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.

Strategies & Market Trends : Galapagos Islands -- Ignore unavailable to you. Want to Upgrade?

To: zonder who wrote (44814)	7/23/2003 1:02:53 PM
From: Lazarus_Long	Read Replies (2) \| Respond to of 57110

We have been heavily trading currencies since the beginning of 2003 CHEAP SHOT! Bernanke TOLD YOU he was going to drive the $ down! And he did a really good job too. Where the markets are concerned I have no heart. Thoroughly educated thus in American schools from the age of 12 until 23 :-) Reality is our specialty. :-) As the discrepancy between perception and economic reality deepens in US markets, it gets riskier. Translate that into English. The "feel good" market doesn't match its actual prospects? Oh and I will be out on a rather long vacation soon and would rather not hold options on US tech stocks :-) No puts? :-) Financial Times on prospects for inflation/deflation and Fed action: The Fed takes a dangerous stanceBy Avinash PersaudPublished: July 22 2003 19:47 \| Last Updated: July 22 2003 19:47 Alan Greenspan appears to be prepared to put the 20-year fight against inflation at risk for the sake of his reputation as the central banker who steered the US through boom and bust and back to steady growth. This is a serious charge to make against the chairman of the Federal Reserve, but it is one levelled at him by his more fervent fans: US financial markets. Advertisement The Fed can directly control short-term interest rates but not yields on US government-issued, inflation-linked bonds, which encapsulate the market's expectation of where inflation will be in the future. Since October 2002, despite all the talk of deflation and the possible need for unconventional monetary action, inflation expectations have risen by 0.7 percentage points, with half of that rise occurring since the Fed's last cut. Rather than heading towards zero, the market now expects inflation to be above 2.1 per cent, or a full 1 per cent above current interest rates. Inflation is not about to return to double digits but US inflation expectations are definitely on an upward trend. This is not the result of over-zealousness by the bond vigilantes - who are forever stroking their inflation worry beads - but the logical response to the Fed's actions and its policy orientation. At his twice-yearly congressional testimony last week, Mr Greenspan said: "The Federal Reserve Open Market Committee stands ready to maintain a highly accommodative stance of policy for as long as it takes to achieve a return to a satisfactory economic performance." This is an inflation charter. This policy orientation makes two assumptions that were found wanting in the 1970s when Arthur Burns, Mr Greenspan's mentor, was in the Fed chair. First, it assumes that a central bank can keep interest rates low until it sees sustainable economic growth, when it can tighten monetary policy to avoid inflation. But by the time you spot sustainable growth, inflation is already in the system, particularly if you start with interest rates below the current level of inflation. This experience in the later part of the past century engendered the idea that central banks should keep interest rates above inflation, pursue a stability strategy and target intermediate variables such as the growth in money supply or nominal income. The European Central Bank has followed this line but Mr Greenspan has disregarded it. Second, Mr Greenspan's policy orientation assumes that it is not possible to have slow growth and inflation, which was a frequent occurrence in the 1970s and the early 1980s. Mr Greenspan believes the fundamentals are far stronger today than they were then. But, productivity miracle or not, a period of below-potential growth is precisely the adjustment that is required to deal with the three years of over- investment and over-consumption in the US in the late 1990s. When this adjustment is allied to an over- accommodative monetary policy, it may result in a period of stagflation. Stoking the fires of consumption too soon will only worsen the record current account deficit. This deficit, close to 5 per cent of gross domestic product, represents overspending by US citizens, paid for by under-spending in the rest of the world. This is unlikely to last for ever. The bigger the deficit, the more painful the eventual adjustment will be for the US. The Fed's switch to an inflationary policy has been carried out under the perceived threat of deflation. There are, however, few signs of deflation in the US or in the world economy as a whole. In the US, inflation is above zero and rising. Globally, equity markets are outperforming bond markets and commodity prices are strengthening. Non-Japan Asia, the world's second largest economic bloc, is achieving 6 to 8 per cent growth. The main sources of deflationary pressure are Japan and allegedly China. However, the latest data show that capital expenditure is recovering in Japan and that inflation has risen above zero in China. The bond vigilantes may conclude that the official deflation-mongering, including the hints of a possible recourse to unconventional monetary policies, was merely a ruse to hide this switch to an inflation policy, or at least intended to soften the blow to the bond market. Certainly the idea that the Fed may consider buying long-term bonds, signalling the central bank's concern about deflation, was always a non-starter in practice. If there were deflation, long-term interest rates would already be low and falling; there would be no need to lower them further. If deflation beckoned but the markets were still worried about inflation and so yields were high, printing money to buy bonds would only raise inflation expectations further, sending bond yields yet higher. The Fed's inflationary turn will undermine fixed-interest assets, such as government bonds and the dollar. But it will support real assets such as US industrial equities, globally leveraged assets such as Asian equities and commodities and commodity-linked currencies. This is the Greenspan legacy asset allocation. But investors will have little time to get used to it. After the past 10 years of turbulence, the next Fed chairman will be likely to pursue greater financial stability. It is striking that while the next Fed chairman is likely to follow a more traditional approach to monetary policy, akin to that of the ECB, European politicians are urging their central bank to be more like Mr Greenspan's Fed. The writer is professor of commerce at Gresham College and global head of research at State Street, Boston news.ft.com