Straight Goods: A number of economic indicators appear to point to at least an economic slowdown occurring, if not something larger. Are the chickens of an over-valuated market going to come home to roost?
Mike McCracken: With an economic downturn some stocks will drop in price and the averages will decline. But there will remain stocks that rise in price, reflecting good performance or the dreams of the holders and/or promoters. This means that some will hold on and prevent the market from falling to zero. And after the fall, the market will rise again, as greed replaces fear. The good news is that these market fluctuations need not have major influences on the real economy and employment.
SG: Do you worry that governments no longer have the tools to deal with economic crisis that were developed by an earlier generation to deal with earlier economic crises?
Mike McCracken: Governments have plenty of tools. They even have a few people around who remember how to use them. The real problem is that politicians lack the confidence to speak up and to order the tools to be used. Economic advisers may be too timid or pursuing another objective (e.g., fiscal prudence). Thus the failure will be the worst kind - having the capacity to do something but failing to act.
SG: What will the impact of energy price increases be on the stock market and economy? How will all this affect consumers?
Mike McCracken: Energy price rises favor oil companies and other energy companies and suppliers to them. Others suffer by them. If oil prices remain high it will continue to drain income from consumers just like a tax hike. In one case (the US) the proceeds go to the Middle East and Alberta, and in Canada's case they go to Alberta. The question then becomes one of the recycling of these funds. So far little has happened. For consumers it is like a GST hike from 7% to 9%. Enjoy!
SG: What are the implications of a generation of workers betting their pensions on the fortunes of Nortel and other mega-stars of the market? What will be the effect on pension funds - and workers' pensions - if the market goes south and a new recession comes?
Mike McCracken: If the market drops a lot, then pensions will require additional contributions from employers if they are defined benefit plans. This will raise the costs of doing business. But if the companies don't go under, pensions should remain as defined.
If the pension is a contributory plan or an RRSP, then the beneficiary holds the risk. In this case, there will be less income during retirement. A balanced portfolio, including real interest rate bonds can help mitigate such a problem.
Mike McCracken
CEO, Informetrica Limited
22 November 2000
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