Taking Stock / It Would Have Been Enough

Five minutes after the first news of Saddam's capture hit the ether, even before the Iranian wire report based on Kurdish sources was officially confirmed, corks were a-popping on the Tel Aviv Stock Exchange.

The year 2003 will definitely go down in history as the one when the Americans organized the biggest boom ever on our stock and bond markets.

If they had just conquered Iraq, if they had just lowered the risk premium of the entire Middle East, and had not given us that $9 billion in loan guarantees - it would have been enough for us.

If they had given us the $9 billion guarantees, a credit line that set the bond market jumping, eased the credit crunch at the banks and pried open the primary market after a year's drought, and had not sent Nasdaq rocketing as well as the guarantees - it would have been enough for us.

If they had only lifted Nasdaq by 60 percent, which sent the Tel-Tech-15 index exploding 100 percent skywards and lifted a whole crew of heavy communications stocks on Wall Street, and not caught Saddam Hussein alive - it would have been enough for us.

Yet once the euphoria of catching the former Iraqi dictator alive wears off, American and Israeli investors will wake up and find there are some pesky economic fundamentals still likely to impact.

Wall Street is supposed to dance only to the tune of financial statements and corporate guidance. But the real story behind its rally lies entirely with that superstar duo, George W. Bush and Alan Greenspan.

In the last year and a half, the dynamic duopoly has been cramming consumers' pockets with money, and given them no reason to do anything with it other than consume, or buy shares.

Greenspan, the chairman of the Federal Reserve Board, slashed interest rates to their lowest level in 40 years. Bush for his part cut taxes, sent Americans tax rebates and poured hundreds of billions into the economy in order to finance the war with Iraq.

Greenspan's bottom-crawling interest rates render holding cash and T-bills highly unattractive. But America's investors have two other alternatives: either to consume as though there's no tomorrow; or to put their dollars into shares, hoping to achieve more than the 1 percent yield on dollar deposits.

The upshot is one - a spike in share prices. The Nasdaq rose 45 percent this year, the S&P-500 gained 22 percent, and the Dow Jones touched 10,000 points again last week, having gained 20 percent from the start of the year. What legitimizes the whole process is of course the growth data, showing an 8 percent leap in the third quarter. Moreover, the economy is expected to continue to expand quickly in 2004. No wonder the American markets are partying.

It may not be enough

The question is whether the process is sustainable over time. Could the mammoth U.S. budget deficit, and the heating of the economy, trigger a hike in interest rates? If they do, would Americans continue to consume and buy stocks?

The U.S. economy is not creating new jobs and consumers relying on cheap credit are the ones beefing up demand for goods and services. Should those facts be sounding sirens somewhere?

And there's another question. What part do inflated property prices play in that American perception of well-being, which is spurring them to borrow more, consume more and buy stocks?

We don't know for sure, and even if we have a general feeling where the whole thing is leading, experience teaches that timing is very, very hard to predict.

But we do feel that the Bush-Greenspan team's ammunition is running out. Greenspan can't lower interest rates any more, and the terrifying magnitude of the deficit foreseeable for the next three years preclude Bush from increasing spending any more, or cutting taxes again.

Are America's investors taking all that into account? Some are. The worried managers of the mutual America Funds advised investors a month ago that their funds may be achieving high yields, but they don't believe it can last, and are adopting a highly defensive strategy.

We can hope that their pessimistic forecasts won't come true, because, leaving those loan guarantees out of it, a key engine driving the gains on the Tel Aviv Stock Exchange (TASE) is the American marketplace.

This morning, days after Saddam's capture, with experts on Wall Street and the TASE brimming with even more optimism than ever, we don't want to be a party pooper. But we should all remember that the day these questions reach the front pages in the U.S., the TASE isn't going to wait around for the answers.