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To: Lalit Jain who wrote (35730)	6/23/1999 9:21:00 AM
From: Rarebird	Read Replies (1) \| Respond to of 116786

Head Fake: What is a head fake? It is when a running back looks one way, while his body goes the other. He looks one way while the real move is the other. Oil has given a head fake. The CPI has been faked. The bond market has been faked out. The bond market (populated by perennial pessimists) got spooked at the beginning of the year when the lack of inflation caused them to surmise that inflation had to be coming back. "Inflation as low as it has been recently can't stay down forever," they suspiciously opined. They forgot to ask the Japanese about how long inflation could go away. Then oil did them a favor and proved their paranoia right by climbing continuously all year until – poof- a bad CPI number was rolled last month. It sent the bond boys running for cover, gleefully patting themselves on their collective backs that they were right. The bonds sold off. But is inflation coming back? What kind of inflation? The late (great) Stanley Salvigsen wrote a number of years ago a classic research piece entitled "Bingo, Bango, Bongo" about the different types of inflation. When you ask most people about inflation, they think of the CPI, price inflation. This, everyone is in agreement, is bad. (Who wants to pay more for things?) The more astute can also name wage inflation. Wage inflation, it seems, is only bad when it is happening to other people. People seem to be very much in favor of personal wage inflation. The last type of inflation is financial asset inflation. Mr. Salvigsen pointed out this can be just as damaging to an economy as the previous two. Ask people about financial asset inflation and the chorus resoundingly approves. "Give us more!" they will shout. Who could blame them? Who doesn't want stocks to go up? Go up is one thing. Go crazy is another. Stocks trading at p/e multiples of 40x, 50x, 100x with earnings growth rates of only 5%, 3% and in many cases, negative, is crazy. It is not a new era. It is a bubble. And nobody has yet figured out a way of letting air out of a bubble slowly. They tried it in 1929. They tried it in Japan in 1989. It didn't work in either case. The bubbles popped and the markets (and economies) collapsed. Investors are a fickle lot. They praise Alan Greenspan as the Master of the Universe, giving him all the credit for this wonderful economy and skyrocketing stock market. At the same time they ignore him and disregard him as a dottering old fool, out of touch with reality when he mentions "irrational exuberance". Can he be both? Of course not. He knows something that the masses don't want to know. There is inflation. Runaway inflation. And it is smack dab in the middle of Wall Street. And he is going to do something about it. He has no choice. Either he tries to control it, or it gets completely out of control on its own. They always do. Repeat that. THEY ALWAYS GET OUT OF CONTROL. Never has there been a bull market without a bear on the other side. Will the next bear resemble the last? Yes and no. Markets will fall. The trigger is irrelevant. It never is. What caused the 1929 crash? What caused the 1989 Japanese peak? It doesn't matter. What matters is that the markets were overvalued and the then current thinking was that there was a new era taking hold. Yeah, a big bad bear. Greenspan has gotten what he has needed. Asset inflation is something everybody likes, but doesn't realize it is bad for them. (Kinda like having a diet of only ice cream, fudge, and cookies. You enjoy eating them, but you are going to pay a price!) Greenspan has the excuse now to take away the cookie jar and give investors a big pile of spinach. Oil has pushed up the CPI, which nobody likes. To fight inflation, of any kind, you need to tighten the money supply. This can be done by raising interest rates. Greenspan now has his excuse to raise rates. People will think he is trying to fight the rising CPI, when actually his intention will be to slow the stock market down. Too bad that Greenspan is being faked out by oil, along with everybody else. What is the major economic theme of the past year and a half, not including the stock market? Deflation. Nobody talks about it anymore. But ask anyone in business. Profits are getting squeezed. Companies are fighting for every penny of revenues they can get. Competition, while good for consumers, is killing most businesses. Prices are dropping in almost every industry due to competition. Deflation by itself can be benign. But couple it with an economy loaded up on debt and it spells disaster. Deflation keeps pressure on revenues while eroding profits. But the debt side keeps costs up, squeezing profits further. Competition from overseas can cut prices while domestic producers struggle just to make the next interest payment. Liquidity and easy money were the ice cream and fudge the Fed has been feeding this spoiled economy. And it keeps asking for more. When Greenspan takes the desert tray away from the American economy, it is going to suffer some pretty bad sugar withdrawals. Just like in 1929, when the Fed got spooked by inflation and raised rates at just the wrong time, this Fed is likely to repeat the same mistake. The head fake oil gave is just the excuse Greenspan needs to raise rates and try to rein in a wild market. But he should have raised rates years ago, when it wouldn't have impacted the markets as much. Today, the wrong move could be just the thing to push this market over into a bear. Only time will tell. cornerstoneri.com