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December 1, 2000

The Recession Ahead: Economist Blames Investors, Unrealistic Expectations

By Kathryn M. Welling

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  • The Recession Ahead: Economist Blames Investors, Unrealistic Expectations
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Not Makin' Bubbles? In fact, they've burst, says John Makin, who - let's disclose the awful truth upfront - is both an economist and a (resident) scholar at the American Enterprise Institute in Washington. But don't get the wrong idea. Makin is not merely some Ivory-Tower

type. He's also a Street-savvy principal in a big bucks hedge fund, whose economic insights are invariably grounded in investment reality, not to mention practicality.

Case in point: Makin's no-nonsense definition of a stock market bubble. "A stock market bubble exists when the value of stocks has more impact on the economy than the economy has on the value of stocks." Even more remarkable, despite his close communion with both politicos and portfolio managers, he's a market economist who hasn't lost his ability to utter the "R" word.

Earnings Fear

Not that he does so lightly, or without considerable chagrin. Long economic expansions, not to mention bull markets, are a lot more laughs. Indeed, when we caught up with him recently, Makin was quick to express the frustration this Fall has visited on investors everywhere. "People are worried about next year's earnings and we've got tremendous volatility in here. One day, it's, Well, we can go back to tech,' and the next day it's Let's try value,' and the next day it's Oh my God, I want to get out of here.' Yet we're not going anywhere. These themes last with intensity for 24-48 hours and then what's striking is that people are on to the next."

The upshot, increasingly, says Makin, is that the market's day-to-day volatility is making lots of investors too uncomfortable to hold significant positions anywhere. Traders, he observes, are griping that risk is too high relative to the meager rewards because there really isn't much direction to the market and nobody on any given day can figure what is going to happen to the big indices.

For the guys running funds, he says, "One day, it's I've got to get out. I've been getting beat up all year.' Then the next day, it's Oh no, the market is going up and if I don't at least stay with the benchmark, they'll take me out and shoot me!'"

"It's not fun; it's not constructive or useful." But it is telling us something, says Makin. "This is what happens when the market is absorbing a new world view and there are all kinds of crosscurrents. People wake up one day and do one thing and wake up the next and do another."