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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: ild who wrote (4448)	1/5/2004 10:42:54 PM
From: mishedlo	Respond to of 110194

Long and for the most part B O R I N G Here are the snips I liked 1/2 way down or so pimco.com ========================================================== China is in the midst of a secular transition from a command economy to a market economy, from a low starting point of consumption and a huge population. Internally-driven growth in China has massive upside. And since it does, it kicks off something called the accelerator principle, which is a secular concept, very different from the cyclical multiplier principle. Think of it this way: California is about 15% of the United States, similar in size to China's GDP. Now imagine there was an unexpected shock to aggregate demand in California, permanently raising its annual growth to 10% (ain't gonna happen, of course, given that California is a lousy place to do business, but it's fun to dream). Such a positive shock to California would arithmetically add 1.5 points to American GDP growth. But far more important, such a shock would kick off a nationwide investment boom via the accelerator principle, which links the desired size of the capital stock to expected normalized aggregate demand. Such is the case with China: internal demand growth in China is acting as a similar shock, both within China and the world more broadly, notably in the emerging world. Soaring commodity prices have a cyclical multiplier effect on emerging market countries, but they also provide the basis for a boom in investment to find and supply commodities – the accelerator principle. Mac's friend Marc Faber6 is an expert on this, dear Margaret; might I suggest you get his book? PM: Cut the sass, Morgan. Here's another question for you, from my good buddy Joe McDevitt, who runs PIMCO's London office. Lots of talk here about Uncle Alan not moving rates higher until after the November election. Question: Given his tenure, why should he really care? While I understand he's a Republican, if there's a case to move rates up earlier than November to preserve his legacy, won't that take priority over helping Mr. Bush get reelected? MLF: You are right, Joe, that Mr. Greenspan has a huge amount of latitude to do whatever he wants to do; if he wants to hike rates in front of the election, he certainly can. Indeed, as you suggest, doing so might be a legacy builder for Uncle Alan, scotching any notion that he's a flunky of Bush's. The real issue here is not politics, but macroeconomics: what problem would hiking rates fix? It certainly can't be an inflation problem, as the Fed wants inflation to move up from the bottom half to the top half of its implicit 1-2% zone for the core PCE deflator. And by the Fed's own admission, unemployment ain't likely to be too low for a long, long time. The strongest case for early tightening is simply that the 1% Fed funds rate is well below “neutral,” fueling excessive speculation in financial assets: the longer the Fed waits, the more nasty will be the unwind of that speculation. Mr. Greenspan is unlikely to get into bed with this thesis, however, as he abhors the notion of using monetary policy to tinker with asset prices, unless he has a compelling macroeconomic reason for tinkering anyway.