To: Roderick Francey who wrote (16944 ) 8/30/1998 5:20:00 AM From: Gabriela Neri Read Replies (2) | Respond to
Thats why we have a deflationary spiral in prices of goods which must compete against competitive imports. Of course, this doesnt apply to the price of services or to the domestic price of wages in the US. And, this is what the fed is worried about. But, the issue you raise is exactly why the prices of many blue chip stocks are falling. It is because they have less demand from their customers overseas(who, due to deflated currencies find the products much more expensive) and also due the fact that their domestic margins are under severe pressure as costs rise and prices either stay level or fall). The issue is central to what is happening and has been written on exstensively. Of course, Hairy Abbey Cohen screams out that Russia and Asia dont matter. Thats crapola. They may not represent very significant percentages of exports, but it is this secondary effect on prices which matters a lot. Besides, in a leveraged credit driven boom, a little change at the margin in demand makes a big difference in the system. Just look at the oil markets. The fed finds itself in a quandry because of the pressure on wages due to the tight employment levels in the US. It is caught in a classic damned if they do and damned if they dont. As usual, the fed, by not being proactive and in effect shaping the situation , it is now in reactive mode with fewer choices. If they lower, the bulls will rally the market and this is counterproductive to their desires. After all, Greenspan wants the market to come back down.(If he thinks that markets can be adjusted with any degree of finesse, he is about to once again learn the hard way that they either go UP too much or DOWN too much) But, the joke is that this will be a temporary phenomenon. The market will only go down much harder at a later date. However, a fed easing will take the wind out the dollar somewhat and may therefore be constructive to Gold. The big question on the feds mind is how to balance the needs of the international crisis(which beg for a fed easing) with the domestic needs of a hot and fully employed economy. Whats good for one is bad for the other. They are stuck, and the interesting thing is that the bulls think that, once again, they have the fed by the shorthairs. They think that an easing will bail them out of their misery and that Greenspan will be forced into an easing. They are wrong. An easing will create a powerful rally but it will prove ephemeral and create more damage down the road. There is no way out of this mess short term that the world finds itself in. It will require long term solutions by destroying excess capacity where it exists and by allowing prices of assets around the globe to adjust to the new level of global GDP. However, governments like China and Hong Kong are trying to fight market forces, and will thereby delay the inevitable. Too much credit, too much capital, too little standards, too little discipline, too much non-economic excess capacity. We need some wealth destruction to fix the situation. The wealth destruction is in reality the invisible hand of Adam Smith. This hand can get very heavy handed.
