story here is that despite whatever
shock comes next, its ferocity, and its speed, recovery will be
close behind.
(Michael Alan Hamlin is the managing director
of consultancy TeamAsia and the author of three books on Asian economies
and companies. His latest book is Marketing Asian Places, of which
he is co-author. His e-mail address is mahamlin@teamasia.com.ph.)
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