Taking Stock / Lost in the Roar

l Morgan Stanley's perennial Cassandra, its chief economist, Steve Roach, takes another blow. At the Davos conferences of 2001 and 2002, he predicted the United States would sink into recession. Come 2003, he flops for a third time.

Ignoring the dire predictions of Roach and other doomsayers, who warned that U.S. economic expansion was leaning on borrowing, growth persists in 2004. Not only does it translate into rising corporate profits and credit-driven private consumption, but into job creation too. The U.S. economy proves yet again that it is more flexible and robust than we thought.

l The gains on Wall Street ignite imaginations around the world. Foreign investors continue to pour dollars by the hundreds of millions into American assets - stocks, bonds and real estate.

l The Fed continues, unchecked, to finance its elephantine deficits by issuing low-interest bonds. The world believes in America and investors are convinced that surging tax collection will balance the government's books again.

l The dollar's collapse in late 2003 continues in early 2004, enabling the U.S. to gradually decrease its mammoth trade deficits and lift the profits of its home companies. America continues to lead the world economy, leaving Europe gasping in its dust. The threat from China and India remains an opportunity for American companies to gain profits, and American consumers continue to benefit from low interest rates and live high on the hog.

l Fed chairman Alan Greenspan manages to keep inflation tamed, despite the low interest rates, thanks to cheap imports, the flexibility of the labor market and the increase in productivity. Interest rises moderately toward year-end and the financial markets remain calm. U.S. President George Bush is determined to maintain America's economic might until the elections.

l The low interest continues to support Wall Street too. The giant corporations maintain profits and their share prices continue to climb. The Nasdaq approaches 2,700 points. Three years after chastened investors figured the bubble was dead for good, high-tech is back, creating new millionaires every day, including some in Israel. Israel's real estate market again comes under siege by brash high-tech millionaires exercising options and looking to upgrade their homes.

l Israel's risk premium drops from 220 base points to less than 100 in 2003, and continues to fall, approaching 50 base points. Israel's currency market remains stable, excepting fluctuations caused by movement in the dollar, euro and yen. Inflation expectations remain low and the Bank of Israel gradually lowers interest rates to 3.8 percent. This time, the markets remain composed.

l The stock market boils. Rising stocks and bonds inflate profits of the banks and major companies. The public invests more and more in mutuals. Stock-indexed and other funds raise NIS 15 billion, pushing the stock indices to unprecedented heights.

l The IPO market turns red-hot too. No less than 150 companies are clamoring to issue bonds, convertibles and shares. Company owners who had been crying for cash during the crisis are selling huge chunks of equity to repay debt. The gleeful banks cancel charges on debts they'd thought lost for ever.

l Terrorism abates and the improved economic times lift the mood of the Israeli consumer, who starts buying again. Companies report growing business after three years of contraction. Small businesses that had accrued big debts continue to collapse, nevertheless; but new businesses are being opened.

l The treasury's tax collection improves faster than expected and the government meets its deficit target, for the first time in five years. Finance Minister Benjamin Netanyahu accelerates the tax reform. Most of the structural reforms fall through or are shelved, but few care. Netanyahu sees the bubbling stock market and the strong shekel as his passing grade.

And the need for painful structural reforms and budget cuts get lost in the roar.