12/1/99 Investment House Daily
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Investment House Daily Subscribers:
A Nice Relief Rally, But The Bears And Bulls Are Still Fighting It Out.
Today was a nice break from Monday's and Tuesday's selling. It was
something we felt would happen sometime this week and it gave us some good
trades, but the seesaw action was an all too familiar trademark of a
market that still has not decided if it wants to rally or fade.
The Economic Numbers And How The Market Reacted.
The day got off to a good start as investors reacted positively to a
softer NAPM index. The overall number was lower than expected, coming in
at 56.2 compared to October's 56.6 number. Analysts expected 56.3, and
the drop for November was the second monthly decline in a row. The key
component all were waiting for, the prices paid index, was 65.3, down from
October's 69.4 number, and much less than the Chicago number released
Tuesday that had all the markets chattering. Stocks and bonds took some
heart and started up.
Then Mr. Greenspan's axe men started taking to the stump again. It has
been a while since we heard any of them beating the anti-growth drum, but
it started again today, and that sent the markets down after the start of
a rally. Specifically, Federal Reserve governor Laurence Meyer took to
the stump fretting over the "extremely tight" labor market and how it
might require another rate hike, and then chastising what he considers
over consumption by consumers. Again, we see the Fed's attack on growth,
characterizing it as the root of all evil for the economy.
The Fed is back once again at its game of trying to instill fear into
investors to effectuate its bizarre goal of lowering the stock market as a
method of warding off inflation. And one can only conclude that inflation
based on stock market gains would arise because of 'excess' consumption.
First, there is really no such thing as excess consumption in a free
market. Supply will meet demand if it is not impaired by regulation or
natural disaster. This economy has been incredibly astute in distributing
resources to meet whatever demand is out there. Second, telling consumers
not to consume is ludicrous. Consumers consume-that is their nature and
hence the name. If the Fed is concerned that consumers are not saving, it
is wrong. More and more consumers are pumping more and more money into
the stock market as their method of saving. Unfortunately, the
government's measure of savings does not include the most prevalent form
of savings in the country today-the stock market. This is another example
of how out of step the government and its agencies, the bodies that are
attempting to control our economy, are with the new dynamics of our
economy. People are not putting money into CD's and savings accounts
because the returns, thanks to this great, low interest rate environment
we have, cannot compare to those in the market. They would rather bear a
certain amount of higher risk for returns that are two, three, four, and
even more times greater than they could achieve through 'traditional'
savings methods.
Similarly, we feel the Fed, at least by its demonstrated actions and
statements, is out of step with this economy. Attacking consumers for
consuming is absurd. Consumers are not the cause of inflation. They may
bid the price up on a 'tickle me pink Elmo' for a couple of weeks during
the holidays, but in this economy and the capacity it is showing to
produce given the new technology, prices are not being bid up as producers
are able to know their markets better than at any time in the past through
instantaneously available purchasing information at the consumer level.
With this type of knowledge about their markets, the producer that does
not respond instantly to changes in its market will not be around. Look
at the last meeting of the nation's top executives: they once again
concurred that they have no pricing power in this economy. As we noted
last night, the trend for major purchases is down. Short-term consumption
cannot hold a candle to long-term purchases in determining if consumption
is too hot. It is easier to buy a $30 shirt when things are so-so on the
home front economy than to buy a new washer and drier, new car, or home.
You are not going to buy 1,000 $30 shirts that would be the equivalent of
a $30,000 auto. Let's get real. Let's not play games here. We are
talking about the economy and our futures. Let's worry about the real
problems we see such as a Federal Reserve policy that is causing money to
flee U.S. markets for what are being considered, believe it or not, better
investment environments in other countries. This same Fed policy is
driving up foreign currency prices against the dollar as U.S. dollars are
exchanged to buy foreign currencies to purchase foreign securities. This
weakens the dollar against those currencies and gives rise to another Fed
bugaboo, that a weak U.S. dollar could lead to inflation. Feel as if you
are chasing your tail trying to figure it out? You are not alone.
You see, the Fed has done a great job over the last year of turning
economic reports that have never been used as inflation indicators into
inflation indicators. The crowning piece of work was the pronouncement
that growth leads to inflation, based on the theory that if anything lasts
too long, it becomes a threat. Rational people are biting, the latest
being just today when Morgan Stanley's chief economist stated that the
U.S. economy was growing "well above potential and the Fed needs to
tighten policy to slow it down." Growing "well above potential"? What
does that mean? The economy has infinite potential to grow. Sounds like
someone buying into the if growth goes on too long, inflation must follow
theory. This is doublespeak on top of Fed doublespeak. The problem is,
people are buying off on this questionable expansion of inflation
indicators and old school thought while completely ignoring or forgetting
about the dynamics that have brought us to where we are today: an
environment that encourages investment; that has generated a technological
edge over the rest of the world; that utilizes that technology; that
breeds the greatest, most resourceful companies on earth; that utilizes
its greatest resource, the super-consuming, super-producing baby boomer,
to its maximum capability. The changes in the last five years are even
more fundamental than those wrought by the industrial revolution. That
changed the world. The world is changing again. Look at the huge shift
in wealth that is occurring. It occurred in the industrial revolution.
Look at the huge shift that is taking place in how we perform our
jobs-from home, from airplanes, from boats, from trails in Colorado, from
Australia (had to throw that in). In the industrial revolution, vast
human resources moved from the plow to the assembly line. The Central
Bank played the major roll in bringing about the crash of 1929 by chasing
phantom inflation. The industrial revolution was changing the world, and
the Fed could not see it then. It set out on a policy that finished off
the U.S. financial markets. This gamesmanship we are getting from the Fed
about growth being bad and threats of rate hikes is exactly what the 1929
Fed engaged in. We learned a long time ago not to play with fire.
Problem is, the Fed does not see this as fire. They see the economy as
something that cannot be really hampered by a few hikes here and there and
by jawboning the markets into a six-month sideways correction as it did
this year. Foolish, foolish. The economy has performed marvelously on
its own. Things were getting touchy in the world last year, and they are
not roses just yet. The Fed, Mr. Greenspan in particular, played a
significant role last year in keeping other economies afloat and did head
off potential overseas disaster. The moves taken, however, were
corrective when human intervention had messed things up. The U.S. economy
has been an incredibly efficient machine because of the lack of
intervention. It cannot be fine tuned as many think. |
