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Politics : Idea Of The Day -- Ignore unavailable to you. Want to Upgrade?

To: IQBAL LATIF who wrote (27641)	7/23/1999 5:47:00 AM
From: IQBAL LATIF	Read Replies (1) \| Respond to of 50167

Bubbles do burst Samuel Brittan: The Financial Times 22/7/99 A Wall St crash around the turn of the century could inflict a good deal more damage than the previous crash of 1987 In an article On May 13 I rejected the rationalisations used to justify the Wall Street surge (Nonsense on Stilts). It was accompanied by a chart showing an uncanny resemblance between the upturn of the 1990s and the upturn leading up to the 1929 crash. Care was taken to ensure that the scales were proportionate so that a doubling of the Dow Jones average in the 1920s occupied the same vertical distance as a doubling of the average in the 1990s. Nothing has happened to make me repent, even though the Down Jones Average reached a new peak last week - Wall Street indices are 50 per cent higher than when Mr Greenspan first referred to signs of irrational exuberance. Indeed Stephen King of HSBC has presented a perceptive analysis, not only suggesting that the US stock market boom is indeed a bubble, but venturing a view on the how and when it might burst (Bubble Trouble, HSBC Economics, July 1999). Strong growth in the money supply, a rapidly rising investment share within GDP, a widening current account deficit and a personal sector spiralling into deficit are all classic indicators of a domestic bubble. "Virtually all the indicators on the bubbles check list are flashing red for the US... When such bubbles burst soft landings never seem to be within reach." Although there is nothing wrong in a current account deficit as such in the right conditions, the rapid increase in the US deficit is one classic indicator of a bubble economy, especially when combined with rapid domestic money supply growth. King argues that the US high-tech breakthrough is far from unprecedented and reminiscent of the production and communication breakthroughs of the 1920s. These were genuine enough but became the pretext for excessive equity valuations, fuelling a general economic boom. In the seven years up to 1929 US GDP rose at an average annual rate of 4.7 per cent -- much faster than in the 1990s - and unemployment averaged below 4 per cent. Yet "as the bubble took hold the evaluation of market fundamentals became more and more difficult, leading to speculative waves of stock purchases based on nothing more than the easy availability of credit". Some commentators and policymakers are being misled by the absence of inflationary pressures in the goods and services markets. But this is a deceptive sign frequently seen in past bubbles. "Most bubbles develop during a period of above average growth and below average inflation. The inflationary pressure is often disguised by declines in global commodity prices or strong exchange rates which suppress inflationary symptoms for a while." Moreover, during a boom, rapid money supply growth feeds directly into higher output or higher asset prices, and the link between money and inflation is temporarily broken. According to HSBC Economics, the most likely forces to burst the bubble are a combination of further rises in interest rates - whatever Alan Greenspan may say today - and a falling dollar, both of which are expected in the second half of this year and in the first half of 2000. This should result in a growth slowdown this year and the risk of outright recession in 2001. Bursting the bubble normally requires a series of official interest rate increases enough to persuade markets that there has been a permanent increase in the discount rate to be applied to future earnings growth and that growth itself is likely to weaken. The recent 0.25 percentage point increase in US base rates, and the proclaimed shift back to a neutral monetary stance, is an example of the kind of rate increase which is shrugged off by the bond markets which actually rose after the Greenspan move. Defenders of the "new paradigm" often remark how easily the US - and the world survived the Wall St. crash of 1987, which took place when earnings yields were no more overstretched than they are today. But HSBC point to one big difference. Twelve years ago there was little evidence of an overstretched private sector balance sheet and little reason to fear a multiple contraction in private sector spending as a result of a fall in stock prices. Today however a much higher degree of spending is supported by rising asset prices and a sustained equity correction is likely to have a bigger impact on the US economy. An academic analysis by the "Clare Group" comes to similar conclusions, if in slightly different language (Global Stability: Risks and Remedies, by J Flemming, M Posner and J Sargent, National Institute Economic Review, forthcoming July 29). In advanced economies there may be bursts of technological innovation or new market opportunities which cause the upswing of the cycle to be unusually prolonged. Although these events are of a once-for-all nature they may be "inappropriately extrapolated"; and "divergence between the expected and the realisable creates problems which the US economy is likely to incur in reverting to a slower and more sustainable growth rate". Unlike HSBC the Clare Group does not believe a hard landing is inevitable. But they believe that there is "a non-negligible risk" of it happening and that policymakers would be "foolhardy to fail to take this into account". They fear that a turnround in US growth -- say from the present four per cent to minus one per cent - would have a much larger effect on the advanced industrial economies than predicted by conventional models. Although European consumers may be less sensitive to share prices, corporate optimism would be seriously hit. The main message of the Clare Group is: be prepared. They are particularly worried that real interest rates might not be able to fall fast enough at a time when inflation is already very low. Indeed if businessmen were to fear deflation, anticipated real interest rates could rise, even if nominal rates controlled by central banks were to fall to near zero. One defect of the Clare analysis is that, in characteristic British establishment fashion, it starts to beat the drum much too early for a world-wide fiscal stimulus, in the event of recession, without first examining unconventional policies for boosting monetary growth. The Japanese recession has produced a whole crop of these including the monetisation of part of the national debt and aiming -- in this exceptional case -- for a positive inflation target to influence business expectations. One can agree however that at the very least more should be done to explain the action of the built-in fiscal stabilisers, provided for in the fiscal plans of most countries. These allow for temporary increases in deficits, as revenues fall and social expenditures increase in a recession. Unfortunately, despite the small print of the official economists, nearly all public discussion is in terms of actual crude budget balances which take no account of the business cycle - possibly because Finance Ministers want to take opportunistic advantage of the present unexpectedly prolonged boom to give out goodies to the public. Governments have not done nearly enough to lay out in advance what they would do in the event of unexpected boom or slump. It is not enough to point to mainstream forecasts saying that such events are unlikely. The Clare Group would however like to go even further and have a shelf of plans ready for temporary fiscal stimulus going beyond the automatic stabilisers. They do make some valuable points. For instance cuts in consumer taxes or employee insurance contributions, known to be temporary, are indeed likely to be spent. Even here however the US fiscal system makes such action almost impossible. In the euro countries, the Fiscal Stability Pact allows deficits to run up to 3 per cent of GDP in a recession. This would be all very well if the normal balance were indeed zero. But as there has not been this degree of fiscal consolidation -- as the European Central Bank incessantly stresses -- Euro governments would be between a hole and a dark place in the event of an international recession. But my main complaint about the Clare Group analysis is that' like so many British mainstream economic documents since World War Two, it argues as if a world recession were already upon us, which is then discussed far too much in UK terms. The immediate picture is one of a seriously overheating US economy, the first signs of a growth takeoff in the euro group, and to a lesser extent in Asia, and quickening recovery in the UK. By all means be prepared for a reversal. But let us not forget that the seeds of a possible slump lie in over stimulus and irrational exuberance, above all in the US, but perhaps in other countries as well.

To: IQBAL LATIF who wrote (27641)	8/27/1999 4:07:00 AM
From: IQBAL LATIF	Respond to of 50167

Taqi Hasan.. Member 235395 You were never forgotten, last night your arrival at my place with your wife was a pleasure. The most important point being that you were just strolling on Champ's Elysee's with your wife, noticed that 'Lido' building late at night, walked up to the guard and asked about Ike, at nearly 12.15 PM he connected you to me, he told me someone Mr Taqi with a lady wants to talk with you. May be you were thinking that you may have to introduce yourself but no I got it straight, my first response was Hi Taqi, where you have been? why you are not posting!.. I once again thank you for visiting us, that is always I have thought distinguishes my thread with any other place on SI. A thread that is more than trading only, it is meeting place of cyber communities , we have made friendships over cyber space solid and lovely. I took great pleasure in your visit last night and enjoyed thoroughly our discussions with you on many of the great 'ideas' you had. I learnt a lot last night. Congratulations on your wedding, your wife is a great lady. On your future visit to your home in Hyderabad Deccan, India in Dec, I hope you stop over in Paris once again, if you plan to visit Lahore let me know I will be honored to arrange for some good 'chaperoned' visits to that city?s historical sites. You will love ?Lahore? the city where your wife was born. I told you I never forget my friends, this was my last letter about you on Ideas.. your naughty links was the subject..since your last post in Oct of 97 we looked back at your porfile.. Saturday, Jul 17 1999 9:02AM ET Reply # of 28450 I trade with Soloman Smith Barney, I don't have to learn the details the only thing I know is buy Long Oct 100's NOK, to be honest I waste my time on other more rewarding things than looking for symbols for months or strikes, never did it nor I am likely to even attempt. My knowledge of all the technical terms is close to zero, Ray does every thing for me, just keep doing trades, in and out in and out. Ofcourse when I am on holidays like right now the fun is more. I play it nice and cool..last night I was searching for an old friend Taqi Hasan works for CSCO was a contributor on this thread but have stopped writing completely went to his profile, the second interesting link on his profile was very bold, thought that is a 'real trader free from all pains' and a man with guts to talk his preferences so acutely, loved it, Hats- off 'Taqi Hasan, you don't post but you made my day.. .... ggg Go and see for yourself..