To forecast the behavior of the Fed is quite difficult. They clearly do not understand what is happening (I'm talking of the staff -- the serious professional economists -- not the Board or FOMC themselves). They are afraid of making a terrible mistake and killing off a non-inflationary boom that has strengthened the US and the world enormously (especially in permitting the bail-out of the Asian economies.) I expect them to do nothing very dramatic, a quarter point up or so. This will affect the short-term rate, but not the bond rate.
We are in the grips of an asset reevaluation -- a real international inflection point. There is a world wide lack of capital. Countries will do wild things to get capital. China, for instance, which generates enormous amounts of savings, is still so poor and underdeveloped that its needs packages of capital and technology to become competitive. Chinese companies cannot build an efficient automobile because of mass technological ignorance. Even with foreign firms, Chinese cars are very costly. So world supply of capital must go up, and this means higher prices (LT interest rates) are required.
Another factor driving up the capital price is competition of bonds with equities. Worldwide, stockmarkets are at all-time peaks. The ROI in stocks this year makes bonds a lousy buy. The price must go up. It has very little to do with monetary policy.
The price of real equities is driven by expectations of cash flow (for real companies with products, capital, revenues, and positive cash flows). The price of virtual equities is driven by dreams of virtual wealth. Consider QCOM (my biggest single holding). I have made this year over 50 times my investment in October 9, 1998 (don't try to figure it out, it is traded for me by a computer program that optimizes returns by using close high sell limits and buy low limits and large cash reserves (all in a cash IRA account) almost every day and I don't pay taxes). This is entirely an explosion of dreams. I could tell you about CGMI (my second largest holding), or JDSU, my third.) There is no excuse for the values attached (temporarily) by the market to these stocks. Without upper limit sales and lower limit buys, adjusted every day (sometime intraday) and stop losses I would have made about 20 percent of my actual gains in these volatile stocks.
The Fed wants to stifle the daytraders. This is a mistake. Mass scalping makes the prices autoregress with coefficients close to one, turning short term movements into broader sweeping moves that everyone can enjoy. The afternoon swoons in the NASDAQ is IMO the result of day traders who have earned their targets packing up, zeroing their accounts, and going out for a drink.
It will take something really dramatic to bring conservatism to the NASDAQ hero stocks. As long as the economy keeps chugging along at 3-3.5% or so, as long as the Fed doesn't get hysterical and do something serious to the markets (increase margin on highly volatile stocks, shorten settlement period, stop free riding,) and, most important, any limits to the advance of technology and commercialization of the internet could stop, or reverse, the boom. A collapse of any of ten high fliers (4 horseman, QCOM, CMGI, ICGE, JDSU, SUNW, ORCL) could be survived as long as the others didn't face a threat to technical or commercial advance. Look, few recognize that Intel has taken on web hosting on a large scale and EXODUS and is going to underprice it; Intel is committed to penetrating the comm chip business, and is selling toys. Only 3 per cent of the world's people have internet accounts. I just put two entire classes of forty students each on a free website (eCircle). No classroom. No books. All the student needs is an internet account, preferably broadband to view the lectures and discussion. The scope of the internet revolution is unlimited. I sent my 6 year old granddaughter an Intel microscope from Mattel on the web for Kwanzaa. She called up to complain that her father only had Windows 95 and had had to buy a USB connecter and windows 98, but said the micrographs of her skin and hair were awesome. It isn't hype. It isn't going to stop. It can't be stopped.
Pick the winners in communications, electronics, e-business, and anyone can be rich. I would limit myself to companies with records of >30% growth in EPS for several with little or no debt and would keep in trailing stops.
The point is that more and more investors and funds jump into the tech stocks real investment in real technology skyrockets. Our state government invested $475,000 in a local tech startup and it mushroomed to $60 million in Digital Island. Now it wants to gamble billions from the Employee Retirement System to grow the economy. Why not? This may not be a bubble, it may be an acorn. Every city with a real tech university can grow this stuff.
When there are hundreds of promising startups demanding capital, what do you have to do to attract capital to fund past business and government overspending and mistakes? (bonds). The yield on bonds will have to go up. Real business will have to increase their yields by restructuring or becoming virtual businesses. Better pay off in dreams than in cold hard cash.
But, of course, the politicians and bankers can screw everything up by killing off the tech boom with excessive control and unreasoning panic. But look what's happening to financing technology. CMGI is IPOing Altavista. The investment bankers who underwrite IPOs aren't allowed to participate unless they cover (and tout) CMGI. All employees, family and friends and stockholders of CMGI can participate in the IPO. We don't even need a Merrill-Lynch to participate. CMGI's family and friends can do the job ourselves. The CEO communicates on the Web. We know DW and we trust him to make us even richer than he has done. Who cares if its all a dream? (we can always cash out our original stake and play with winnings.)
This is the promise of people's capitalism. We buy from ourselves and the people we work for. We lend each other our money. The people who work for us are ourselves. We want the government to butt out and not screw things up. We want the old businesses to get with it or to go away. We can handle this ourselves. We can find the crooks, sell them short, and wipe them out long before the IRS, SEC, or FBI finds out they exist.
We can always pull our stakes. I've done it a dozen times. But I always reinvest it in the dream.
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