Can the Stock Market Be Wrong?

Everyone is positing positive scenarios for the Tel Aviv Stock Exchange, but ignoring ominous portents is standard practice among stock market people.

It's quite amusing to read the comments of "experts on the capital market" - CEOs of investment firms, directors of mutual funds, brokers and speculators who make their living from the capital market - when they are asked about the expected developments in the stock market.

For those who live from market commissions, the situation is sharp and clear: The wise say that the stock market (which has risen by 28 percent in the past two months) will continue to climb and pass 500 points, thereby, of course, increasing their commissions. The wicked say that it will reach 470 points and that anyone who has yet to enter the market is going to be sorry. The simple folk say that because all the news is good in the security sphere (Iraq), the stock market will hit 450 points by the end of the year. And those who don't know how to ask say: Don't inquire into what's beyond you - it's rising and therefore it will continue to rise.

Everyone is positing positive scenarios: Iraq is no longer a threat; the loan guarantees from the United States will soon be forthcoming; the economic plan will be passed because there is no alternative; and the peace process will also be moving along soon. After all, the prime minister said that he would take advantage of the window of opportunity to launch negotiations with the new Palestinian leadership.

Ignoring ominous portents is standard practice among stock market people. They don't mention the bogged-down negotiations with the Histadrut labor federation and the threat of a general strike; they don't talk about the difficulties that have emerged in the attempts to form a Palestinian government; and they don't deal with the fact that the war in the territories is not yet over and that we could be in for more terrorist attacks. Furthermore, they don't bother to do the economic calculations for the 2003 budget.

Even on the assumption that the most optimistic scenario will be realized - that the Finance Ministry will succeed in slashing the budget by NIS 9 billion - even then, the situation won't be good.

A few days ago, the accountant-general at the treasury, Nir Gilad, said, "Without in-depth treatment on the expenditure side, the budget deficit could reach NIS 33 billion this year - a deficit of 6.6 percent."

Therefore, even if the economic plan is approved and the treasury manages to cut the budget by NIS 9 billion in seven months (because the implementation of the plan will not begin before June, at best - and not in April, as was originally thought), the deficit will reach NIS 24 billion, or 4.8 percent of the gross domestic product.

This is a dangerously high deficit, which will lead to a lowering of Israel's credit rating. It's higher than the deficit the finance minister, Benjamin Netanyahu, is talking about (3.5 percent), and far higher than the deficit that the governor of the Bank of Israel, David Klein, would like to see (3 percent).

There are some who hope that salvation will come from the American loan guarantees. But this is a hope in vain too. The terms of the guarantees ($8 billion) and the defense grant ($1 billion) have yet to be concluded with the Americans; but in any event, Israel will not receive the sum in one package. In addition, this year's external debt is especially high - close to $4 billion - such that all the guarantees that will be available this year will have to be used to raise new loans to replace the old ones.

As a result, the guarantees will not be able to finance the budget deficit. For this, the treasury will have to raise NIS 24 billion from the public - a frightening amount. And that's only if the economic plan is approved in the very near future.

And what will happen should it turn out in the days ahead that the negotiations with the Histadrut have run aground and that a harsh, prolonged general strike is imminent?

In such a case, the treasury will not be able to wait very long before raising capital. It will have to start in May, or in June at the latest, because otherwise there will be no money with which to pay salaries in the public sector. And then, as soon as it becomes apparent that the treasury has to raise such huge sums, everyone will understand that the optimism currently on display in the capital market is slightly excessive.

In short order, the optimism will become gloomy pessimism; the funds and their ilk will be thrown into the bond market, the interest rates will spiral upward; the stock market will plunge abruptly; and the dollar will soar back toward the $5 level.

The conclusion is that one should not follow the market blindly. Sometimes, it can be wrong - as witnessed when the Nasdaq bubble burst exactly three years ago.