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

To: valueminded who wrote (69066)	10/13/1999 8:18:00 PM
From: Sid Turtlman	Read Replies (1) \| Respond to of 132070

Chris: Inflation could send T-bonds down for a while, but when a serious bear market gets underway, it will drag down the world economy and yields on safe paper will plummet. People forget that the equities markets are not just gambling casinos, but are intimately connected with the real economy. The booming stock markets in the 1990's were a strong message to companies to expand, at the same time providing the funds for that expansion. This has created overcapacity in most industries, especially service/information/technology. This excess supply is not obvious, because information related companies don't need huge factories with smokestacks we can see, and because the very process of setting up new capacity stimulates demand. (For example, a richly funded IPO will buy computers and hire engineers and programmers, who will buy houses and cars.) But this demand is an artifact of the market - take away the bull market, dry up the IPOs, and watch consumer and business spending collapse. Once a bear market gets solidly underway, whenever that may be, we will see vicious price wars caused by having just too many competitors. The Fed can then try to stimulate all it wants, but we will go into "liquidity trap" mode, in which no one will want to expand because they don't need any more capacity, and without capital investment demand stays weak. In that environment T-bonds could easily be down to 1-2%. Interest rates may be going north of 7% in the short run, but once the stock market and the economy start heading downhill, you should be able to buy long dated zero coupons and double or triple your money in a year.