From: John Conover <john@email.johncon.com>
Subject: $674 billion sounds like a lot of money-or is it?
Date: 9 Jan 2003 07:37:45 -0000
The Bush $674B Economic Stimulus Plan-$364 billion, more than
half-from the elimination of federal taxes on the dividends
corporations pay investors, is really not that much money; and its
over ten years.
That's an average of about $36 billion, per year.
As a perspective, the total market capitalization of the US equity
markets is about $10 trillion, or so, in round numbers; and it
fluctuates with a deviation of about 1% per day, or about $100 billion
per day.
Or, another way of looking at it is that 35.9% of the time, (one
standard deviation is 0.359423566782008819,) investors will make more
money in one day on luck alone than the Bush Economic Stimulus Plan in
one year.
The US equity markets lost about $7 trillion in two years when the
dot-gone "bubble" went away; $36 billion a year is not much money
relative to that.
But the Economic Stimulus Plan is a good political move; there is a
50% chance that the equity markets will have bottomed, by late April,
2003, and a 50% chance that they would have regained their losses, of
$7 trillion, by July, 2005-looking pretty good for the late 2004
elections, (probably being down about 10% from their highs of 2000 at
the 2004 election time-a couple of the indices maybe breaking through
the high.)
Its a good political move-kind of like the guy standing on the beach
of the Pacific Ocean with a teaspoon. The tide goes out, and he says
"See!"
John
BTW, I would really be surprised if the NASDAQ made it back by mid
2005. To do that, it would have to gain a factor of 4 in 2 calendar
years, or 500 trading days. The standard deviation of that would be
about e^((0.0004 * 500) + (0.02 * sqrt (500))) = 1.91, or about a
factor of 2. 2 sigma is a 2.27% chance. Not impossible, but not
likely, either.
It would be inappropriate to assume that the technology recession will
be over anytime soon. Such is the price of the piper when equity
prices are pumped up in a buying frenzy by a factor of 2.5 over any
reasonable valuation, (the "new economy" wasn't-its value was as a
rationalization for PR folks and equity analysts to justify the
enormous increase in the value of the index, which increased the value
of the index even more; it was a pyramid scheme.) Although the
scenario is not uncommon, it makes it a long way to fall.
--
John Conover, john@email.johncon.com, http://www.johncon.com/