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To: McNabb Brothers who wrote (14259)	8/21/1998 12:30:00 PM
From: Bill Harmond	Read Replies (1) \| Respond to of 164684

>>One needs to study what deflation does to markets and it is not a pretty picture! We need deflation first.

To: McNabb Brothers who wrote (14259)	8/21/1998 2:25:00 PM
From: Rob S.	Read Replies (2) \| Respond to of 164684

Good points. The "liquidity problem" may be deeper or different from what many people think. Some of the factors that appear good for the short term - lower commodity prices due to devaluations and ample supply - may be the tip of the iceberg of a huge worldwide over-capacity problem. Ignoring the wisdom of western style financial controls, Asian and other markets went deeply into debt. The extent of debt taken on by many companies in Asia and nearly bankrupt "third world" countries such as Russia, is hardly believable when compared with the norms in the west. Even Amazon.con does not have nearly the 10X to 50X debt to sales and equity ratios several companies racked up. And the macho international glad-hand bankers waltzed right into the picture with billions. Now some of this huge debt is threatened with default and international banks blackmail world banking institutions to make good on their stupidity. Capitalism works great when it isn't grossly artificially distorted. The result of building of huge capacities in many industries and breaking down of cold-war barriers is a glut of cheap products rolling through the world economy and a declining price/demand trend spiral. Bullish sentiment goes something like this: "Yes, but the U.S. is positively effected by this because consumers benefit by lower prices at a time of full employment and high consumer confidence". I partly agree with that - it is positive for the end-of-channel sectors (at least as long as consumers stay employed and euphoric). The glut of cheap goods due to over-supply and currency devaluations will stock the shelves in stores and warehouses and spur consumer and corporate spending. But the foolish level of loans that have built up huge excess capacity in products such as semiconductors, consumer electronics, etc. cripples even the best run firms here in North America and in Europe. The downward spiral in pricing is having an effect on the prices that American companies can charge just at a time when labor is scarce and expensive, other domestic costs are not going down to match foreign drops, and productivity gains seen in the past are much harder to come by. As a result, we haven't seen the last of a downward trend in earnings. We may have only seen the beginning. A recent study pointed out that it takes up to 18-24 months for foreign devaluations and other events to trickle through to effect the earnings in U.S. So the wisdom, as you pointed out, that low interest rates does not mean that a recession and drop in the stock market can't occur is not at all certain. When you have excess supply in world markets and deep pain overseas, it is only time before the pain is felt here as well. Until recently I have had a rosy outlook for improved earnings prospects of American and European corporations for '99. I am still sticking to that general belief - but only narrowly.