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.

Technology Stocks : Intel Strategy for Achieving Wealth and Off Topic -- Ignore unavailable to you. Want to Upgrade?

To: Yaacov who wrote (26732)	12/21/2000 5:13:53 PM
From: William Hunt	Respond to of 27012

Thread---from Tony Viola---thought you might like a different perspective : Hi William, found the article below on Raging Bull. Get the gold watch for Greenspan ready: OT: Kudlow: Fed Blunders Again By Lawrence Kudlow Contributing Editor Dec 20, 2000 11:23 AM The Federal Reserve made another bonehead decision by failing to cut the key federal funds policy rate and end the liquidity deflation that is damaging stock markets and the economy. Shifting the so-called policy bias from fighting inflation to fighting recession may occupy the thoughts and minds of legions of Fed watchers. But this is mere rhetoric. Blue smoke and mirrors. The economy needs liquidity, not rhetoric. As Fed mistakes mount, the need for president-elect George W. Bush to appoint independent thinkers to the three open seats on the Reserve Board becomes more and more important. Institutional policymaking reform, where market price signals replace NAIRU-Phillips curves, should be an urgent priority. Inflation fears and economic growth expectations are rapidly declining. That is the clear message of the Treasury market, where both real and nominal rates have plummeted. Not just long rates, but even three-month bill yields, which have declined half a percentage point. If we had savvy thinkers at the Fed, they'd have lowered the funds rate by the same amount. Meanwhile, gold remains low and king dollar strong. There's no inflation in our future. Stock markets plunged after the Fed's knucklehead decision. This continues a yearlong pattern in which bonds have been strong while stocks have been sick. I call it a recession trade. Recession trades are bad. Stable bonds and rising stocks are better. That's a growth trade. Does the Fed know the difference? Do they even care? The Phillips-curvers on the Federal Open Market Committee must still be worried that there's someone out there left working and producing. That the level of the industrial production index has declined two straight months doesn't seem to matter much. Another four months of this and there will be an official recession. In technical terms, as economic demand slows, or sinks, the only way the Fed can maintain the prevailing 6.5% funds rate is to drain more and more liquidity from the financial system. In other words, the bank reserve supply has to be reduced as rapidly as the decline in bank reserve demand. This is why the year-to-year rate of monetary base growth has been deflated to 1% from 16% over the past 11 months. The Nasdaq has also been deflated. Risk-capital investing has been deflated. Lately, production, sales and consumer confidence has been deflated. Pegging the funds rate at 6.5% is a very bad policy. Even a soft-lander like myself is starting to worry. Liquidity deflation is a tall monetary barrier to economic growth. And since Main Street folks now know from the Fed that short-term financing costs will eventually come down, they are going to defer spending and investment decisions until they can take advantage of lower rates. That is, if they still have any resources. But this deferral effect merely prolongs the economic slump. That is why the Fed should move now, not later. Does the Fed understand this? Who knows. Policymakers who continue to obsess over the non-existent trade-off between growth and inflation probably have the blinders on when it comes to human action, or the discovery process embedded in the wisdom of market information. Where to go from here? Economic redemption requires an inter-meeting fed funds rate cut of 50 basis points. Waiting six weeks until the next FOMC meeting, on January 31, is way too long. Right after the first of the year the Fed must begin to take action. Markets are smarter than Phillips curves. But the Fed needs help from people who know this. Both tax and monetary barriers to growth must be reduced quickly. Otherwise the soft landing scenario will look like a triumph of hope over experience. Let's hope that help is on the way.