Taking Stock / Victims of Success

Wow, what a ride!

The stock market animals and speculators have crawled out of their holes, Tel Aviv's financiers are caroling, and the leverage lovers are in ecstasy.

Amazing, isn't it. Just moments ago, the only topic in town was financial crisis, the treasury's austere economic program, the abyss, doom.

Poof! Suddenly the darkness is gone, as though it were just a bad dream concocted by evil pencil pushers at the Bank of Israel and Finance Ministry, whose nefarious purpose was to scare the daylights out of us.

The TA-100 index, for instance, the mother of all local indices that reflects the movements of the 100 weightiest and most negotiable stocks on the Tel Aviv Stock Exchange, rose 1.8 percent Sunday, completing a 30 percent gain in two months.

And that's nothing. Unlinked government bonds, which nobody would touch with a ten-foot barge pole just two months ago, soared 10 percent and 20 percent in the last two months. We haven't seen anything like that since the famous steep interest rate cut in December 2001.

The conclusion of the various stock market fauna, who have been locked into stocks up to their necks since the gay days of the bubble, is obvious: The market smells an economic turnaround; it senses a growth spurt on the way; it feels the bad years are behind us. No need for all those Standard 15 write-offs! The banks will roll out the red carpet again; it's time to prepare bond prospectuses and strap in for the ride.

There is also an obvious conclusion for our leaders in Jerusalem: The treasury's economic program isn't necessary any more, and budget cuts are mere snake oil touted by nasty Bank of Israel and treasury officials. The real medicine, say the stock market sages, is a fast and furious interest rate cut, and the sooner the better.

But before we pop the corks and toast the wisdom of the stock market mystics, before we consign the economic program to the trash, before we slash interest rates from 8.7 percent to 5 percent, before we recalculate Israel's economic growth for 2003, let us recall a few facts.

The TA-100 index did rise 30 percent, but that's a mere technical correction from its trough of two months ago. Taking a longer view (true, a tough task for stock market animals and the press), we find the index is only 5 percent above its nearest peak five months ago.

As for government bonds, they did perform wonders, as yields to redemption for fixed-interest shekel-denominated Shahar bonds sank below 9 percent. Yet that is still sky-high; it's just less than they had been. In fact, yields have returned to their level of May 2002, which was a terrible period marked by terror attacks, economic slowdown and rapid devaluation of the shekel.

In short, this latest rowdy astounding exhilarating ride is no more than a blip, a fluctuation of a manic-depressive market, a mere spike in the choppy graphs of interest rates, the shekel-dollar, and stocks.

Unarguably, the intensifying American interest in the Middle East in general, and its decision to infuse money into Israel through loan guarantees in particular, reduce the levels of risk regionally and in the Israeli capital market in the short run. With the U.S. army bunking down in the area and Congress approving giant aid packages for Israel, the danger of financial crisis ebbs.

It is the drop in risk premium and the guarantees that caused the sharp correction of exchange rate. With risk down and the interest differential between the shekel and dollar still high, there is good reason to rush for the high rates on the shekel. And given the low prices on the stock market, it's clear why some expect another ride on stocks.

But it would be a mistake to see this ride, and maybe the one to come, as harbingers of the upswing. Israel's fundamental economic problems remain unsolved. Terrorism persists, the budget deficit is as deep and threatening as ever, the public sector continues to gorge itself on massive slices of the economic pie, and it has been many years since the last reforms and changes in the marketplace.

At this stage, it would seem that the finance minister and his economic program, which is the first real attempt at reforming the public sector, are victims of their own success in the form of the credit the market gave them. The climbing shekel, the drop in interest rates and the upward momentum of stocks have eliminated the sense of urgency pervading the market just two months ago.

The result of the current euphoria could be devastating. Unless the budget is slashed and structural changes are introduced, the marketplace will return to the brink of financial crisis at worst, or be doomed to low-level growth that continues to churn out unemployment and poverty at best.

Yes, en route there will be spikes, such as the ones triggered by peace euphoria, the high-tech bubble, the Iraqi fling and the guarantees. But ultimately, all are mere spurts of action that ultimately plunk us back to square one, while the world economy advances, steadily marching farther and farther away.