As Of: October 31, 2001
THE COST OF WAR
The Markets Have Not Priced Reality
War is a destructive enterprise. One can make the argument that new inventions and technological improvements have been developed as a result of war, but at best any benefits lag far behind the actual event of war. What provokes this obvious insight? The stock market indexes are now close to or above the levels they were at on September 10th (depending on the index you look at).
Consider the billions of dollars of cost brought on by the destruction in the United States on September 11th. Consider the hundreds of millions of dollars spent so far on attacking Afghanistan. Consider the cost of rebuilding Afghanistan - something that the U.S. taxpayer will undoubtedly be called upon to participate in. Consider the huge cost and loss of productivity caused by anthrax attacks, security protection, and other fears here in the United States. Imagine if that money had been spent instead on medical services for our citizens, or education, or housing, or providing a free computer for every family in America, or rebuilding the infrastructure of the country. We are witnessing a huge diversion of resources from which we will receive no obvious benefit except to ensure our security and thus return us to the same place that we (mistakenly) thought we were in a few months ago.
The war on terrorism has a cost that must be paid. Either the stock markets were mispriced on September 10th, or they are mispriced now. It is unrealistic to think that America can assume the huge new costs of this war without having it negatively impact our economy and our stock markets. Yes, the stock market anticipates the future; but I fail to believe that the stock market on September 10th could foresee the attack that happened the next day. And I fail to believe that the stock market on September 10th had already priced in the cost of uncertainty that the war on terrorism has created. I have to conclude that the markets are now being held afloat purely by optimism. While it is always nice to put a smiling face on everything, it simply is not realistic in this case.
As discussed in The Mortgage Time Bomb, I have great concerns that the strength in the housing market is an illusion that could rapidly disappear. This would have a devastating effect on the finances of American families. As discussed in Educating The Consumer, I believe that economic statistics can be distorted by the lag in consumer behavior modification that occurs when there is a structural change in the economy. And as discussed in an article on Velocity, I am concerned that too much hope is being pinned on government stimulus and bailout programs which may be totally neutralized by a change in consumer behavior. While there are certainly many reasons to be very optimistic about the long range future of America, I think there is a great danger in being too optimistic about the short term. If one looks at all the facts objectively, I think we are still on the leading edge of a recession that has much further to go. This implies that, despite short term rallies, the trend of the stock market is still down.