On the 30 year bond yield, inflation, deflation, recession etc., etc., etc.
My comments are from the perspective of a person with a net short exposure and, must add, who usually does not believe in market timing [you may find the statement a bit contradictory]. I must also add that my knowledge of economics is limited to macro and micro economics MBA level introductory courses. I do hold a PhD in Operations Research. The mathematical tools I use are not too far from those used in econometrics.
On the most recent GreenSpan testimony to congress, I guess not too many people noticed that the delicate balance GreenSpan is hoping for has a very low likelihood of materializing. What we [he] are [is] hoping for is the Asian crisis takes on GreenSpan's [his] role by:
1) Having cheap Asian imports control upward price pressures when in fact we all know the largest sector in the US economy is the service sector, a sector not very sensitive to the cost of asian imports.
2) the crisis inducing a slowdown in US exports - not only to Asia but to other regions of the world in which Asian imports are now more attractive [people seem to forget this last point when concluding that the net effect will be less than 1% in GDP] - that is just enough to slowdown economic activity without throwing the ecomomy into recession.
Of course given all the uncertainty and little evidence of [past] inflation - let's remember that government statistics reflect the past not the future - look around and tell me where you see prices going - the best course of action for Greenspan is to do nothing. The impression is that I got he feels powerless plus he is also scared s...less. He wishes he could raise rates - among other things to stop the "rational exuberance" and inflation pressures - but this would probably worsen the Asian crisis [equity markets] and strengthen the dollar in a way that would cause a recession.
My conclusion from all this: There is a good chance we may have some pretty bad news for the market within the next four to six months. In the best of cases an earnings slowdown, in the worst of cases an economic slowdown coupled with substantial price increases in the service sector (e.g., induced by the outrageous rates Cobol programmers working in the y2k problem will charge:)), some version of the stagflation of the 80's; and finally a scenario in which Asia does not cool off the US economy and Greenspan raises rates. With a market priced to over 25 times earnings, IMO any of these scenarios spells trouble for the market.
Trivia question: Why is PG thinking about raising the price of tide?
Pancho |
