From: John Conover <firstname.lastname@example.org>
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, email@example.com, http://www.johncon.com/