KONGThink of the action on Wall Street not as a crisis but as re-entry
to the earth's atmosphere. The journey is hot and bumpy but necessary. Or think
of it as a return to normalcy, to values rooted in Main Street, not Wall Street.
Or think of it in terms of cycles, and of reversions to the mean.
What has happened to the S&P 500
index and the dollar in recent weeks should come as shocks only to those who
forget that major market cycles seldom last less than five years, more often the
biblical seven years and in some cases (Japan may prove to be one) almost a
Unfortunately, most of the fund managers
paid to look after householders' savings are focused on the short-term returns
that determine their careers.
Students of Wall Street should look to
Asia for some spectacular examples of cycles at work.
Take Hong Kong's relatively sedate Hang
Seng index. At around 10,000 points it is at little more than half its twin
peaks reached in 1997, at the time of a property bubble, and in 2000 during the
global technology bubble. It is felt to be languishing, depressed by local
deflation and Wall Street gloom. But it is still double its level at the start
of 1992, the beginning of a five-year bull run.
Whether it can take off again soon
remains to be seen, but it has reverted to a mean which broadly reflects a
decade of nominal economic growth. The silver lining, particularly for those in
sight of retirement, is that dividends are again significant. The Hang Seng
index has a yield of 3.2 percent, double the S&P's. Recurrent earnings in
the hands of the investor are what rule in the longer run.
Another island of relative stability in
Asia, Singapore, has done even worse than Hong Kong. At 1,563, its Straits Times
index is back to where it was in 1992, having twice been up to 2,500.
Other Asian indices such as those of
Japan and Thailand have demonstrated more extreme movements, reflecting their
roles in the Asian financial crisis, so they are perhaps more akin to the Nasdaq
than to the S&P 500, which is down only 40 percent from its peak and still
double its January 1992 level.
The Dow is off only 30 percent from its
peak, a modest fall which leaves it at a historically high price-to-earnings
Currencies have moved in somewhat
different cycles. The dollar has fallen very sharply in recent weeks, but at 116
to the yen it is back to a midpoint between a cycle low of 85 back in 1995 and
high of 146. Given the bulging of the U.S. trade deficit in the past four years,
the dollar could fall as steeply in 2002 as in 1985. That would be uncomfortable
for Asia and Europe, but they cannot rely any longer on a strong dollar and the
U.S. consumer to generate demand.
It would not be surprising if the dollar
tested the 85 yen and 120-cents-to-the-euro level within two years. Such an
adjustment might be necessary to bring the trade deficit down to the sustainable
1996 level of $10 billion a month from the current $30 billion plus.
Looking back, 1997, the year of Asian
crisis, was the year when credit growth, the dollar and U.S. stock markets began
a journey into orbit. For three years Alan Greenspan provided the fuel and Wall
Street the faith. Those who believed mostly lost out - and not just because of
This column noted on Jan. 14, 2000, that
the AOL-Time Warner merger, now coming unstuck, would go down in history as the
"crowning example of the mania which gripped Wall Street at the turn of the
millennium." The merger was driven not by industrial logic but by the financial
logic of executives' stock options. But such views were overwhelmed by
Although exuberance is long gone, Wall
Street has not yet swung to irrational despondence. Markets have made major
moves back toward the mean. But re-entry to the real world is probably not