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Strategies & Market Trends : Currencies and the Global Capital Markets

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To: Chip McVickar who wrote (4)	5/1/1998 10:57:00 AM
From: Henry Volquardsen	Read Replies (1) of 3536

Thanks Chip, welcome aboard. It is indeed good to see the leaves turning green again. The post on M-2 is interesting. I particularly have taken note of Fed comments that they believe the old velocity relationships are beginning to reassert themselves. This is long cycle stuff however and not something that is likely to cause an imminent change in policy. But definitely something to file under "To Be Monitored". The poster also made the comment that It's amazing that everyone was so focused on the ECI (the whole week seemed almost orchestrated to produce a rally on the ECI news - am I being paranoid again?) that they totally ignored the GDP report, so I guess no one noticed M2 either. I took a slightly different interpretation of events. The bond market is barely higher than it was at the end of last week, so if 'they' they were orchestrating it to produce a rally they did a pretty poor job of it. Not that I am a believer in conspiracies (few humans are capable of keeping their mouth's shut long enough to carry one off for long) but if one did want to put such a spin on the past week I would come at it from a different angle. The Fed remains very concerned about 'exuberance' in the US markets. If they were of the opinion that the ECI was going to be a market friendly number they would know the market would lift off on yesterday's number. With that as a backdrop they might consider leaking some hawkish comments in the media to knock the market down so that when lift off occurred it would happen from a lower level so that it would have a tougher level when it reapproached the highs. It's called managing expectations. Also I can't see why anyone would be amazed that the market is focused on ECI. The market always reduces questions to it's simplest levels and tries to identify the root question. The root question right now is inflation. The other issues are subsidiary. Money supply is simply not a short term issue. As I said above these are long term cycles and will take time to reassert an influence. The market has not paid attention to money supply good or bad for years. GDP is a much more important. But the economy has been strong for awhile and the market has known this for awhile. But economic strength has had a qualifier for some time. That qualifier has been the question 'is economic strength translating to inflationary pressures or are productivity gains and deflationary influences from the international economy balancing this out?'. If the GDP numbers had come out on any other day the markets would have sold off because the stronger than anticipated growth would have reraised the qualifying question. But they came out on the same day as ECI and the ECI answers that question by saying 'no inflationary pressures are not building at the moment'. It is well known that the ECI is one of Greenspan's favorite indicators of inflationary pressures and since that is the root question of the moment it makes perfect sense that the market focused on that. Henry

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