<SPECIAL FEATURE>
January 21, 1999

Eyes on the Press

Newsweek
Stumbling Toward Recession,
Maybe a Market Crash

Issue Date: October 12, 1998
Cover Headline: "The Crash of '99: It doesn't have to happen -- But here's why it might."
Inside Graphic Motif: Dominoes.

The best that can be said about Newsweek's coverage is that reporter Robert Samuelson recognized just how badly the U.S. market and economy needed Greenspan to cut rates more deeply than he did September 29. A lower Fed funds rate could shift investor psychology away from panic. Broader interest rate reductions would also give consumers more to spend and boost corporate profits.

Given that insight, it's ironic that Samuelson's whole piece simply assumed the Fed wouldn't act -- so he ignored the sunnier side of the story. He began by arguing that the market turmoil didn't result from investors being "rattled" by a series of unusual events but from a "genuine economic turning point: that the United States... is stumbling into a sharp slowdown or even a recession." He concluded by drawing parallels to the 1920s.

A basic problem here was that Samuelson assumed the strong consumer confidence that had driven the U.S. economy had been based partly on "stratospheric stock prices," which had now been cut down to size to better reflect slowing corporate profits. In other words, the market had fallen back to where it belonged. Yet he never bothered to explain why that might be a reasonable viewpoint; he just assumed it was.

Turning to one of the companion pieces, we find reporter Ellyn Spragins talking about the possibility that the Dow could drop to 5,500 if "the market returned to historical norms." She also bemoaned the speculation in the marketplace, citing people "buying a stock like Cisco <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %> or Amazon.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMZN)") else Response.Write("(Nasdaq: AMZN)") end if %> simply because it's going up." So what should Amazon be valued at, book value?

Both of these articles depended on an idea of fair market value that they simply never addressed. How might the level of corporate earnings and interest rates interact to produce fair value? That wasn't a question Newsweek thought to ask. As a result, the magazine's reporters told readers to "batten down the hatches" -- or "trim stocks back to a level you can live with" -- in preparation for a recession and a possibly severe bear market.

The confusing (or perhaps just sensationalizing) logic within these articles is reflected by a broader confusion. While Samuelson was pointing to the need for more proactive steps by the International Monetary Fund (IMF) to dispel the global "climate of fear," reporter Allan Sloan spent an entire article denouncing the "bailout" of Long-Term Capital Management (LTCM) orchestrated by the New York Federal Reserve bank. Sloan even took up the populist tone of the congressmen who criticized Greenspan despite Sloan's recognition that Greenspan made considerable sense when he argued that an LTCM bankruptcy could have triggered worldwide financial panic.

Sloan knew this wasn't a "bailout," but a case of the Fed getting private investors to do what Samuelson was arguing the IMF should do with public money. These two articles were just intellectually incompatible.

Furthermore, by suggesting that Greenspan was losing political support, Sloan's piece made it seem natural that Samuelson would ignore his own insight about the Fed's potential role as the cavalry. A week later, the market rallied for good on the Fed's intermeeting rate cut. The Crash of '99 appeared to have been averted almost as soon as it was predicted.

Next: Eyes on Time