The Crazy Stock Market Jude Wanniski November 24, 1998

The mood swings on Wall Street throughout the year have caught so many analysts off guard -- bulls planning celebrations that have to be canceled followed by bears planning wakes that have to be canceled -- that the Big Story in the financial press is about the obvious irrationality of the markets. The only analysts who continue to believe in the pure efficiency of the market are those not surprised by its movements. I was at a dinner last night where Abby Joseph Cohen of Goldman Sachs spoke about the soundness of the market and the economy. She commands great respect because she firmly stood her ground in August, when her bullishness was being sorely tested. She remains serene in her view that the economy justifies the level of prices on Wall Street, although she really does not have a theory as to why the bottom of the market remains hunkered down. The S&P 500 is up 22% this year while the Russell 2000 is down 9%. She was asked several times about this dichotomy but could only say the low-cap stocks will be viewed at some point as a bargain when the perceived risks to holding them decline. Hmmm. 

The risks to different asset classes is the reason we’ve been writing about a two- and even three-tier market for the past two years. In fact, the Russell 2000 index of smaller-cap stocks today is about where it was two years ago. This is why we continue to wonder if the economy will be in a technical recession in the next year, with the top of the economy growing and the bottom of the economy receding. There absolutely is no doubt at all that agriculture and mining now are in recession as a result of the Fed’s monetary deflation. The 3000 small banks that serve the farm sector face a bleak future as there are no hopeful signs of price increases that would drive the wolf from the door.

Of course, farmers and miners who hold assets in the form of Amazon and Yahoo and some of the other Internet rockets will be able to stay solvent and ride out the deflation. The Internet stocks are at the top tier of the world economy, irrationally priced only if one expects them to be producing positive returns in the next few years. As long as the market sees nothing ahead of them and nothing behind them anywhere on earth, they seem to have almost limitless potential. Because they are like infants being bought to hold to maturity, not to trade, they are relatively immune to the short-run vagaries of monetary errors by Alan Greenspan or tax-and-budget disappointments by our government -- or any other government. Alberto Vilar, on whose Amerindo Mutual Fund board of directors I serve, points out that early in the century there were 5,000 auto companies in the U.S., 300 by 1920, and a handful by 1940. The market already may be identifying a few firms like Yahoo as ultimate survivors of a global competition.

Otherwise, the near horizon seems hospitable. It looks like no impeachment. The new House Speaker, Bob Livingston, seems born for the kind of bipartisanship the country craves at the moment; he was exceptionally passionate in his Sunday "Meet the Press" call for supply-side tax cuts. The White House has decided not to bomb Iraq in the next few hours. And there’s even talk of another interest-rate cut on Dec. 22, which won’t end the deflation but is nothing to sneeze at. Happy Thanksgiving.