JRI, the situation from a macro point of view is that the FED made severe mistakes last year , 1999 by adding to much liquidity to the system for political reason IMHO, and also to enable companies to modernize their computerized systems toward Y2K.
Funny enough there were many glitches on Jan 1, 2001 but the media barely paid attention.
As such the side effect was that the balance of currency flows favored the US currency and eliminating the influences of the US trade deficit.
US High Tech industry still has the most hype in the world, attached to it, and most High tech companies are trading on the NAZ. Therefore it is in the US national interest to prop up the NAZ at least 1000 points or so to avert financial disaster from developing.
The main reason being is, that it will in effect, return some of the foreign money back to the US to counter the US trade deficit and hold the currency relatively steady until the excess capacity will be worked out and new demand will surface again, hopefully mostly from overseas.
The FED by sleeping on the wheel now by failing to recognize the acceleration in economic cycles and not dampening the speculation in equities a year ago has now a huge problem on their hands ...... avoiding a total collapse of the US financial system.
But remember most of the blame should go to the big WS houses, Business Media (mostly CNBC ) and their analysts. They acted in a more criminal fashion as they profited handsomely from the hype and bubble which they promoted.
Keep in mind that many corporation will report earnings in line with expectation by drawing their profit from their overfunded pension funds profits who are mainly invested in stocks and corporate bonds. A slide in the valuation of US financial assets will not only reverse the currency flows but also collapse the US pension fund system, insurance industry and real estate market.
My speculation is that the FED will try to keep the market on an upward bias pumping more liquidity and lowering interest rates to keep those financial assets afloat and by that the funding for pension funds and insurance companies in balance and liquid.
Those action will indirectly spur more investments and efficiency and save the US economy from a calamity.
Unfortunate they must act quite quickly as they are lagging by around 2 to 3 months, which in an economy with an inventory turn rate above 7, is a life time, therefore the urgency in lowering rates. (High tech companies achieve even 15 or more inventory turns now).
One point missing from many and the FED is that the shortening of inventory turn period also shortened the business cycle and the ripples resulting from it. We as human are acting slower to changes and perceive mush slower the economic change resulting from just in time delivery. Even our statistical reporting is not geared to that, therefore the surprises in statistics.
The logic behind this is the continuation of the building of the high tech infrastructure and boost in efficiency in countries and industries who are still lagging. Asia in particular is the next engine of growth with Europe not far behind. The buying parity in those countries are about double or even more as related to that of the US and adequate incentives can avoid any slowdown.
Lowering interest rates must be done in concert with the rest of the world and achieve a interest rate and growth parity, which in my opinion is around 1.2 to 1.5. (e.g. 3% growth 4% to 4.5% interest rates)
US treasuries already reflect that but the FED is still lagging.
The wild card is energy prices and real wages.
BWDIK
Haim |
