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Below is an excerpt from Alan Abelson's column in this week's Barron's -
there's much more worth reading. Abelson is a curmudgeon and contrairian
(probably an oxymoron) however one might want to keep in mind Marty Zweig's
"Don't Fight the Fed". While this bull does not yet look dead, it does bring
to mind the appearance of a rodeo cowboy attempting to beat the clock.
Earl
Thus, a week from Tuesday when interest rates are lifted a quarter of a
percentage point, the official explanation will be that the hike is being
prompted by "imbalances" that could induce inflation in the economy. The
real explanation is deep concern that, unless deterred, the mania gripping
the stock market will end in tears, and so, in that case, will the
expansion.
Wall Street breathed a sigh of relief after the chairman's testimony,
persuading itself that this will be a one-shot increase. Even bond traders
sighed with relief, hopeful that, in terms of Fed action, the worst is over.
We sympathize with the sentiment and think it's dead wrong.
And we think so on several counts. The first is no way a bubble so enormous
and so long in the making can be contained by one tiny boost in interest
rates.
As Bob Farrell points out in his current "Theme and Profile Investing," our
stock market now accounts for 53% of the total value of all global markets,
up from 28% a decade ago. It has returned 24% a year for the four years
through '98, the highest return for any four-year stretch on record. It has
attracted a record flow of investment from abroad, and individuals not only
own more stock than ever before, but they're stepping up their buying.
Trying to stop this kind of investment momentum with a 25-basis-point
increase in the cost of credit is the monetary equivalent of trying to stop
a tank with a peashooter.
And since Mr. Greenspan's attempt to pre-empt dismay among investors with
soft words and the promise of only modest action seems likely to encourage a
fresh burst of speculative activity, the first rate hike will be followed by
another.
Nor will that be the final one. For if the Fed pursues a policy of damage
control, it'll have to do so in what's left of this year. Next year, in case
you've forgotten, is an election year, and we don't reckon the governors
will have the stomach or spine to play tough guy.
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