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>From An Interview With John Ballen:
Q: Layoffs are still a concern. Industrial production is down. Pricing
power is scarce. So is the economy really improving?
A: The unemployment number came down in the most recent time frame. The
indicators do suggest the economy is improving, maybe not at a rapid
rate, but definitely improving. The people with negative outlooks refer
to two time periods, 1929 and Japan since 1989. Japan isn't a fair
analogy at all. They never readjusted their economy, and they continue
to invest in companies that don't have sound fundamentals. The
equivalent would be if we kept investing in Internet companies with
skyhigh valuations. In that case, we would have poor earnings growth for
the next 15 years like Japan. Instead, many Internet companies with bad
business models have gone bankrupt, and capital is going into companies
that have sound business models and provide a return on investment. That
isn't at all like Japan.
The environment today is also a lot different from 1929, when monetary
policy was so restrictive. There were fundamental problems with the
economy and the monetary system in 1929 that we just don't have today.
Q: Where do you see interest rates headed?
A: If the economy improves, interest rates are probably at some sort of
low point. Still, there's no inflation out there. And if you look at
long-term interest rates over the past several hundred years in the
U.S., 4% or 5% isn't unusual for long periods. If the economy improves,
you might see an uptick in rates, especially on the short end as a
psychological response, but there's no real reason why interest rates
should get out of control or disrupt the stock market. Certainly, if
rates rise, the stock market looks less attractive. But, on the other
hand, if rates rise that would also indicate earnings are improving, and
that wouldn't be such a bad thing.
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