Deflation talk hits closer to home for U.S. stocks>>>
The growing debate about deflation hit closer to home for U.S.
stocks this week after government data showed that producer prices in 1997 tumbled 1.2 percent
to an 11-year low.
Until now, talk of deflation and falling prices has largely focused on Asia.
Although nobody is predicting full-scale deflation in the United States, the stock market will not
escape some domino effect from Asia's slowdown.
''The equity world simply cannot be the same after the Asian event as before,'' said Allen Sinai,
chief economist at Primark Decision Economics.
The deflation debate was rekindled after Federal Reserve Chairman Alan Greenspan spoke at
length about the issue last weekend. Some analysts even expect the Fed's next move to be one of
cutting, not raising, short-term interest rates.
Federal Reserve Bank of Chicago president Michael Moskow said Thursday that problems in
Asia and the domino effect on the rest of the U.S. economy should trim real gross domestic
product growth by about 3/4 point in 1998.
Federal Reserve Bank of New York Senior Economist Rae D.Rosen also said Thursday that he
was worried about the possible deflation of goods.
Bruce Steinberg, chief economist at Merrill Lynch said the deflationary process should intensify
and stock market trading in the first half of this year will be treacherous.
Edgar Peters, chief investment strategist at Boston-based fund PanAgora Asset Management said
deflationary pressures will affect stocks across the board, not just those exposed to Asia because
almost all stock sectors are overvalued.
''It's taking people time to realize that earnings expectations have gotten out of whack. Wall Street
is starting to wake up to this, but there are still a lot of people in denial and that's why the market
keeps bouncing around at these levels,'' Peters said.
Crude oil has tumbled to two-and-a-half year lows of $15 to $16 per barrel due to shrinking
demand from Asia and increased supplies. Gold on Friday fell to an 18-1/2 year low of $278.70
an ounce as inflation appears remote.
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