Watched a pretty good conference on CSPAN last night (couldn't sleep). It was the Fed Policy prediction type meeting of various ex FOMC board members and big shot economists.
Anyway some tidbits that I found interesting.
The new paradigm is real... in a way. In every market cycle in history, Productivity growth peaked in teh first couple years and tailed off from there, in this latest cycle productivity growth has been accelerating and especially so in the last year. What does it all mean? No one was sure since this is a first.
The new era economy is actually a split economy which is split 20/80 with 20% being new era technology based and the other being 80% old industrial type, brick and mortar companies needed to make the country work and they won't go away. What makes this important is the Fed is caught in a balancing act. There is real inflation problems rearing their heads in the 20% technology based new era section with lack of employees already driving higher costs and this section of the economy CAN raise prices since there is little foreign competition. The old 80% industrial section part of the economy is facing increaed Foreign competition since Asia etc is getting back on it's feet and trying to export their way out of trouble keeping pricing pressure on goods so if our businesses try to raise prices, they will lose market share. If the Fed tries to slow inflation in the tech sector, they could accidently kill the larger 80% industrial based sector.
The stock market IS DEFINITELY the target of the Fed but they can not say so due to politics and a misunderstanding of the announcement by the market which would tank it. The reason is this.... The stock market is fueling the economy and the government surplus. The higher stock prices go, the more houses people buy and the more jobs companies can provide by paying stock options instead of cash. Also IPOs and secondary offerings can provide the cash to start new companies or finance growth in older ones. The increased spending in the economy, capital gains taxes and corporate taxes feed the Fed which enables the surplus. If the "Bubble" ( They did call it that) is popped, the economy will collapse, we will go back to huge deficits in the Fed and companies will lay off both because of reduced spending causing less demand for products and because companies can't pay in cash and employees would not accept options anymore.
The main reason for the Fed not to raise today is because if they do, the markets will see it as the last raising for three months and go hog wild to ridiculous levels. However if the Fed doesn't raise, they still may not be able to control it. Some thought it possible that the Fed could not raise but keep the bias and do a surprise higher hike down the road to bring the market back down if it got too far out of hand but it was unlikely.
A 1/4 point hike in the rate would have minimal effect on the economy but would reduce housing starts by locking out approximately 400,000 first time home buyers from qualifying for loans. Other than that, the effects are negligable. However there was one guy that was pretty darn sure that we would end up with another 4 raises in the next 12 months as the market got totally out of control causing inflation. This would have a bad affect on the 80% industrial sector since the technology area would be the main inflationary source but the higher rates would impact the 80% industrial sector the most.
EDIT - My thought - Could the 80/20 split help explain the divergence inthe Advance Decline ratio??? In other words 80% of stocks are not growing earnings enough to show advances thus they are declining while not all Tech sector stocks are winners so you have a more normal a/d ratio in that sector. The cumulative effect is a lousy A/D but the tech advancers could be for real.
I am off to try to work today, Good Luck,
Lee |
