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Technology Stocks : Semi Equipment Analysis

SOXX 299.81

+2.7%

Dec 19 4:00 PM EST

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To: Thomas DeGagne who wrote (324)	2/11/2001 6:09:17 AM
From: WTSherman	Read Replies (1) of 95616

Thomas, I agree with you that this was a very simplistic analysis of the situation. In fact, I think that the Fed had slowly found itself in a box that over magnified any actions it took. The combination of such a long bull market and the increased participation of the general public in the stock market(through funds, 401k's, etc.) had inevitably created a stronger and stronger relationship between the markets and consumer confidence(the wealth effect is quite real and undeniable). When the Fed pumped liquidity up during the Asian crisis and then again in anticipation of Y2K a speculative blowoff by the market took place that could not be sustained and inevitably collapsed. The fact that unemployment had reached almost historic lows of 4% really limited the options that the Fed had. There wasn't much room for "waiting" since it was quite clear that further tightening in the labor market would lead to significant wage inflation that could not be matched by productivity gains(this was happening by late '99. Thus a catch-22 existed, if the Fed did little or nothing it seemed inevitable that inflation would start to rapidly increase. If they raised rates steadily it would prick the bubble and impact consumer confidence as the wealth effect reversed itself. If there is anything to criticize about the Fed's actions it might be that they overreacted to Y2K. Of course, that's easy to say now. It wasn't so clear in late '98 and '99. The other thing that people don't seem to realize is that such a long boom and economic expansion inevitably creates a great many inefficiencies in the way capital is used and the way organizations operate. The dotcom phenomena is only one example of such inefficiencies. Sooner or later there has to be a period of purging where these ineffeciencies are removed. That's what were going through now. It may be much longer and more traumatic than we would like, but, its actually good in the long run(as long as you are not the one "purged").

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