Sounding off a bit too soon

There are two words that should strike terror in the hearts and wallets of America's growing investor class. "Bear market?" Nope. "Margin call?" Wrong again. How about "rate hike?" Not even close. The answer: "sound fundamentals." If you don't believe it, just consider the evidence:

In a speech on March 27, US Treasury Secretary Paul O'Neill boasted that "the US economy is fundamentally sound." The very next month, US unemployment shot up to its highest rate in 30 months and businesses cut more than 220,000 jobs - the largest monthly jobs loss in more than a decade. Since then, the economy has continued to deteriorate, with American companies announcing record layoffs last July and the US economy barely growing at all in the second quarter.

A mere coincidence, you might think? But there's more. On Oct. 27, 1997, Treasury Secretary Robert Rubin issued a statement reminding the public that "the fundamentals of the US economy are strong and have been for the last several years." That day, the Dow Jones Industrial Average lost some 550 points - more than 7 percent of its value.

Still not convinced? Then go further back and recall the case of James Baker, Treasury chief under Ronald Reagan. On Friday, Oct. 16, 1997, Mr. Baker met with reporters at the White House and reassured the world that the US economy "looks fundamentally sound." The following Monday, the Dow plummeted by 508 points - or 22 percent - the largest single percentage decline in history.

Does anyone else see a pattern here?

The curse of sound fundamentals even transcends US borders. On Jan. 5, 1995, Mexican Finance Minister Guillermo Ortiz addressed a standing-room-only audience of investors at the Pierre Hotel in New York City.

"We have a fundamentally sound economy," he assured them.

The Mexican economy proceeded to implode in 1995, contracting by more than 6 percent, with inflation reaching 35 percent.

There is only one logical, inescapable conclusion: If anything hurts markets and economies, it is those fatal sound fundamentals. Every day I pray for a fundamentally unsound economy, or one that is "dangerously overheated" or "unbalanced" or even "irrationally exuberant."

Anything, please - just no sound fundamentals. They terrify me. The only sound thing about them is the sound of markets crashing.

Which is why we should all be horrified by a recent statement from Andrew Crockett, the head of the Bank for International Settlements in Switzerland.

"Fundamentals are better, and transparency is greater," Mr. Crockett proclaimed on Aug. 5, speaking about the prospects for the international economy. "Many countries have sound fundamentals and they are resisting contagion better than in the past."

What? So now the global economy displays sound fundamentals, too? A worldwide financial meltdown can't befar off. Time to cash in that investment portfolio and stock up on the bottled water and canned goods.

Seriously. It's the fundamentally sound thing to do.

Carlos Lozada is the associate editor of Foreign Policy magazine.

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