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Politics : Idea Of The Day -- Ignore unavailable to you. Want to Upgrade?

To: Paul Moerman who wrote (42265)	3/27/2002 7:06:17 PM
From: IQBAL LATIF	Respond to of 50167

It’s very important that one needs not to lose the sight of realism while analysing global strategic and economic events. Since the last few years, we have been trying to analyse events on this thread and if we look back at most of the things we have analysed here with the exception of our pre-dominant bullish frame of mind, the sequence of events and bias of analysis has been towards honest interpretations. Post 9/11, the few posts that I have written on this thread regarding the economic situation, I have always maintained my line of pre 9/11 that the US economy will be able to face and tackle the enormous challenges that events of 11th Sept had burdened it. The issue is optimism is not considered to be a virtuous thing as bad news sells very well. I was reading Rob Norton in which he writes that bad news sells good that financial journalism has an interest in the bad news and likes to create a mountain out of a molehill. So for everyone in the last 12 months, the US economy was dismissed as a economy that has met the fate of Japanese model and as such banners like Is this the beginning of another great depression gain much more popularity than ideas of lesser people like us who believe in the productivity miracles of this decade and think that demographic growth and consumer spending led by housing and autos will help us through these lean times of corporate profits. The low interest rate cycle will certainly help us. In the last 30 years, I do not recall any time when productivity surge was so robust, inflation so contained and an economy that was able to rebound from such a crisis such as 9/11. If you would like at the previous boom and bust cycles, you will have noticed that high treasury yields have been a causative factor and those high yields stem from higher inflation. Here in present case 74% capacity utilisation and 5.7% unemployment both are at level that does not indicate overheating. We need to worry about wage pressures if any below 5% unemployment and 85% capacity utilisation. The Carter era severe recession was a high interest rate recession as was 1991-3 but since then we are in a low interest rate environment and the bull market that started from 1995 has seen productivity gains which are unprecedented in the economic history of any industrial nation. One other tool that Fed has generously used in the past few years very conveniently is the ability to create liquidity without compromising the value of the dollar. The recession lovers club as Rod martin calls them have always inundated us with the thoughts of ideas that the US dollar is going to the dogs with the kind of liquidity that the Fed is able to pump. The interesting part of this whole drama is that lower interest rates and high liquidity has seen dollar gaining strength instead of losing strength. The reason the dollar has maintained this strength instead of losing it is due to the fact that the US economy is the most successful model compared to the other 2 major economies. Euros birth was still born and still facing serious crisis of confidence as the Germans, the leading members of the euro land economic consortium have still not been able to put their house in order. They have a global problem of un-funded state pensions and they have serious problems with productivity and high social charges resulting into sever structural problems of labour mobility. All these factors are quite positive in the case of the US or the Anglo-Saxon model even the UK enjoys US model kind of prosperity because they do not have Europe’s structural problems with labour. One of the reasons the US economy remains robust and comes out of crisis time and time again is because of labour flexibility and layoffs help companies to adjust to the economic realities and slowdown. The recession lovers who talk about US dollar becoming weak also quote the Japanese economy as the kind of model where the US is heading towards. Again as I have written yesterday the interest rates cuts aggressively pursued by A.Greenspan helped the US economy come put of recession and into a period of sluggish growth which I expect it to be between 3-3.5% for the next 6 months. Short of any untoward incident that I doubt, I believe that an economy, which recovered from 9/11 crises within 1 quarter, would not see a double dip recession. The idea that Japanese model quagmire is waiting to happen for the US economy is plain nonsense. Interest rates did not work in Japan where within 3 months of the last cuts, we are already talking about hikes because unlike Japan the US is not mired with maddening irrational defence of failing companies, high government stimulus packages with no economic return and low risk nature of Japanese populous in CDs. The very reason that economic recovery has come so fast is sign of basic strength in relation to other models. Joesph Stiglitz, chairman of the council of economic advisors during the Clinton administration, wrote in the Washington post about the Downward Spiral that was part of the great depression of 1929 are part of the US economy post 11th Sept and that the economy will sink deeper into recession and take the world with it. Even Paul Krugman hinted that instead of a recovery, there would be a second dip recession. Political inclinations and maligned interpretations of economic data has unfortunately become an integral part of US financial journalist committee. They have very shallow interpretations and predict events like higher interest rates by FED because if economy remains sluggish and corporate profits do not improve, the global investors will pull their money out of the US. This pull out of investors from US would result in weakening $ where fed will have to take a stance between low interest rates to safe companies from bankruptcies or higher interest rate to save $ from oblivion. As I have explained above neither the Euro nor Yen have the ability to absorb that kind of pullout. More over, if such a pullout ever materialised, that should have been after Sept 11 when the very foundations of the US economy were attacked or US was its most vulnerable. Rather to the contrary US dollar became the flight to quality and there was even switch from the Swiss franc to the dollar. This is the kind of economy one would ideally like to achieve. Here, the global economic gurus have full faith in IOU’s of US issued by the treasury because within the global $35 trillion economy, the US is at the centre of it all. It is an oasis of stability and this is the reason that dollar is so well bid because of its fundamental strengths otherwise low interest rates and high liquidity should have eroded the strength of the dollar. A well bid $ and slow and steady recovery in fortunes of US will help equity markets. Politically inspired ‘damn Bush’ economic forecasts predicting recession and end of the prosperity have so far fallen well short of their catastrophic predictions, hopefully as far as US maintains the line to engage with the world and keeps its mottos of 'doing business as business of US' we will be alright and hopefully come out of this short-lived recession in flying colours, of course profits will follow as economic growth would certainly bring new hopes to corporate America presently straddled in last 6 months with all sorts of problems from huge drop in its spending from 650 billion US $ to 430 billion US $. I assume that hopefully GDP is going to recover from here and in next 6 months we will see test of SPX1450 a real possibility. I am not very sure about Nasdaq I think my year end target would be 2400-2750.. Thanks from everyone from our family..Ike