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Strategies & Market Trends : MDA - Market Direction Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Lee Lichterman III who wrote (25384)	9/9/1999 5:31:00 PM
From: pater tenebrarum	Read Replies (2) \| Respond to of 99985

Lee, who knows, the news on KEA may come out tomorrow... i can tell you one thing though: the two 1/4 point hikes have had no effect at all, as the Fed is prepared to meet any given level of credit demand that comes about at current rates and credit demand hasn't abated , quite on the contrary, it is more vigorous than ever before as recent household debt data show. no-one in his right mind could possibly expect that two puny rate hikes will do anything to stop an economy that is close to overheating and is characterized by credit and asset bubbles of hitherto unknown magnitude. i do believe the Fed is aware of that and to wait for the recent hikes to feed through could become a long wait indeed. nevertheless, they will keep on trying to go about their gradual and well advertised ways, which in turn will allow the bubble to inflate further. i am absolutely certain that there is a lot of political pressure on the Fed to keep rates as low as possible and as long as the government's statistics suggest that inflation remains contained (however bogus these stats may be) the politicians will have an additional lever for pressurizing the Fed. however, this is a big mistake...and the very same mistake has been made before. during disinflationary periods, monetary policy tends to be too loose, which allows the bubbles to build. in the end, the whole economy becomes dependent on the asset bubble's continued existence, lest the mountain of debt that has been built up during it's formation take the whole house of cards down for years. just think about it: corporations are buying back their stocks, which trade at inflated multiples, and they use debt for doing so. but what if share prices should fall dramatically? the debt will still be on their books, but the stock will be worth much less, which means that the buy-back will turn out to have been an incredible waste. during times when both stock prices and real interest rates are high, corporations should raise capital by issuing stock instead of taking on debt. considering that corporate debt has exploded from $ 120 billion in '96 to $ 366 billion now, it is highly doubtful if shareholders' long term interests were really served well by the buy-back craze. in the end the ESOP dilution means that the buybacks in effect do not remove supply as is often suggested. on the contrary, they tend to increase it. it follows that an expense is actually incurred, as the only net change is the growth of debt on corporate balance sheets. the manipulation of earnings via pension fund surplus transfers is also a device that is dependent on the bull market. it follows that a popping of the bubble would result in grave long term consequences for the economy, as both households and corporations would have only a mountain of debt to show for it, and would be forced to batten down the hatches just as the Japanese had to after their bubble burst. conclusion: nobody wants to be responsible for popping it, and the mania will be allowed to continue until it collapses of it's own accord. pure insanity in short. regards, hb