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

To: George Martin who wrote (72478)	3/17/2001 2:57:15 PM
From: Doug	Read Replies (1) \| Respond to of 99985

G.M: Few realize that we are living with a double bubble. There was the bubble due to ever increasing stock prices and simultaneously there ia a bubble of an overvalued dollar. Stocks are riskier investments and therefore must generate a higher return than bonds. If inflation is at 2% and bond return at say 4%, stocks have to generate appreciation by over 6% to be attractive. Projections based on the past 10 years show that profit growth for the next decade will be less than that of the GDP growth. So in 10 years we have smaller proft growth yet stock valuations that must be nearly 60% higher viz P/E's of over 1.6 * pre bubble P/E's. That is impossible and so the bubble P/E has to deflate to near historic averages. Now for the overvalued Dollar. The Dollar is overvalued between 30-40%. This has made it easy to import goods from other countries. A devaluation of the Dollar will cause a massive reduction of imports and will at the same time boost our exports. However it will be inflationary. Because it is inflationary , A. G has been insisting on shielding the Dollar thru interest rates. Theoretically interest rates should be 1% above the inflation rate. The rate cannot be reduced because it could lead to a devaluation of the Dollar and we would have to face 2 Bubbles at the same time. Nevertheless ,I would hope that in time (2 years) the FED's address the trade deficit problem by gradually lowering interest rates to the maximum.