Lee- I would like you to concentrate on affect of lower interests on corporate profits. We have good great productivity, efficiency is improving, demand is good, consumer confidences is intact and still no inflation. Now the 'gurus have been waiting for this inflationary dragon to raise its ugly head since last two years, it appears nowhere.
On the other hand we have now budgetary surplus, the need US government was responsible for this so called crowding out as they were biggest user of funds, now with their lost appetite and the topsy turvy investment a scenario of ASEA, the money is coming out of exotic places into US, where it is looking for safe haven, not only US but Matif and Bund are also at new highs .Japanese investments funds will soon be available in the market as Japanese deposits base is deregulated. All these factors will in my opinion help bonds. Russian situations will if any help flight to quality if it aggravates further.
I fail to see why I 'economists' are hesitant to term this breakdown of employment- growth relationship as a new undefined uncharted territory.( I wrote somewhere last year about this and indicated may be the breakdown is equivalent to developments which may lead to negation of Einstein's 'Theory of relativity'. Naturally, the kind of response we may have from brotherhood of world scientists may be like a deer caught in front of a big Mack. In my opinions we the small guys need to keep asking these question, not to infuriate Krugman Company but to demand a answer to an apparent anomaly which is unexplainable with application of present economic principles.
We need to appreciate that 'long money' is the smartest money, it needs ground reality not conventional academic books to convince that a premium is really required for inflationary concerns. If it is prepared to forgo that premium we need to know if it is for real or a apparent anomaly. The jury is still out, as a loud thinker I would tend to go along this argument that what we are seeing is a breakdown of conventional relationship of unemployment and growth.
A worker producing 'Honda' car in Japan produces a product which caps the profit margins for its US counterpart, now back in 60's this relationship did not exist. In a detached world the pressures of price competition were non-existent however now 'globalisation's resulted in new kind of price competitions which go beyond price but touch on areas like productivity competition, efficiency competition, all this leads to 'convergence of quality and price' within global producers. US happened to understand that much earlier, EU are still caught up with national strikes and cradle to grave protection but since last three years have started working on US model.
In face of above, notwithstanding, interim hiccups we may see 5.5% during next few years establishing as the top resistance and movement of the long money may be restricted between 4% to 5.5%. This will mean a low interest environment, higher spending and external imported price pressures which may restrict the capacity or tendency to pass on price hikes of 'corporate' to consumers. One also needs to think of shifting of 'dirty industry' labour intensive to the third world even if it means China and US emerging as producers of state of art goods. Dirty industry labour demands are much more stringent being at the lowest rung of the ladder where as specialised workers traditionally better paid has lesser demands. Food for thought only. Ike
An article and interview for you:
Forbes- Asset inflation causes deflation! US do not have asset inflation. Period
Some excellent articles from Forbes by Milton Friedman and Kenneth. L. Fisher
As I See It
The wise old Nobel laureate talks to FORBES
about deflation and inflation, explains why he is
skeptical about the European Monetary System
and tells why Asia's economic mess may help
Alan Greenspan.
Milton Friedman at 85
By Peter Brimelow
MILTON FRIEDMAN turned 85 in July. The
Nobel laureate economist, now a Senior
Research Fellow at Stanford's Hoover Institution,
has just finished his autobiography, Two Lucky
People, co-written with Rose, his wife of 59
years, to be published by University of Chicago
Press next spring. Now he has gleefully set about
mastering the Internet. FORBES interviewed
Friedman when he turned 80 (Aug. 17, 1992)
and previously at 76 (Dec. 12, 1988). This year's
rendezvous took place in his apartment, with its
stunning views of San Francisco.
FORBES: Deflation talk is fashionable. . . .
I think the chances of a 1930s-style deflation are
trivial. You can only have that kind of deflation if
you have a bad monetary policy. Deflation is the
easiest thing in the world to avoid; you just print
more money.
You're not worried about involuntary
deflation through collapsing financial
institutions?
Oh, you can have recessions. You can have
economic crises and financial institutions failing.
But that will not produce deflation in the sense of
falling prices, as in the Thirties.
In 1953 I gave a talk in Stockholm under the title
of "Why the American economy is
depression-proof." I've been right for 45 years.
Why should I change my story now?
And the reason I said it then is the same reason I
say it now: The Great Depression need not have
occurred if the monetary authorities had behaved
differently.
But price levels fell through the last part of
the 19th century. . . .
You can have mild deflation, but it needn't be
depression. From 1879 to 1896 prices in the
U.S. fell by an average of 3% a year. From 1896
to 1914 they rose by an average of 3% a year.
The economic rate of growth was identical in the
two periods. So it's pretty clear that deflation
doesn't mean depression.
Okay, but you can have mild deflation
without depression. And even mild deflation
does mean different investment strategies. It
means lower interest rates and higher bond
prices. It's an issue for FORBES, because
the editor has us on the line saying U.S.
bonds are a good buy.
Oh! Well! [Laughs.] At the moment I feel that
they're probably a pretty good buy-but not for
the long term.
At the moment we have a rate of inflation of
about 2% to 21/2%-maybe 1% to 11/2%,
allowing for overstatement (because there's no
doubt official statistics overstate the rate of
inflation-they're not properly allowing for
qualitative improvements). We've had very good
monetary policy ever since Alan Greenspan has
been chairman-the best of any period since the
Federal Reserve was established in 1913.
But Greenspan is not going to stay chairman
forever. We're getting euphoria about how
inflation is dead. Yes, the pipeline is set for the
next year or two. We're not going to have
significant inflation in the next year or two.
But longer term, inflation is headed up and not
down. Money supply has been going up at 3% or
4% per year-recently at about 7%. And that
was already showing up in wages. Now I think
developments in East Asia will slow things. But I
would not be prepared to say that for the next ten
years the consensus estimates of 2% to 21/2%
inflation will work out. Sometime within the next
10 to 12 years we'll have a period of much higher
inflation.
You're absolutely confident that we're not
going to see a secular decline in prices for a
long period of time? We can't go back to the
situation that obtained in the late 19th
century?
We could. But I don't think we will. Because of
political opposition-given that we know how to
prevent it. And given our past history, particularly
the Great Depression. Now, if there's any
country in which the deflation scenario is possible,
it's Japan right now.
Do you see that spilling over?
Of course, but it's not a major spillover. And I
don't think it'll happen in Japan. I don't
understand the way in which the Japanese central
bank has been working. They should be printing
more money. And sooner or later, it seems to me,
they're going to do so.
You see, the problem is that central bankers are
hipped on the idea that they should worry about
interest rates. The Japanese central bank says,
"We've done all we could; look how low interest
rates are." But they have another alternative. They
don't have to care about interest rates. They can
just go and buy up government securities. If they
drive the interest rate to zero, what difference
does it make? The effect would be to put more
money in circulation and to offset this
extraordinary situation in which they had a
speculative bubble; they broke it by cutting
money supply, and they've been suffering ever
since because they can't get any upward
momentum.
Is that what will spark the next U.S.
recession-a trading partner's troubles?
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.
What do you think about the stock market?
Well, I think the stock market is overvalued. But
it's not setting up for a major crash.
When we last spoke, you predicted that the
European Monetary Union would collapse.
And it did. Britain and Italy came out.
Yes, it collapsed. I've also been predicting that
the euro would never happen. I'm still not sure
I'm wrong. The costs have been enormous. To
preserve the link between the franc and the
deutsche mark, the French had to adopt tight
monetary and fiscal policy. They got double-digit
unemployment and recession. Britain and Italy
floated and have prospered.
Why are the Europeans doing this?
For strictly noble political purposes. [Former
French President] Mitterrand and [German
Chancellor] Kohl believed that they were the last
leaders of their countries to experience World
War II. They were determined to set up a system
in which World War II could not happen again.
And they were willing to pay an enormous
economic price.
What do you think will happen now?
I'm baffled. I really don't know.
Jerry Jordan of the Cleveland [Federal Reserve]
has made a very good point. Suppose the euro is
in existence, with a central bank overseeing it.
What assets is it going to deal with? If the U.S.
central bank wants to increase the money supply,
it buys U.S. government bonds. If it wants to
decrease the money supply, it sells U.S. bonds.
On the balance sheet of the European central
bank, to begin with, the assets will be francs and
deutsche marks and so on. But if it wants to
increase money supply, what does it buy?
German bonds, Italian bonds, French bonds?
Because to the extent that it does anything,
it's going to affect the economy of the
various countries differently?
Exactly. If you had first a political unification of
Europe and the separate national bonds were
converted into a European Union issue, it'd be no
problem. Or if the European bank was going to
start out by deflating, it could sell its own
securities, and then it would have something to
deal with. But over time it's going to be
expanding the money-to keep prices stable with
output growing, it has to increase the money flow.
All right-how? It makes a big difference to the
French or the Italians-or the Germans-whose
bonds are used.
They're going at political unification backwards. I
am still not willing to bet my life that the euro will
go into existence. I think there's still a substantial
chance that between now and then the whole
thing will break down.
But the will of Europe's political elite to do
this is phenomenal.
Phenomenal. The people are opposed to it. And
who is being stupid in all of this, in my opinion, is
the business community in Europe. They're not
going to benefit from the euro, they're going to be
harmed by it.
Why?
Because the euro will lead to a less prosperous
Europe. For example: Spain is hit by something. It
can't adjust by having its exchange rate fall. It's
going to adjust by rules, by regulations, by more
control.
Will the euro be an inflationary or
deflationary factor in the world economy?
Neither inflationary nor deflationary-if there are
floating exchange rates. And most exchange rates
float.
But who knows what's going to happen if they go
to the euro? There could be a real donnybrook in
Europe.
Enough to impact the world?
Oh, yes.
Isn't there increasing central bank
intervention in exchange rates- more dirty
floats?
Oh, there've always been dirty floats. The only
ones that are not dirty floats are Hong Kong, at
the moment, Argentina maybe, Lithuania, Estonia.
The Thais had pegged the baht against the U.S.
dollar. When the dollar appreciated, that was a
real problem for them. But every pegged
exchange rate system tends to go the same way.
If there is central bank intervention, it gets out of
alignment.
Where does the Wall Street Journal's
editorial page campaign for fixed exchange
rates fit into this?
You got me! I think that's just an aberration. My
God, how the hell can they stick with that?
They've just got an id‚e fixe about it. Like
they've got on immigration. It's just obvious that
you can't have free immigration and a welfare
state.
The debate about floating exchange rates has
been won by the floaters. Other than [Columbia
University economist Robert] Mundell, who is a
nonfloater among major American economists?
[Wall Street Journal Editor Robert] Bartley
says he thinks the nation-state is dead, that
we're moving to a world driven by markets,
free movement of labor and capital-I'm not
sure what he thinks the political institutions
will be. Your view?
No, I don't think the nation-state is dead. And all
attempts to depart from the nation-state in the
direction of the U.N. and a United States of
Europe have so far been complete disasters. It's
kind of hard, I think, to get the American public
to go that direction very far. They're not very
happy with the U.N. There are beginning to be
some rumbles about opposition to the IMF.
A lot of opposition to Nafta came from fear
of loss of sovereignty. . . .
I thought Nafta was a terrible treaty-except that
it was better than nothing! [Laughs.] I'd rather
have unilateral free trade in the U.S.
Other examples [of failed supranational
institutions] are the IMF and the World Bank.
We would never do with our own money what
the IMF and the World Bank have done.
Look what's happening now with Iraq. The U.S.
wants to hide behind the U.N. Our Iraq policy
has been stupid from the beginning. We ought to
declare defeat. Give up. Say we're not going to
be a policeman for the Europeans. Call it
isolationist if you will, but I don't see any other
way out.
Talking of isolationism: Congress recently
refused to renew Fast Track [the President's
enhanced authority to negotiate further free
trade treaties]. On the political right, there's
clearly increasing interest in protectionism,
for example voiced by Pat Buchanan. Are
you concerned?
Buchanan's not a fool. But on economics, he's
terrible! Well, historically, the American Right has
always been protectionist. McKinley, the 1896
election. . . .
I don't think it's much of an economic threat.
Given the size of the U.S. and the amount of
internal trade and the ability to get around
protectionism via the Internet, via various other
means-I don't think protectionism is a real
threat.
See you in 2002?
[Laughs.] The odds are against it! But I'll be
delighted.
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Go slow: Inflation
ahead
By Kenneth L. Fisher
IN THE ISSUE of Nov. 17 editor Jim Michaels
notes that the edition included the word
"deflation" at least a dozen times. He noted that,
based on deflation, four commentators were
recommending bonds. I disagree with the
deflation thesis. When everyone expects deflation,
it won't happen-or it's already priced into
securities.
If money is created rapidly, we can't get deflation.
Globally, central banks are printing money like
drunken sailors. I never believe any country's
published economic data, but this process is
ubiquitous: I don't need precise data to see it. Yet
it is seldom cited, increasing its force as a surprise
factor to impact pricing. Deflation is a nonstarter.
As Milton Friedman has said so well for so long,
inflation is always and everywhere a monetary
phenomenon. Deflation, too. You can't have it
when the printing presses are on overtime.
This money-creation should keep the bull market
alive for a while. It will end when inflation gets
ugly. That's what's in store, not deflation. I don't
know when-but it's coming.
I don't buy the deflation trend, and I don't buy
the small-stock trend, either. Readers now ask if
the third quarter's small-stock rally isn't the new
basic trend.
I don't think so. The really important trends aren't
the ones the media get quickly. They get the big
trends late, very late. The recent strength in small
caps is ephemeral, a bounce-back that I think is
already over. That the media was so quick
recently to jump on the small- cap bandwagon
suggests to me that big stocks will outperform the
small fry.
Late in bull markets and then afterward in bear
markets, small stocks usually lag most of the way.
If small stocks really have just begun a big, long
move, then the bull market has a long, long way to
go, in which case you can also make good money
in big caps. But hey-while intact, it's an old bull.
I can't see it running far enough to make small
stocks pay off. Forget that talk.
If you want diversification away from big-cap
leaders, don't go to small caps. Try large
Continental European stocks, and huge Japanese
global exporters. They are pumping money out in
Japan and the Continent, and it's going to revive
those economies for a while and strengthen their
stock markets.
I don't buy the deflation trend,
and I don't buy the small-stock
trend, either.
For example, Banco Santander (27, STD) is up
about 60% since I first suggested it at 17 on Nov.
4, 1996 (after a 3-for-1 stock split). I expect
more. Spain is leading Europe's economic
recovery, and I don't think Spain's largest
commercial bank will slow down until the rest of
Europe finally speeds up. Even now it is not
overpriced at a P/E of 14 with a 2.4% dividend
yield.
Tele Danmark (29, TLD) is not only big, and
dominant in its market, but it is cheap and
financially strong. As Denmark's prime telecom
supplier, it has virtual monopoly power to exploit
trends like the Internet. Hence, note Ameritech's
recent move into this market by buying 34% of
TLD at a big markup to the stock price. At 17
times earnings, 87% of book value, 1 times annual
revenue and a 4.6% dividend yield, it's cheap.
On Sept. 22 I recommended Electrolux (82,
ELUXY) at 70 as a follow-on to my Sept. 9,
1996 recommendation at 55, saying to look for
100. After a huge move, several readers wrote
asking about it and about my dividend comment
(which had two combined copyediting screw-ups
on my part-maybe I figured I'd get all my
copyediting errors for one year into one
sentence-sorry). Well, ELUXY may be a bit
ahead of itself. I still expect 100, but I would hold
off, waiting for a better buying opportunity.
Kubota (66, KUB), Hitachi (74, HIT) and
Matsushita (163, MC) have been among my
worst recommendations of the last year. All three
suffer from the rare "J" disease. But this bug will
pass. Japan will rise again.
One reader says his ego is bruised from following
my recommendations on these Japanese stocks.
Mine, too. But if they were good buys before,
they are better by far now. The firms are fine.
Kubota is doing particularly well in its basic
business, evolving from modest earnings gains in
its basic farm machinery business, but also adding
new products at a rapid clip. Be patient. Pacific
Rim volatility may delay Japan's recovery, but it is
coming.
Kenneth L. Fisher is a Woodside, Calif.-based money
manager. His third book is 100 Minds that Made the
Market.
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