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Technology Stocks : George Gilder - Forbes ASAP -- Ignore unavailable to you. Want to Upgrade?

To: Sandy who wrote (900)	1/22/1999 2:47:00 AM
From: zebraspot	Read Replies (1) \| Respond to of 5853

On the other hand, he seemed clearly skeptical about the sustainability of the current market: >>Despite brisk demand and improved productivity growth, corporate profits have sagged over recent quarters. This is attributable in part to some acceleration in labor compensation, but other factors have also been pressing, especially intensified competition and lower prices facing our exporters and those industries competing with imports. In these circumstances, businesses will feel under considerable pressure to preserve profit margins should labor costs accelerate further, or should the falling prices of commodity inputs, like oil, turn around. But, to date, businesses' evident pricing power has been scant. Either that would change and inflation could begin to mount or, if costs could not be recouped, capital outlays might well be cut back. The recent behavior of profits also underlines the unusual nature of the rebound in equity prices and the possibility that the recent performance of the equity markets will have difficulty in being sustained. The level of equity prices would appear to envision substantially greater growth of profits than has been experienced of late. Moreover, the impressive capital gains of recent years would seem also to rest on a perception of relatively low risk in corporate ownership. Risk aversion and uncertainty rose sharply over the late summer and fall of 1998 following the Russian default in mid-August, as evidenced by widening spreads among yields on debt of differing credit qualities and liquidity. The rise in uncertainty increased the discounting of claims on future incomes, and that reduced stock market prices even as the long-term earnings growth expectations of security analysts continued to rise. As risk aversion subsided after mid-October, stock prices returned to record levels. Markets have doubtless stabilized significantly after the turbulence of last fall but they remain fragile, as the repercussions of the recent Brazilian devaluation attest. Moreover, our chronic current account deficit has widened significantly, in part reflecting the strength of domestic demand that has accompanied the further accumulation of capital gains. The continued increase in our net external debt and its growing servicing costs clearly are not sustainable indefinitely. In light of the importance of financial markets in the economy, and of the volatility and vulnerability in financial asset prices more generally, policymakers must continue to pay particular attention to these markets. The Federal Reserve's easing last fall responded to an abrupt stringency in financial markets and the effects that the consequent increased risk aversion was likely to have on economic activity going forward. We were particularly concerned about higher costs and disrupted financing in debt markets, where much of consumption and investment is funded. We were not attempting to prop up equity prices, nor did we plan to continue to ease rates until equity prices recovered, as some have erroneously inferred. This has not been, and is not now, our policy or intent. As I have discussed earlier, movements in equity prices can play an important role in the economy, which the central bank must take into account. And, we may question from time to time whether asset prices may not embody a more optimistic outlook than seems reasonable, or what the consequences might be of a further rise in those prices followed by a steep decline.<<