During the go-go 1990s, Michael Knetter was quick to warn his friends and relations that what was going up would, sooner or later, come down.
As his siblings entered the markets for the first time a decade or so ago and then reveled in the stratospheric returns that followed, Knetter recalls telling them, "’You really can’t expect this to continue.’"
Now Knetter, dean of the School of Business at the University of Wisconsin-Madison, is applying the same principle to the current bearish economy: Sooner or later — and he thinks it’s sooner — things will turn up again.
"For people who really got their main experience in the market during the last decade, it still looks pretty bleak," Knetter acknowledges. Yet all is relative. "The market’s still up three-fold from where we were before the Gulf War under [President George] Bush the Elder."
Knetter is among the speakers at the Small Business Times Northern Trust Economic Trends 2003 breakfast Jan. 10.
"I think 2003 is going to have better growth than we had in 2002," Knetter says. He bases his optimism on the economy’s underlying fundamentals. The ’90s boom wasn’t a mere speculative bubble, he notes; it had a solid foundation in the twin revolutions of communications and computer networking that brought massive efficiencies to the economy.
"Those efficiencies are real. We can get much more work done with much fewer people. The economy is still digesting that. We’ll have another period of solid growth once things get rebalanced."
Knetter expects generally better growth this year than last. "There is a solid underpinning for the growth that we experienced in the ’90s," he says. "We’re going to see more efficiency captured from innovation in the information industries."
Even the year just ended isn’t as bad as it may look right now, Knetter adds.
"I think 2002 played out much better than most people expected." A year ago, he notes, people were very uncertain about how events would unfold in the Middle East and whether the Taliban regime controlling Afghanistan at the time of the Sept. 11 terror attacks would mount a major counteroffensive. Yet the worst-case scenarios never happened. "Not much of the downside materialized," Knetter says. "I take that to be the positive side of 2002." The immediate anxieties about war with Iraq and the stock market’s continued uncertainty may be overshadowing that largely "good news" story, he suggests.
Knetter also doesn’t worry unduly about the unexpectedly downbeat year-end consumer-spending numbers. Short-term spending patterns reflect people’s momentary confidence in the economy, which will ebb and flow in the current climate.
"What I think is the real driver of our economy is the supply side," he continues. "On the supply side there’s a lot to be excited about. Innovation will drive more efficiency. It’s building a better mousetrap." Labor surpluses will be created, he agrees, but those surpluses also will be absorbed by a renewed economy. "That’s the thing I’m 100% confident about."
One question that will haunt the coming year is the naming of Alan Greenspan’s successor. Knetter doesn’t share that notion of "Greenspan as God" that many seem to hold, but he admits that because of the Federal Reserve chairman’s success both at cajoling the economy and, more important, projecting an image of power and control over the nation’s fiscal health, the decision over who will next sit at his desk could have an unusually far-reaching impact.
So what does worry him?
The world political situation remains dicey, Knetter acknowledges – another reason consumer confidence is at that low ebb for the moment. As much as things turned out better in 2002 than they might have, "I don’t want to take anything for granted," he says. "Bad things could still happen."
"The other big risk is overreaction to some of the problems that we’ve seen in the private sector in terms of corporate scandals," Knetter continues. And that’s a risk, he says, we can avoid.
Knetter is a firm believer that the market can usually correct itself. As an example he cites the round of scandals involving securities analysts working for investment banking firms. In recent months, repeated instances have surfaced in which analysts have been caught talking up companies that they didn’t really believe in – companies that their parent banking firms were underwriting, giving them an incentive to pump up the stock prices whether they were worthy or not.
The wrong road, Knetter believes, would be if government steps in and uses huge fines it’s levying on investment bankers in order to finance the development of an independent investment research industry, as some would like to see. He argues that research by itself probably won’t make a profit — the findings are too easy to duplicate — and therefore trying to create an independent industry is likely to fail.
Moreover, he contends, it’s not necessary. "The market will correct itself," Knetter says. A few brokerage firms are beginning to produce objective rankings of stocks, and others are following suit to keep up with the competition. Investors also have begun to realize that they should pay attention to the issue of whether an analyst recommending a particular stock has a potential stake, through his or her parent company, in the security’s rise or fall.
"It’s like any other product: buyer beware," says Knetter. "If Ford runs an ad about its cars, you shouldn’t just believe it."
Regulations invariably have unintended consequences, he says. Under President Richard Nixon, "Wage and price controls seemed like a good idea at one time to try to stop inflation. It turned out they ground the whole economy to a halt in ways that nobody anticipated.
"Government doesn’t seem to be able to unwind these decisions very easily," Knetter concludes. "It took government until the 1980s to decide they should shut down the agricultural extension office in Manhattan."
Jan. 10, 2003 Small Business Times, Milwaukee
