Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : VOLTAIRE'S PORCH-MODERATED -- Ignore unavailable to you. Want to Upgrade?

To: Mannie who wrote (19517)	11/26/2000 2:46:59 PM
From: Mannie	Read Replies (1) \| Respond to of 65232

Blunder-Heads By Lawrence Kudlow The Fed made a blunder-head move today by failing to shift their policy bias from restraint to neutral. They should have opened the door to future credit-easing moves, but instead they remained pig-headed in pursuit of a discredited labor market theory of inflation. Actually, they should have reduced the fed funds rate, by roughly 50 basis points according to inflation-sensitive market price indicators. Market prices are smarter than Phillips curves. They are telling us that the money supply is too scarce and the central bank policy rate is too high. But the Fed has gone back to the Phillips curve, grousing about alleged labor shortages. This despite a huge jump in jobless claims last week that foreshadows rising unemployment in the months ahead as the overall economy softens way below its potential to grow. All those rumors that the FOMC recently took a Phillips curve behind the building and shot it are proving to be false. Knut Wicksell, who truly is dead, is nonetheless turning over in his grave. Real interest rates are falling, and this should be a sign that monetary policy is too tight. That’s the Wicksellian price rule. Inflation-adjusted ten-year Treasury rates have dropped 50 basis points since January. Investment grade corporate bond yields have eased about 80 basis points since May. Ten-year Treasuries have dropped about 100 basis points. These are disinflation signs. If the Fed were following bond rates, then they would observe a clear easing signal from the market. If they were following other commodity indicators such as weak gold and falling industrial metals prices, they would also observe a clear easing signal from the market. If they had a more global view of monetary policy, then they would see that the growing shortfall of dollars circulating around the world is causing a worldwide liquidity squeeze that is punishing numerous foreign currencies and stock markets. And while the Fed keeps its head in the sand, they seem not to notice the election shock effect that has created so much uncertainty over future economic policy. Though George Bush has already won three vote counts in Florida, Team Gore is working overtime to win in the courts what they lost in the polls. Bush is clearly the pro-growth, pro-business, pro-energy production candidate. Gore is the big government Regulator-in-Chief who would stall growth, a sort of Jimmy Carter without the inflation. While the election story drags on and on, it seems that people are consuming and investing less and less. The animal spirits are frozen. Risk aversion is overwhelming risk taking. We could be on the verge of the slowest holiday season in five years. Forecasters cannot be sure about this, but at least they can agree that rising uncertainty acts like a tax on the economy. And when you tax something more, you get less of it. Thank heavens for the technology sector, which will prevent the economy’s bottom from falling out. This is our Schumpeterian safety net. In today’s industrial production report, output from computers, communications equipment and semi-conductors rose 3.2% for the month of October, summing to a 56% rise over the past twelve months. Everything else was down. Durable goods fell, auto output fell, utilities fell and consumer goods fell. Manufacturing excluding high-tech dropped by one-half of one percent, registering a 1.3% decline rate over the past three months and a one-tenth of one percent drop over the past twelve months. Earlier in the week it was reported that core production prices -- the PPI -- fell by one-tenth of a percent, including price drops for autos and computers. Core crude commodity prices have deflated at a 6.2% annual rate over the past three months. Did anyone say inflation? Question is, if technology customers are slumping, can a technology slump be far behind? Greenspan had it right in his Mexico City speech yesterday, when he argued that ". . . any notable shortfall in economic performance from the exemplary standard of recent years runs the risk of reviving mistrust of market-oriented systems . . . ." He was particularly referring to the expansion of free trade, which may be stopped dead in its tracks if a global economic slump materializes. Trouble is, Sir Alan is not following his own advice. He has acknowledged that the new U.S. information economy’s potential to grow is about 4%. Even the Congressional Budget Office is looking at a 3.3% long-run potential growth path. But the recent $15 billion markdown of business inventories implies that third quarter GDP will come in closer to 2% than the original inflation-adjusted estimate of 2.7%. Judging by the weakness in purchasing managers and car sales, a slowdown in private business investment, a flat housing story, and large increases in personal tax burdens, the fourth quarter economy looks to be no better than Q3 and quite possibly worse. And this doesn’t include the uncertainty tax from the endless voter recount election shock. I’ve always believed the best central bankers focus exclusively on domestic price stability rather than countless and inaccurate pulley-and-chain formulations to fine-tune economic growth. And the best leading indicators of price pressures come from the market. This is the heart of the Fed’s blunder. Instead of following downward gold prices and bond rates, the central bank is stubbornly clinging to outdated labor market models and other misleading econometrica. The best remedy for a below-potential 2% economic growth rate is lower marginal tax-rate incentives and deregulation. But at least the Fed can do its part by acknowledging commodity and financial signals that argue for the provision of new high-powered bank reserves. Buried in the Fed’s policy announcement press release, the FOMC did say that ". . . softening in business and household demand and tightening conditions in financial markets over recent months, suggest that the economy could expand for a time at a pace below the productivity-enhanced rate of growth of its potential to produce." Did anyone call for a speechwriter? At least it’s possible that help is on the way. I wouldn’t rule out a fed funds rate cut in December. Futures markets are predicting a one-quarter of a percent easing by next April. But April is a long time away. Meanwhile, twelve-month growth of the monetary base has deflated to 3% from 18% so far this year. That’s overly scarce liquidity. Dollar users at home and overseas need some help, and it’s up to the Fed to supply it.