The general stock bubble ($SPX:1994-2000) is actually a "bubble of stocks" - by this I mean that there are way too many shares out there.
Absolutely... No disagreement between us there.
But asset bubbles do not an economy make, nor should they be permitted to "break" an economy through the Fed tightening up money supply and exacerbating the problem.
IMO, the bottom line of any economy essentially involves suppliers and consumers. Consumers either pay cash, or they "mortgage" their future earnings and purchase on credit. The exhuberance of consumers, and thereby suppliers who expand to meet that demand, ebb and flow. And only a small portion of ANY economy is strictly "cash and carry". Most of it is people willing to take on debt out of confidence that they will be able to pay it off with future earnings.
But the most important thing is to continue to maintain that confidence so that when "the party's over" people don't irrationally perceive it as end of the world. And if that means lower rates to reorganize debt loads, then fine. After all, the Fed was hiking rates partially in response to the asset bubble, not the overall economy and they should lower rates when pessimism replaces exhuberance.
I am a firm believer that these cyclical effects (boom and bust) are beyond the power of institutions and individuals to control being the product of crowd psychology.
Again... I'm in agreement.. But the Fed's (and Federal Government's) job is to try and reign in exhuberance and provide hope when there is despair. And in comparison to many of our competing economies out there, the US is in FAR BETTER shape... Our long term liabilities are, per capita, lower. Our national debt, again per capita, is lower.
We have an increasing tax base due to our societal values as a immigrant nation, whereas Japan's aging population is xenophobic and homogenous. Europe's socialist "cradle to grave" policies have hampered their productivity and created huge long term pension liabilities, while the rest of the world is so economically dysfunctional that they rely primarily upon the US and Europe to provide the markets vital to their development.
And we can hardly claim that the undeveloped world is "living high on the hog" with regard to irrational exhuberance when their per capita income still leaves many of them living in poverty (It's how that income is distributed throughout an economy, IMO, since is seldom "trickles down" to the lower classes)..
But it would seem that Greenspan is going to do whatever he can to avoid the crash in the equity bubble dragging the overall economy down. And if that means we have to deficit spend as well, then so be it (within reason) and it should be focused upon infrastructure projects that keep people earning sufficient money to pay off or restructure their debts and keep from going bankrupt.
Btw, I also see the potential of the SPX going to 650 or so. We're at a critical point here and in the worst part of the year:
bigcharts.marketwatch.com
And I suspect that it will be led by the last of the "Generals", MSFT, which still nets a 33P/E and $9/share book value (and may still be forced to expense their options):
bigcharts.marketwatch.com
But this doesn't mean the rest of the economy has to suffer. One sector can fail while another prospers and it's the government's responsibility to insure that private market failure (telecommunications) is boistered as a public good (which I sincerely believe it is).
Hawk |
