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Tuesday, July 23, 2002

Buying value, as opposed to, you know, buying into a bubble

George W Bush's latest foray into the world of Wall Street couldn't really have been more ill advised. The kindest that can be said is that this is another example of poor judgement.

The question is, how does he really know whether the market has touched bottom, or whether we're about to go down again. After all no serious economist would venture a judgement here, there is just no way of knowing. Or is the president trying to be a stock analyst like he was once a company executive. I sure hope he doesn't want to be categorized along with those Merrill Lynch analysts who got the profession such a bad name - recommending stocks in public, and trashing them in private (will we one day be able to relish the Bush tapes, the way we were once entertained by the Nixon variant?). Wall Street certainly isn't especially convinced, after all stocks haven't stopped falling since he paid them a visit there.

He should also bear in mind what happened to his treasury secretary Paul O'Neill who last Sept. 19, when markets were falling in the wake of the terrorist attacks, had the vision to say: "My guess is that when we look a year down the road, the people who bought today are going to be the happy people. The people who sold today will be sorry they did it." According to the New York Times he went on to add that he thought the Dow, which was then around 9,500, could be approaching a record high "in another 12 or 18 months."

Paul Krugman's coments in his column today are bang on the mark. What Bush should be doing is thinking about general economic strategy - the dollar, Greenspan and interest rates, and how to reduce preoccupations about the future (rather than the present) of the US government deficit:

The bull market is now well and truly over. In fact, if you adjust for inflation the S.&P. 500 — a much better measure than the overused Dow — is now below its level in late 1996, when Alan Greenspan gave his famous "irrational exuberance" speech.
So what should the responsible officials — Mr. Greenspan, George W. Bush and whatshisname, the Treasury secretary — be doing?
A good first step would be to stop trying to talk up the market by extolling the economy's fundamental strength. For one thing, it reeks of desperation. For another, stocks are still richly valued compared with earnings. Most important, the fundamentals aren't actually all that great. Doubts about corporate governance are growing, not fading away. State and local governments are in a desperate fiscal crisis. And even before the sudden plunge in the markets, the data were pointing not to a boom but to a "jobless recovery," in which the economy grows too slowly to make much if any dent in the unemployment rate.

The Bush administration's economic plans have not changed significantly since the fall of 1999, when they were introduced as a way to ward off a challenge from Steve Forbes. Back when the tax cut that eventually became law was announced, "Dow 36,000" was climbing the best-seller lists. The economic environment has changed completely; the administration's plans haven't changed a bit.
Our economic problems are real, but by no means catastrophic. What scares me is the utter inflexibility of the people who should be solving those problems.
Source: New York Times

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