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To: Amy J who wrote (144073)	9/25/2001 6:13:57 AM
From: 10K a day	Respond to of 186894

And the guys coming on the TV and telling me that inflation is non-existent. And i'm looking at the price of homes which have doubled in the last year or so. And i'm thinking what rock did this guy crawl out from under.

To: Amy J who wrote (144073)	9/25/2001 10:00:02 AM
From: GVTucker	Read Replies (3) \| Respond to of 186894

Amy, RE: inflation At the risk of sounding like Chicken Little, inflation is a significant risk right now. First of all, even though the overall CPI has indeed declined, that is solely due to energy prices. Take energy out of the equation, and inflation this year has run close to 3% even though the economy has slowed significantly. Core inflation hit an inflection point early in 1999, and appears to me to be increasing since then. Next, look at the liquidity that the Fed pushed into the market over the past two weeks. During the week following the 11.9.01 attack, the Fed added an average of $75.3 billion per day. The only time in history that the weekly average was higher was when the Fed modestly panicked at Y2K, adding an average of $93.1 billion in the week ending 05.01.00. I am not questioning that this liquidity was needed. It was needed. Without it, our whole settlement system would have shut down. Bank of New York wasn't even able to complete wires for a couple of days. But now, the Fed has a difficult task. Draining a big piece of this liquidity will be necessary. If the Fed doesn't drain the excess, the dollar will tank. But the Fed doesn't want to drain so fast that it inhibits capital movement. One thing that I am confident of, though, and that is that this capital will be drained. At one point last week, the cost of Fed Funds was as low as 0.06% on an annualized basis. There isn't enough demand for capital right now to put those funds to use. The item that worries me most in core inflation is healthcare costs. Throughout the 90's, healthcare costs declined. They are now increasing in excess of 5% annually, and that number itself has been increasing. Right now I see almost zero chance of us seeing a 70's style inflation, mainly because right now there is not the degree of price and wage controls that existed in the 70's. In addition, OPEC has little control over the price of energy now, in sharp contrast to the 70's. Domestically, in fact, the price of crude has waned in importance. On the negative front in energy, the price of natural gas is much more important to our overall energy costs; the potential for gas price shocks still exists, and is much more possible than the potential for crude oil price shocks. In the end, I see the risk of, say, 5% inflation as much greater right now than it was at any time in the 90's. Inflation risk on the order of the late 70's/early 80's is not on my radar screen right now, though.

To: Amy J who wrote (144073)	9/25/2001 1:08:00 PM
From: Saturn V	Respond to of 186894

Ref < I see inflation as the worst enemy to an equity holder. > Yes inflation is the biggest threat ! The Fed is busy trying to revive the floundering economy, and the danger is that is that this will have long term inflationary consequences. And the conventional wisdom is that wars are always inflationary. Desert Storm was an exception, but all wars, the Vietnam War, World War I & II, have always been inflationary. The reason is simply that Wars tend to be financed by major budgetary defecits, and sure enough we are headed in the same direction. At this point in time we do not know what kind of armed conflict is in the cards . And everyone appears to think that it will be a short localized conflict. I am also hoping that it will be a quick military action, which will not be a drain on the countrys finances. Historically the best hedge against inflation has been gold or real estate. In the past in situations like today, the price of gold would soar. However today everyone is fixated upon the last war i.e Desert Storm and the allure of gold has faded.