Stock market's extreme optimism giving way to extreme pessimism

Posted: Friday, December 08, 2000

NEW YORK (AP) -- What makes the current economic scene so strange is the reaction to news of a downturn. Extreme confidence seems now to have been replaced by unwarranted pessimism, with little else in between.

The most likely explanation, and it's only a guess, is that in a very big economy the good news and the bad news come in very big doses -- doses so large the public gags and cannot easily digest the significance.

Moreover, just as confidence promoted confidence and led to exaggerated hopes during the 116-month economic boom, bad news now tends to be overstressed and the worst scenario is foreseen.

You don't have to search for evidence that the economy is slowing. It is there in abundance, so obvious it can't be avoided.

Credit is tightening. Corporate losses are rising. Dot.coms are disappearing. Energy costs have risen. Stocks have fallen. Debts are onerous. The election is stalemated. The trade deficit is rising.

There's no end to the list, if you wish to extend it. Construction and manufacturing are weaker than they had been. Layoffs have begun to appear. Excess inventories are being reported, especially among carmakers.

Dramatic failures provide frightening illustrations. Bank of America reports that it has $1 billion in uncollectible debt. DaimlerChrysler's merger produced huge losses rather than big gains. Much-admired and much-feared Microsoft remains under a court's breakup order.

But, during the long, unique and not likely to be repeated economic boom, an awareness that modern economies evolve through regular up-down cycles may have been lost. Slowdowns do not necessarily become recessions.

Calmer economists are now rushing to reassure clients that this slowdown is, after all, simply what the Federal Reserve has been seeking for almost two years, during which it raised interest rates six times.

And there are some very positive aspects to it.

Inflation has not escaped from its cage. Productivity increases are continuing. Interest rates might be lowered. High-tech's reinvention of the economy proceeds.

Slowdowns have their benefits, especially when the current slowdown comes after years of increasingly fierce competition. If you watch television you can get a sense of it: More ads than news items on your news programs, more car ads than plays on the football broadcast.

Slowdowns help get rid of corporate waste and give companies time to regroup -- energy-strained utilities, for example. They remind people to take better care of finances and to bring expectations back to earth.

Okay, they also winnow out the weak companies, but that process, Fed chairman Alan Greenspan reminds us, is not inconsistent even within strong economies. It's the way the system obtains the greatest efficiency.

Nevertheless, it was a Greenspan speech that gave both optimists and pessimists what they were looking for last week. In the same speech on Tuesday, each group found support for an extreme view.

First, optimists found evidence in the address that supported their view that the Federal Reserve should lower interest rates to avert a further slowdown. The stock market rose in its old, ebullient way.

On Wednesday, however, the opposite interpretation gained control. Examining the chairman's phrasing, those investors who feared the slowdown might be worse than realized, read dire prospects into the chairman's words. And the stock market lost a good deal of the previous day's gain.

It gets that way after almost a decade of expansion, when investors stand atop a mountain of long-term gains, get dizzy looking down into the valley, and fear they might stumble and lose it all.

End advance Sunday, Dec. 10.

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