Greenspan is pushing on a string.
This recession has been caused by a reduction in capex caused by irrational exhuberance on growth and consumption estimates (e.g. 6%+ GDP growth).
There is major overcapacity in a large number of industries. Capex will continue to go down until this overcapacity is corrected.
There is no incentive to borrow more for increased capex.
There has been a rise in debt recently as consumers and corporations take advantage of low interest rates to refinance existing debt. This refinancing will continue into 2002 but probably at a slower pace.
The increase in debt is not enough to soak up the excess liquidity pumped into the market. The only way out of this is to generate inflation. I don't see how they can do this for the forseeable future in the current environment. (Perhaps some of it will go in debt defaults and stock market losses?)
Earnings are in trouble as there is no pricing power due to oversupply.
E.G. Dram and cars are selling at breakeven or at a loss, not including R&D and capex costs. Retailers had to discount heavily pre xmas to get sales.
Earnings forecast for 2002 are for an increase of 8-9%. Even the most optimistic forecasters are now looking at +1-2% in 2002 GDP. Earnings estimates will need to be reduced.
Where have all the grand schemes gone? Broadband for everyone, video on demand, everything connected to everything else, 3G. No one is talking about these revolutions any more, but capex was based on it happening. It probably will happen eventually but take 10 years longer than expected?
Any further rate cuts will have diminishing returns. My mortgage has dropped by 50%. Another 50% won't make much differnece though.
If rates get to 1% or lower they will be looked upon as a joke as per Japan.
The cut in interest rates should have increased disposable income, but this seems to have been balanced out by lower incomes for savers, increased unemployment and less overtime.
Lower year end bonuses will also decrease disposable income.
The SEC is making noises of a test case of pro forma earnings. Earnings reporting is widely abused across a number of industries. The S&P average earnings is probably 20% overstated (p/e 20% under rated)compared to accounting methods of 20 years ago.
A high profile test case (e.g. Disney, Cisco) would certainly set the cat among the pigeons.
There is a wealth of evidence for the current recession continuing throughout 2002. The bulls arguments that recessions since WW2 have only lasted an average of 14 months does not hold water. All previous recessions since WW2 were caused by high inflation and consumer demand dropping, they were not preceded by a stock market and credit bubble we have witnessed over the last 10-20 years.
I firmly believe that this recession is going to bite hard and long. 2002 earnings will be less than 2001 not more.
Incidentally the Dax may be worth considering for a short. Dax has priced in 25% earnings growth for 2002, but Germany is in recession.
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