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Investment View – March 15th, 2001

I hope my timing on investment matters is as good as on travel. Within hours of leaving Boston last week, the city was deluged in sufficient snow to cause a state of emergency to be declared. Interestingly, shortly after I left, our head of compliance flew there for a holiday.

On the subject of timing, Abby Joseph Cohen was back in the news last week. She is the head strategist at Goldman Sachs, most famously attributed with calling the continuation of the bull market in America when the Dow stood at a mere 5,000. Many said it could go no further. Not so Ms Cohen, who correctly predicted that shares would continue to enjoy a bonanza as the economy expanded. I doubt even she realised just how strong the economy would be.

Now she is saying value has returned to the US market. This time last year she was sounding a note of caution which, coincidentally, marked the peak of the TMT boom. Since then, the Nasdaq Index has declined by more than half and even the S&P 500 has fallen by nearly a fifth – almost enough to qualify for a bear market. Her words of wisdom were enough to bring the buyers out. Long may it last.

With the thoughts of US investors so much in my mind, it is not altogether surprising that I have been more inclined to focus upon what is going on over there than to pay too much attention to the UK Budget. Gordon Brown must be particularly pleased with his press coverage. Eulogistic is hardly the word, with plenty of editors subscribing to the view that the Iron Chancellor has done enough to put a May election in the bag for New Labour.

Personally, I found the Budget rather boring. Brown is a serious detail man – as anyone receiving copies of the Red Book and attendant press releases will be only too well aware. This was a Budget for accountants. Nigel Lawson promised to repeal a tax each time he delivered a Budget. Brown has more than doubled the number of taxes since he has been Chancellor.

Buried in the detail were rather optimistic assumptions of consumer demand and economic expansion. Fine. We have to start from somewhere but what happens if there is a consumer strike, as appears to be the case in America? I am not aware the US treasury officials have a Red Book but there is certainly a Beige Book, from which members of the Federal Open Markets Committee get guidance on what to do with interest rates. Last week, the Beige Book suggested the American economy had more or less ground to a standstill. That, to my mind, is far more of an issue than what happens to betting tax and child allowances.

The Beige Book collates regional economic data to paint a picture of a country which is as big as Europe. Consumers are spending but only if they can get goods at knockdown prices. Companies seem only too anxious to comply as the rapid fall-off in economic activity last year left many with high inventory levels. Some economists believe this poses a threat to the recovery as, even if consumers start spending in earnest again, companies will have sufficient slack to be taken up not to expand production immediately.

It is against this background that Goldman Sachs has turned positive. It is not alone. Merrill Lynch and Morgan Stanley are more bullish and there are other straws in the wind suggesting support for the US market. Much cash sits on the sidelines. As well as institutional liquidity being high, it is estimated there is around $2trillion worth of private investor money held in cash mutual funds. This might have fuelled the January boom but was kept aside awaiting a better opportunity. Perhaps that opportunity has come. My only real worry is that the forecasts are too optimistic. My view remains we are in for a period of lower investment returns.


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