Double Vision

Rarely have I seen Wall Street so split down the middle. Half of the Street seems to think that we are about to head into an abyss of the darkest and blackest proportions. The other half senses that we may be at the beginning of a new, more sensible, long-lasting bull market, free of the dross of speculation and rapid profits.

You have to go back ten years to find as stark a dichotomy. In 1990, as in 2000, the market took apart its favorites every day, and the gloom and lack of confidence were palpable. Then, as now, a combination of business failures, high debt, and high energy costs rocked the economy.

Just as we do currently, we had the “center will not hold” crowd postulating that we wouldn’t be able to pull ourselves out of the tailspin through a lower-interest-rate tonic. And just as in 1990, I am not buying it. In fact, I think we may find ourselves in an environment where the risk turns out to be much lower than expected and the reward much, much larger.

My credentials as a stock maven were forged in that era. In 1990, I spent most of the year betting against stocks, as people stayed wildly bullish until it dawned on them, too late, that we were in a nasty recession. I made a killing on the short side. Same with last year. The crowd loved the market far more than it deserved, and trillions got lost when the unexpected recession arrived.

Now, though, as in 1991, the worst is probably already over, just when the gloom is most pervasive. The Federal Reserve knows that we must stem the decline now. Because of the quick rate cuts we’ve already had, we might be out of this recession moments after it began. The stocks of economically sensitive companies have already begun to anticipate better times, even as the prognosticators stay gloomy.

But before you go and take every last dollar and bet it on the S&P, let’s assess the bear case for what it is worth and compare it to the chaos of 1990.

Central to the gloom-mongers’ case is the sizable debt load that corporate America has taken on in the past few years to build out – some would say overbuild – the nation’s technological infrastructure. Last month, The Economist, in a blistering treatise called “The Party’s Over,” crowed that the debt binge has been going on for eighteen years and will send the whole economy crashing down when investors recognize that there’s simply not enough money out there to pay back anywhere near the total amount of corporate debt owed. Ron Insana, the influential CNBC commentator and anchor, last week likened the current debt burden – assumed for building cyber-highways – to the colossal financial tinder that the railroad barons took on when they massively overbuilt train lines in the nineteenth century. Once again, Insana worries, the debt will never get repaid and the excess highways will be abandoned. Already some telco defaults have rocked the junk-bond arena and led to a situation where only the most credit-worthy can borrow, precisely those who don’t need it.

The bear case gets rounded out by the energy fiasco, both at the pump, where prices are still too high, and in the home, where natural gas has ratcheted up so much that heating costs threaten to cut into consumer spending. The threat of a nationwide version of California’s energy debacle only exacerbates the bearishness.

Oh, and don’t forget the collapse of the dot-com movement. While “only” 54,000 jobs have been lost, the overall hardship hasn’t really hit home yet, the bears say. That’s still to come.

To all of which I say, Yeah, yeah, sure, but let’s get a couple of things straight. First, the balance sheet of our country’s government, which was a sad, pathetic joke a decade ago, is now rock-solid. Never has the government been in such a fantastic position to help end a recession. With inflation low and the surplus bulging, Washington can turn on the presses if it wants and reflate us out of here like there is no tomorrow. It can cut taxes and make it retroactive, putting billions in our pockets immediately.

At the same time, the Fed stands ready to cut rates back to levels we haven’t seen in six years. I think the Fed will cut rates down to 3.5 percent to ensure that this economy doesn’t go into a prolonged slide. That will force the trillions of dollars now on the sidelines, paralyzed by fear, into equities. The rush could ultimately end up causing a shortage of paper out there to buy, as not much new supply has been created in the past year and a ton of stock has been retired. That dearth of equities will make the financial and retail sectors stronger than they have been in years. Much of the money forced in will be used to reliquefy the balance sheets of corporate America, nipping the debt woes before they get out of hand.

I can’t belittle the energy crisis, but does anyone doubt that any of this chaos would have occurred if the utilities in California had been able to raise prices for power? One hopes the other states that have deregulated will see the error of California’s ways and wise up in time to prevent any more artificial crises. And the overbuild of the telco infrastructure? The comparison to the railroad overbuild is a stretch. We have no alternative to the fiber build-out, except wireless, which even the most bullish of telco analysts don’t believe will be ready to handle massive high-speed data for many, many years to come. We will need every inch of this fiber build-out, even if it means that the ultimate owners of the information infrastructure will have to buy the networks out of bankruptcy.

So let the pessimists create bargains as they scoff at the rate and tax cuts for being too little too late. I think they are setting us up for a non-inflationary boom the likes of which will make the post-1990 rally seem tame by comparison. The boom will not be spread as equally as it was a decade ago, though. Technology, which just started roaring right about then, has way too much mending to do to participate until the economy gets much stronger. It will be the Targets and the Kohls and the Citigroups and the Merrills where the investment boom will occur. Or, in the vernacular of the trading desks, “S’s over N’s,” or S&P 500 names over the tech-heavy NASDAQ.

Don’t get seduced by the schadenfreude of those saying “The party’s over.” They no doubt missed the last one. We don’t need them with us now spoiling all of the fun. And profit.
Check out’s “10 Questions” feature this week. Greg Jackson, co-manager of the Oakmark Global fund, is on the hot seat. Available for free at

Double Vision