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Pastimes : Ask Mohan about the Market -- Ignore unavailable to you. Want to Upgrade?

To: Bonnie Bear who wrote (14122)	2/15/1998 8:26:00 AM
From: Tommaso	Read Replies (2) \| Respond to of 18056

To judge from the money supply bubble, the Fed is keeping interest rates low by buying bonds. It is now over 11% on M3 and even M1, which is radically reduced by automatic bank sweeps to interest-bearing accounts, is at 4%. bog.frb.fed.us Here is the ultimate source of the money that is keeping the stock market inflated. Most people are living on credit, at least to some extent. If the Fed does anything to cut back on this money growth, bonds should become cheaper and interest rates should go up. If this provokes additional selling of bonds, it could happen faster. I think that the Fed is trying to forestall worldwide deflation that they see coming from the devaluations and equity collapses in Asia. Vast productivity increases and overproduction resulting from that have produced a world-wide situation somewhat analogous to the internal overexpansion in the US during the 1920s. The Fed may be able to keep this game going for some time because most people, not even Congress members, pay no attention to money supply figures and do not know what is going on. The problem is that a lot of us already have all the goods we need from Asia. In my house we already own several vacuum cleaners and I can't think of another appliance we can use. I have one sturdy pair of shoes from China and I don't really need any more. I don't need a new computer and don't even hanker after much peripheral stuff for the ones I have. The last Asian-made shirt I bought shrank three sizes when I washed it and I don't think I will buy any more. I realize that my own micro-economic horizons may not be applicable, but I think I already provided enough macro arguments. I am afraid that all this credit that is supposed to keep the consumer economy healthy is just going into bidding stocks up and up far beyond any intrinsic value. Anything the Fed does now to restrict credit will start a terrific deflation of equity values. If I were Greenspan I would suddenly develop a very bad back (he already has one, actually) and say that I had to retire. He's somewhat in the position of Louis XV: "Apres moi, le deluge."

To: Bonnie Bear who wrote (14122)	2/15/1998 7:21:00 PM
From: Tommaso	Read Replies (1) \| Respond to of 18056

"No, I believe the next problem in the U. S. will be an inflationary surge in the money supply. What always happens under those circumstances is that when the Fed starts raising the interest rate, it tends to overdo it. [Laughs.] The market will overreact. And that's where you're going to get your recession. " This is Milton Friedman in an interview last December. Here's the whole interview: forbes.com Well, we already have the inflationary surge in the money supply. It remains to be seen if and when the fed will overreact. Friedman does not foresee a stock market crash. But to me, it's hard to see what other effect a recession could produce on the market. Maybe by "crash" he meant more than 50% down. Not that Friedman is much more accurate than anyone else, but given his presuppositions and given what is actually happening, he is at least worth listening to.