19 Oct 2001 Letters of Terror and the Waning Influence of Mr. Greenspan
Wednesday’s market opened with much promise. Our president said there were indications that our efforts against the Taliban and Al Qaeda were showing success. IBM and several other notable companies reported earnings that were better than expectations. The DOW and NASDAQ opened up 100 and 30 points, respectively, above their Tuesday close. Investors seemed to ignore the news that terrorists had crossed yet another line by assassinating Israeli Tourism Minister Rehavam Ze’evi outside his hotel room. Later in the morning, though, the weight of two events finally began to drive the resilient market down. The first was a lack of financial inspiration from Mr. Greenspan followed by a steady flow of new anthrax letters cropping up in places of high visibility.
Dan Ackman of Forbes magazine summed up Mr. Greenspan’s market effect as follows:
“During the boom years of the 1990s, Fed Chairman Alan Greenspan had the Midas touch. Whenever he testified on Capitol Hill, no matter how banal his words, and certainly when his Federal Reserve Board cut interest rates, traders would applaud and equity markets would add to investors’ riches. Now, however, the Greenspan effect is working in reverse. Yesterday, Greenspan told lawmakers that the economic effects of the Sept. 11 terrorist attacks were temporary and that rapid, ’90s-style growth would follow stability; the markets plunged in response. “
That the market is primarily interested in earnings and less in affairs of state, gives Mr. Ackman’s points some merit, but only to a degree. The new anthrax letters, while low in shock value, probably were causing a cumulative ill effect on investors. Traders began to fear that the already struggling economy might be further threatened by a prolonged campaign of infected letters and other fiendish terror tactics not yet revealed. Ironically, just as shoppers were returning to the malls and the tourist industry was seeing slight glimmers of hope, these horrible letters seemed to halt that progress in its tracks. The idea that one letter could shut down a branch of the United States Government became too much for the market to take in a day.
It is almost certain that today’s investors face risks unprecedented in history. While the markets are accustomed to dealing with surprises or even shocks, such as war, natural disasters, bad government policy decisions, and others, current threats rather defy investors’ best attempts to quantify, or at a minimum, identify the risks. At the heart of the problem is the terrorist’s mind – he is not bound by reason or logic. Because investors cannot yet (maybe in time can) identify the risks of terror on an individual company or our economy, it is impossible to know how long and to what degree the markets will suffer under these threats. Investment strategy and policy decisions are now much more subjective than they were pre-September 11. As I pointed out last week, countries like Israel have managed to grow their economies effectively under the constant threat of terrorism. We have to wonder though, how much greater would the Israeli economy be if the huge amounts of energy and resources devoted to security and military were focused on more productive aims over the past few decades? Will our gains in productivity of the 90’s, unparalleled in history, be achievable again? Mr. Greenspan said he believes so. Was he being patriotic or logical – or both? I, for one, believe he was correct on both counts.
I am privileged to have access to the Bloomberg global data system. With this extraordinary tool (found in most major news agencies around the globe and all large financial institutions) I am able to view headlines and news stories from all over the world as they are released, 24 hours a day. As the stories roll across the screen, I am often struck by the wide variety of news going on in the world at the same time. Blended among the breaking news of anthrax letters, discovered in yet another high-level office and the frequent briefings from the White House, Congress, Pentagon, Treasury, and Federal Reserve, are the comforting reminders that life is truly going on pretty close to normal. Companies report their earnings, and yes, layoffs, but plant expansions too (not reported as much as the bad news), baseball scores, Michael Jordan’s return to basketball, Nobel prizes handed out, the price of gold, oil, or tea in China, this CEO quitting, or that VP being promoted, the renewed popularity of cell phones, colder than normal weather forecast in the northern U.S., etcetera, etcetera, etcetera.
When we watch CNN, CNBC, MSNBC, ABC, CBS, or FOX, or listens to National Public Radio, we hear only the message the broadcaster intends. In essence, we hear what they think will keep us glued to our televisions between commercials, or in the case of non-commercial NPR, what they think are the germane facts supporting the topic they choose to focus on at that moment. And it’s no secret that sensational news holds audiences best. The ‘CNN effect’ is bad for our economy because it keeps us glued to our televisions, preventing us from producing or spending, but worse, because it saturates our minds and emotions with bad images and feelings. Consumer confidence, quite naturally declines as a result.
The supposition is that we are headed into recession because of the events of and since September 11th. That very supposition, however, has caused world governments to do all in their power to re-energize their economies. They are much more fervent than they would have been pre-September. Even the media in this country seem different than in the past. While still focused on the sensational, there is more balance in their reporting. Newspaper editors and television journalists are not only aware that the constant drone of bad news will harm our economy, but they are addressing that subject head on in their discussions. As a result, the average person in the street is better prepared to discuss the psychology and economics of these issues than before. A significant improvement this time is that Americans are better educated about the cause and effect nature of economics. We understand that our individual actions do not take place in a vacuum. Patriotism and defiance of the terrorists are galvanizing Americans to stay involved in their economy like never before. Will it be enough? Time will tell, but the indications are positive.
Other good news is that we are more than half way through the infamous October earnings-reporting season with no major bad surprises so far. While unemployment is rising, a full 95% of Americans are still employed. Energy prices are coming down. Interest rates are very low and will likely go lower, easing the debt load of consumers. Eventually low rates will stimulate business investment (they always have in the past). There were signs of economic improvement in several industries in the weeks before the latest letter scare. Other than the first case of anthrax discovered where one man died in Florida, there have been no other deaths related to this terror tactic. While still developing, our emergency medical response systems have performed effectively, if not yet very efficiently.
I honestly do not know how much risk lies ahead for us as investors. My intention is to give citizens, companies, investors, the market, the economy, our law enforcement, medical establishment, military, and our leaders the benefit of the doubt and remain committed to our long-term investment philosophy. But, if you are more worried now than you feel you should be, please contact me so that we might better discuss your situation.