January 21, 1999
Eyes on the Press
Requiem for a Bear,
or a Tale of MisFortune
Issue Date: September 28, 1998
Cover Headline: "The Crash of 98: Can the U.S. Economy Hold Up?"
Subhead: "A troubled world may finally halt America's miracle expansion."
The lead story by Joe Nocera was entitled "Requiem For the Bull," but it perhaps should be remembered as a requiem for a bear: Barton Biggs, the widely followed but badly mistaken chief global strategist for Morgan Stanley. The piece kicked off with a quote from Biggs: "This time the market won't be so quick to bounce back." The rest of the article echoed that sentiment, arguing that we're in an "era of deflation" and that the market "is not likely to recover as quickly as it did from the corrections of 1987 and 1990." Fact: The actual recovery this time was much, much faster.
During the October 1997 panic, Biggs had predicted the Dow could fall 30% to 40%, to about Dow 5,000. After dipping slightly, the market soon proved Biggs completely wrong. As it did again this time. Nocera somehow failed to mention Biggs' track record, but that was in line with an article that sometimes ran roughshod over reality to sensationalize the situation.
Nocera highlighted falling prices for PCs and commodities as evidence for this era of deflation. Yet, he failed to mention that every broad measurement of the U.S. economy has shown only decelerating price increases -- not actual falling prices. Deflation is characterized by a sustained decrease in prices. A falling off in the rate of price increases is called disinflation. The economic implications of disinflation are very different from the implications of deflation. Nocera talked about stocks being overvalued, suggesting a return to "traditional valuations" could send the Dow down another 30% to 5,291. Yet, he made no mention of how low interest rates and low inflation might affect valuations.
He also highlighted permabear James Grant's view that Warren Buffett's Berkshire Hathaway (NYSE: BRK.A) acquired reinsurance firm General Re to diversify more heavily into bonds. He failed to mention that many serious Buffett-watchers mock Grant's view, asking why Buffett sold his Treasuries if he wanted more exposure to fixed-income investments.
Fortune balanced out Nocera's piece with a fairly dismal article arguing that not even Fed chair Alan Greenspan could act fast enough to salvage the world economy. Of course, it also argued -- incorrectly -- that the Fed wouldn't cut rates on September 29, though Greenspan had pretty much signaled a forthcoming rate cut in his September 4 speech.
In an ever so slight attempt to balance all this fervid bearishness, Fortune ran a tiny companion article devoted to the bullish views of Goldman Sachs' bullish strategist Abby Joseph Cohen. It failed to mention how Cohen's analysis of U.S. corporations, based on an Economic Value Added framework, makes mincemeat of the historical P/E argument. In short, Fortune blinked, providing one of the most biased and inaccurate market prognostications of any of the major financial magazines.
Next: Eyes on Forbes