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Meeting of the Markets

Eric Plosky

Oh, East is East, and West is West, and never the twain shall meet,

Till Earth and Sky stand presently at God’s great Judgment Seat;

But there is neither East nor West, Border, nor Breed, nor Birth,

When two strong men stand face to face, tho’ they come from the ends of the earth.

-- Rudyard Kipling, “Ballad of East and West,” 1892

Federal Reserve Chairman Alan Greenspan, that fearless dowager in charge of the nation’s economic psychiatry, has over the past few months raised Fed interest rates five times in an attempt to tame what he three years ago called “irrational exuberance” in the stock market. On Tuesday, predictably, Greenspan raised his eyebrows, claiming that the rate hikes were merely intended to prevent an “inflationary expansion of liquidity.”

That means inflation, I think.

All I really know is that this week in particular, the markets have been bouncing like a tennis ball on acid. Tuesday, the Nasdaq index plunged nearly 600 points -- over 13 percent -- but then recovered to close only 75 points down; the Dow Jones swung by 700 points during the day. An isolated day, perhaps? No.

Below-expected earnings at Procter and Gamble last quarter dragged the Dow briefly below 10,000 for the first time in a year, a major correction of the sort that historically signals a bear market. The spooking of Nasdaq has been attributed both to the growing realization of dot-coms’ flaky business models and to the finding of trust-busting Judge Thomas Penfield Jackson that Microsoft worked the wrong side of the law. But come on -- there’s more going on.

Investors, day-traders, the press, and twits who fiddle with margin deals all cozied up to labeling the Dow the needle of the Old Economy and the Nasdaq that of the New. Naturally, most of the excitement was to be found in the New Economy, the sexy start-ups and the mysterious biotechers, and dollars flooded the Nasdaq, running it up from less than 3,000 in November to over 5,000 last month. But Old and New were interlocked. If a blue-chip fell, the Nasdaq climbed further and faster -- but if a tech firm hit a snag or an IPO failed to clear the launch tower, the Dow rose. The dollars had to go somewhere, after all.

Now, Economies Old and New are beginning to dance in synch. Finally, some of the more important bow ties are declaiming that New Economy stocks are ludicrously overvalued. Was this not obvious? Was it actually possible that every fool dot-com that ambled onto the scene deserved $100 million in venture capital and an IPO that quadrupled its stock value in the complete absence of any profits -- or even a workable business model?

Maybe the initial successes of Yahoo! and Amazon -- businesses that actually look to be going concerns over the long term -- muddled dollar-clutchers just enough to think that similar startups, with similar logos, could be just as successful even if they sold wicker baskets, or personalized something-or-others, or nothing at all. The line between Old and New is quickly vanishing; long-established corporate heavyweights have finally muscled their way onto the Web, and some of the harebrained startups are being seen for what they are. At long last, the Dow and the Nasdaq are learning how to dance together. Mr. Greenspan, swing your rate-rising baton toward the brass section and cue the band: enter the Modern Economy.