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Politics : Ask Michael Burke -- Ignore unavailable to you. Want to Upgrade?

To: Knighty Tin who wrote (67367)	9/8/1999 2:26:00 PM
From: Les H	Read Replies (2) \| Respond to of 132070

"STRIKE THREE?" Our job isn't to encourage a bear market, or even forecast one in advance. It's to tell you where we are today. It's to help you keep both risk and reward in proper perspective. No one can say whether this past week's new high in the DJIA was the final peak. However, what we can tell you is this............... 1) We are in the most overvalued stock market in U.S. history - bar none! So overvalued, in fact, that all previous peaks and extremes pale in comparison. 2) We are in one of the most dangerous technical climates in history. It is one of the longest, and one of the biggest, divergences in breadth ever seen. 3) Between breadth, leadership and now monetary conditions, there are now three big strikes against this frenzy. Technically, ALL blocks have dropped into place for a bear market. Last year, it appeared the washout would unfold under a deflationary cloud - without any monetary models turning negative. Now, the scenario has changed - but definitely not the inevitable outcome. Inflation vs. Deflation.......the debate flares on! It'll continue until Wall Street's valuation bubble starts to deflate. Over the near-term, almost everyone (except today's farmer) feels more inflated than the 1-2% statistics supplied by the U.S. government. Reasons are not hard to find........rising taxes, insurance, college tuition, health care, home prices. In past issues, we've discussed the "magical massage" that the Bureau of Labor Statistics performs to arrive at the Consumer Price Index. There's the quality adjustment, the substitution allowance, the boas removal, and so on - all "improvements" made in just the past dozen years. Personally, I feel the BLS stats have lost all credibility. The public knows the government has a strong vested interest in doctoring down inflation figures (to control entitlement outlays). Yet few know the degree to which it occurs. For example, fully 40% of the CPI comes from its housing component. Now the BLS tells us that annual inflation (the CPI) has averaged barely 2.5% since 1990. However, median home prices have soared +45.1% over this period (+4.4% annually). If the BLS hadn't removed actual housing prices from the CPI in 1983 and replaced it with a hypothetical (and quite arbitrary!) rental equivalent, then official inflation would likely be running at least 1% higher. Yes, the inflation problem is real. Globally though, the real threat is still deflation. On August 18, 1999, China declared a moratorium on new factories which build "standard" consumer products. They're awash in jeans, bicycles, toasters, VCR's and microwave ovens, In Asian countries, the economic recoveries are more (stock) market-based than real at this point. It seems that if you're trapped on thin ice, you might as well be dancing. As we see it, the U.S. is the consumer of the world.........the engine of global growth........the monetary Rock-of-Gibraltar in a sea of uncertainty. The only problem is that all the monetary creation is going into credit growth and speculation - a condition not unlike that of 1929. Not wanting to repeat the mistakes of '29, Alan Greenspan is hell-bent to deal with Wall Street's overvaluation from an inflationary side. So far, he's been successful. The danger is when the credit, valuation, and speculation excesses start to unwind. Will they do so in a controllable manner? Greenspan hopes "yes," but the historical answer is "no." Name one bubble or mania (stock market or real estate based) that didn't end in a washout. It is as Galbraith said in A Short History of Financial Euphoria: "For built into this situation is the eventual and inevitable fall. Built in also is the circumstance that it cannot come gently or gradually. When it comes, it bears the grim face of disaster. That is because both of the groups of participants in the speculative situation are programmed for sudden efforts at escape." Our bet? Count on growing inflation pressures until the initial "pop" is heard on Wall Street. That will occur once the DJIA breaks under 9000 (-20%). If the decline at that point is swift, then the deflationaru snowball will be rolling downhill and gathering momentum. That's when all the debt and credit excesses of today's new paradigm will come to light. James Stack, Editor Investech Research Market Analyst & Mutual Fund Advisor US$ 275/yr www.investech.com