Sat, Sep 15, 2001 page19

• How bad news leads to good

  It's time for all good Americans to put their money where their hearts are

  • By Caroline Baum / BLOOMBERG
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  I'm bullish on America.

  Like most Americans, I've spent the last two evenings glued to the TV set, staring at photos of the devastation in downtown Manhattan, watching dedicated firefighters, police and emergency medical technicians working around the clock to save lives, listening to interviews with relatives of the victims of the dastardly terrorist attack on the World Trade Center.

  There is something about tragedy that makes people come together. We may suffer individually, but we heal as a nation.

  Shock turns to mourning turns to anger turns to action. How can you not be impressed at the way this city, this country, has mobilized its resources in the toughest of circumstances?

  Opting for America

  Everyone tells me US stocks are going to tank when the market opens on Monday, but I'm going to buy.

  I'm not sure what I'm going to buy just yet or how I'm going to do it -- my broker was in the World Financial Center across from what were the twin towers -- but I want to show my support for everything that is great about this country.

  And I have a sneaking suspicion that many domestic investors, who have been tempted in recent months (for the last two years?) to look to the euro for succor, will think twice and choose to buy American.

  As an aside, four of the 12 euro-zone countries have already reported a contraction in real GDP. One, Germany, showed no growth in the second quarter.

  Our European allies often seem to gloat at our misfortune; at least it reads that way in the financial press.

  They think the only way they can compete with our highly efficient capitalist system is by "averaging down," with US economic activity converging with euro-zone activity at a lower level.

  The idea of averaging up hasn't occurred to them just yet.

  Elevating their own standard of living through higher productivity growth -- "averaging up" -- is secondary in a social market economy, with its kinder, gentler form of capitalism.

  I went ballistic when I read the Lex column in today's Financial Times, which led with the following assertion: "The recovery in the dollar should not be misread."

  The Financial Times went on to say that the terrorist attack is unlikely "to enhance the US currency's role as a haven."

  Dangling precariously

  "Until this week, the dollar's strength dangled precariously on the prospect of a US economic rebound,'' the Financial Times writes.

  "Even assuming positive impacts from rebuilding work, that is unlikely to materialize soon."

  Don't be so sure about that. The disruption in business activity and a spending strike on the part of the consumer -- either too glued to the TV to shop or too cowed by the horror to leave the house -- will depress third quarter growth, to be sure.

  The US was already teetering on the brink of recession when two hijacked passenger jets slammed into the twin towers on Tuesday.

  Consumer confidence took a dive in September, according to the University of Michigan mid-month consumer sentiment survey.

  At 83.6, the index was at its lowest level in almost eight years. And that was before the attack.

  The effect of the tragedy, however, will be "to resolve in two quarters what would have taken two years to work itself out," says Bob Barbera, chief economist at Hoenig & Co in Rye Brook, New York.

  Instead of a slow drip, with companies gradually laying off workers, depressing consumer sentiment, creating uncertainty over whether the consumer can hold on while capital spending finds a bottom, "we can start to talk about a recovery in the second quarter of next year," Barbera says.

  Recessions advocated

  Some economists often advocate recessions as a necessary antidote for booms.

  "You get a brutal, cathartic cleansing from recessions, which unwinds all the excesses," Barbera says. "Employment, capacity, debt-to-income levels: we get to levels where the big monetary and fiscal stimulus cause a rebound."

  A strong military response, which is almost guaranteed now that US lives have been lost on US soil, should restore consumer confidence.

  "You don't do this when the president is from Texas," Barbera says.

  Congress was took up legislation yesterday to approve a US$40 billion emergency spending package for disaster assistance and security expenses -- for the financial year that ends on Sept. 30. That's just the start.

  "The shape of the recovery will be different" than it would have been if this event didn't happen, says Henry Willmore, senior US economist at Barclays Capital Group.

  More for the military

  "The 1990s saw base closures and a cutback in defense spending. Now we're going to have to allocate more resources for the military."

  Displaced firms will occupy some of the vacant commercial real estate. The rebuilding effort will generate new construction jobs.It will be good for gross, not net domestic product.

  To the extent that the stock market anticipates economic activity, stocks are going to be a "buy" in the not-too-distant future. Maybe I'm talking my heart, not my head. Maybe it's my nature to see good come from bad. Maybe I'm being less analytical and more emotional than I usually am. If so, I apologize. I just can't help being bullish on the US right now.
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