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Strategies & Market Trends : Asia Forum -- Ignore unavailable to you. Want to Upgrade?

To: MikeM54321 who wrote (4043)	5/31/1998 10:41:00 AM
From: Zeev Hed	Read Replies (3) \| Respond to of 9980

Mike, I think that you forgot another major source of liquidity, the budget surplus. The government no longer competes aggressively for money in capital markets. The Feds now believe that we will have a period of 5 to 7 years of budget surpluses. I personally do not see that. In this country, budget surpluses have historically led to at least recessions, and bear markets. The way I see it, during the initial stages of such surpluses, the markets sets itself up for a decline (by progressing too high too fast, due to the excess liquidity such surpluses create). The recession results from the simple fact that the government takes out more money from the economy than it puts in, thus , in essence soaking or reducing aggregate demand. No two historical situations are equal, and the current surplus is accompanied by an Asian deflation which, I believe will initially cause further rise in equities (low inflation, low interest rates, and delayed impact on US competitiveness, except the export section of our economy). Later on, however, the loss of corporate pricing power will eventually show in corporate earnings (slow down), the fiscal soaking in reduced aggregate demand and thus a recession. When, I really do not know. I have attempted in prior posts to factor in the leak of liquidity from the Japanese Big Bang (at the time I suggested that about $200 billion/year would leak from Japan to world's markets, but one should not be surprised if this leak becomes a torrent) into international markets. One can only guess when such capital flight will cease. Until it does or until our own GNP actually takes a tumble, I cannot be overly bearish on US markets. As for the arguments about the growth of M3 and L, I think that he is failing to take into account the new found "desirability" of the dollar in foreign economies. I have an inkling in my stomach that a large portion of the less stable economies are moving to "dollar denominated" trade transactions, and to support these, additional dollars need to be put into circulation (in all forms from actual money to treasuries etc.). I wonder if anyone is looking at the world money supply rather than just the US. We may find many countries with nominally contracting money aggregates, and these contractions have simply been replaced with US dollar aggregates. If that is the case the argument that explosive money supply induced inflation is around the corner is hollow, since the total amount of money "chasing" goods has not gone out of balance, only the color of the money has. Zeev