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Strategies & Market Trends : Strictly: Drilling II -- Ignore unavailable to you. Want to Upgrade?

To: Canuck Dave who wrote (21915)	11/15/2002 12:15:16 PM
From: Jim Willie CB	Respond to of 36161

notice Dow minus 67... AND... TEN yield up 2.4 bpt !!! more cracks to the entire USA financial paper foundation much more coming next year when stocks and bonds decline gonna be big for gold Roach says it best regarding the stimulus much disappointment coming The place where I always get stuck in this argument is on the issue of traction -- which sectors of the US economy can now be expected to respond to the Fed’s monetary stimulus. There are three obvious candidates -- the interest-rate-sensitive sectors of consumer durables, homebuilding activity, and business capital spending. In my opinion, the response of each of these sectors to Fed easing is likely to prove most disappointing. Here’s why. Normally, at this stage in a business cycle, there is a good deal of pent-up demand for items like cars and homes; as such, lower interest rates typically are quite effective in unleashing that demand and spurring vigorous recovery. That’s unlikely to be the case in the current cycle. Demand in these two sectors never fell in the recession of 2001 and they have remained resilient in the subsequent recovery. That means there is no pent-up demand that can now be unleashed by Fed easing. Just ask Detroit, where car buyers are now suffering from zero-interest-rate fatigue. The same is true of capital spending -- a sector that remains constrained by the twin pressures of the capacity overhang of the late 1990s and the ongoing imperatives of corporate cost cutting. In a deflationary climate, why would businesses compound their lack of pricing leverage by adding to aggregate supply? Fed easing is unlikely to change the capex calculus in the current climate. Don’t get me wrong. I’m not saying that the Fed should have done it any differently on 6 November. What I am saying is that it may well be wrong to conclude that this action will be the silver bullet that sparks cyclical recovery and eliminates deflationary risk. The neutral bias announcement from the Fed is intended to persuade us that such a rosy scenario is now at hand. Once again, I suspect we’ll be disappointed in the outcome, and that the Fed will have to change its mind. The time honored anti-deflationary drill requires a central bank to be both aggressive and early in its monetary ease. The Fed is now trying its best to be aggressive, but the risk is it may be too late. / jim