Susan, I think that a number of event or policies could dry up liquidity. One could be the spreading of the Asian malaise into a world wide recession. A recession will lower the rate of earnings creation and employment in the US and throw our budget back into deficits. If these deficits start and reach the $200 billion annually, there will be a credit crunch (heavy issue of treasuries not met by sufficient demand and thus increase in interest rates with negative impacts on market valuation (at 6.5% long term rates, the "fair value" of equity could come down to a PE of 15-18 or so).
If the FED continues their restrictive interest rates policies for too long (and when inflation is less than 2% annually, 5.5% long term interest rates are a good 50 to 100 basis points too high).
Massive repatriation of treasuries by foreigners could also impact liquidity.
Right now, however, I think that our economy (save few segments as I have discussed before) is relatively well isolated from the Asian malaise, and the liquidity balance is moving to excess liquidity due to Japan's big bang and flight of capital from devaluing currencies.
Another possible source of problems is a major shift in ether taxation mode, industry allocation of resources (for instance, Yardeni's thesis that y2k will soak resources away from hardware to software, if true. I happen to disagree with him on this, thinking that whether industry spends Y2K funds on software or hardware will affect specific sectors but not the overall economy, after all industry will still spend the money and thus impact aggregate demand).
Zeev |
