Well I do disagree with his calling this an intentional fall to fool chartists. I feel the chartists were the ones that saw the NASDAQ up against the resistance line even slightly penetrating it and we were the first to see that we needed a fall to even things out. LG had beensaying for weeks that we needed to correct back into the channel we had been previously following.
I had some visitors and phone calls so this is a bit late but here is what I felt was important in AG's speach today. I added my own comments in italics and put his strongest points in bold. The paragraphs are kind of pieced together though I tried to add ... where I spliced.
While the level of these estimates (by stock analysts) is no doubt
upwardly biased, unless these biases have significantly changed over
time, the revisions of these estimates should be suggestive of changes in
underlying economic forces. Except for a short hiatus in the latter part of
1998, analysts' expectations of five-year earnings growth have been revised
up continually since early 1995. If anything, the pace of those upward
revisions has quickened of late. True, some of that may reflect a pickup in
expected earnings of foreign affiliates, especially in Europe, Japan, and
the rest of Asia. But most of this year's increase almost surely owes to
domestic influences.
There are only a limited number of ways that the expected long-term growth
of domestic profits can increase, and some we can reasonably rule out. There
is little evidence that company executives or security analysts have
significantly changed their views in recent months of the longer-term
outlook for continued price containment, the share of profits relative to
wages, or anticipated growth of hours worked. Rather, analysts and the
company executives they talk to appear to be expecting that unit costs will
be held in check, or even lowered, as sales expand. Hence, implicit in
upward revisions of their forecasts, when consolidated, is higher expected
national productivity growth. ....>>They have unrealistic expectations that everything will stay perfect forever ignoring that there are things called market cycles<<
Even taking into account the evidence of declining unit interest costs of
nonfinancial corporations, unit labor cost increases (which constitute three
quarters of total unit costs) must also be slowing. Because until very
recently growth of compensation per hour has been rising, albeit modestly,
it follows that productivity growth must have been rising these past five
years, as well. Accelerating productivity is thus evident in underlying
consolidated income statements of nonfinancial corporations, as well as in
our more direct, though doubtless partly flawed, measures of output and
input. >>We can't measure output or input so we guess the best we
can<<
That said, we must also understand the limits to this process of
productivity-driven growth. To be sure, the recent acceleration in
productivity has provided an offset to our taut labor markets by holding
unit costs in check and by adding to the competitive pressures that have
contained prices. But once output-per-hour growth stabilizes, even if at a
higher rate, any pickup in the growth of nominal compensation per hour will
translate directly into a more-rapid rate of increase in unit labor costs,
heightening the pressure on firms to raise the prices of the goods and
services they sell. Thus, should the increments of gains in technology that
have fostered productivity slow, any extant pressures in the labor market
should ultimately show through to product prices. Inflation will come, it is only a matter of when, not if
...when productivity is accelerating, it is very difficult to gauge when an
economy is in the process of overheating....
In such circumstances, assessing conditions in the labor market can be
helpful in forming those judgments. Employment growth has exceeded the
growth in working-age population this past year by almost 1/2 percentage
point. While somewhat less than the spread between these growth rates over
much of the past few years, this excess is still large enough to continue
the further tightening of labor markets. It implies that real GDP is growing
faster than its potential. To an important extent, this excess of the growth
of demand over supply owes to the wealth effect as consumers increasingly
perceive their capital gains in the stock and housing markets as permanent
and, evidently as a consequence, spend part of them, an issue to which I
shall return shortly.Watch the employment numbers as to hinting when I will jack up the rate
There can be little doubt that, if the pool of job seekers shrinks
sufficiently, upward pressures on wage costs are inevitable, short--as I
have put it previously--of a repeal of the law of supply and demand. Such
cost increases have invariably presaged rising inflation in the past, and
presumably would in the future, which would threaten the economic expansion.............
....The remaining gap between private saving and domestic investment has been
filled by a sizable increase in saving invested from abroad, largely a
consequence of the technologically driven marked increase in rates of return
on U.S. investments. Moreover, in recent years, with many foreign economies
faltering, U.S. investments have looked particularly attractive. As U.S.
international indebtedness mounts, however, and foreign economies revive,
capital inflows from abroad that enable domestic investment to exceed
domestic saving may be difficult to sustain. Any resulting decline in demand
for dollar assets could well be associated with higher market interest
rates, unless domestic saving rebounds. Gee, haven't you guys been talking about this for a few days now
After considering the various forces at work in the near term, most of the
Federal Reserve governors and Bank presidents expect the growth rate of real
GDP to be between 3-1/2 and 3-3/4 percent over the four quarters of 1999 and
2-1/2 to 3 percent in 2000. The unemployment rate is expected to remain in
the range of the past eighteen months.employment numbers don't have to grow to hike rates, just keep growing at the same rate as productivity gains slow down and we already know we will have to raise rates
Inflation, as measured by the four-quarter percent change in the consumer
price index, is expected to be 2-1/4 to 2-1/2 percent over the four quarters
of this year. CPI increases thus far in 1999 have been greater than the
average in 1998, but the governors and bank presidents do not anticipate a
further pickup in inflation going forward. An abatement of the recent run-up
in energy prices would contribute to such a pattern, but policymakers'
forecasts also reflect their determination to hold the line on inflation,
through policy actions if necessary. The central tendency of their CPI
inflation forecasts for 2000 is 2 to 2-1/2 percent. I have now given out a targeted rate of inflation, any hint of us going faster than this and I will put the breaks on.
....As I have already indicated, by its June meeting the FOMC was of the view
that the full extent of this insurance was no longer needed. It also did not
believe that its recent modest tightening would put the risks of inflation
going forward completely into balance. However, given the many uncertainties
surrounding developments on both the supply and demand side of the economy,
the FOMC did not want to foster the impression that it was committed in
short order to tighten further. Rather, it judged that it would need to
evaluate the incoming data for more signs that further imbalances were
likely to develop. We are leaning toward tightening but didn't want a stock market crash by saying so at the same time we were doing the first cut
Good Luck,
Lee |
