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RT's,
Throwing ones hat into the ring is never without its pains. I am new to the
list and to trading and hope that the views expressed below offend none and
show as little ignorance on my part as possible.
Gwen, I will grant you the fact that the underlying problems of the US are
not all that similar to Japan, but the US economy is in a unique situation
all the same. With the pressure on wages and the housing sector, singly
caused by the stock market, the U.S. economy seems to be overheating.
Savings rates are at an all time low. Conversely, debt is at an all-time
high. Look at the CRB. Although we have seen an up tick over the last few
quarters, it has been mainly caused by oil and the squeeze in the gold carry
trade. Most of the components are at 10 to 20 year lows.
The stock market rally has been a psychological shift in the general
population into "riskier" investments. Like all cycles, a significant
downturn would turn away a large percentage of this trusting public. I have
seen stats that indicate that a mere 55% of the US population is invested in
the stock market in some way. That could leave a significant base for
further run ups if the statistic is correct. So what of the sell off the
other day?
The Fed had increased liquidity to astronomical levels prior to Y2K, yet on
the first two business days after the millennium in the US, they found it
necessary to add liquidity. That is not a sign of strength in an economy.
Granted it was only two days and they started the third day with several
matched sales to drain reserves, but the Bond market took a very dim view of
this on Monday and stocks began a correction the next. Coincidence?
Did the Fed's acceptance of "lower" quality collateral before the millennium
to shore up liquidity concerns, cause an unexpected problem now that Y2K
turns out to be a relative non-issue? How do they get rid of the MB's and
CD's and pare back the Agencies without severely distressing the bank's and
investment houses that bet on Y2K?
With upwards of 75% of the collateral over the last two months consisting of
"lower" quality products, how does this affect the Fed's ability to confront
economic issues going forward? The Fed's stuck in a catch-22. If they
don't raise rates the stock market roars ahead and forces their hand.
If they raise without addressing some of these issues they risk weakening
the banking sector because of billions of poorly collateralized loans, and
plunging us into a Japanese-esque scenario. Greenspan has been issuing
warnings to banks for months (to no avail) for them to tighten up on lending
practices. That, coupled with the MB's used as collateralized loans by the
Fed, could have disastrous affects.
Although I am by no means an expert on international finance, wouldn't this
push the Euro to the forefront as the international currency, weakening the
dollar and putting further pressure on the US economy? Didn't the Bund
rally on Friday quite significantly as compared to the Bonds? Also,
wouldn't this put everyone else's recoveries from a few years ago in
jeopardy? The US has been a major net importer of a plethora of goods.
With our switch to a service economy, and its commensurate less stable
foundation's, what happens to everyone else's economies?
Greenspan is still smarting from 1987, when he hiked rates and we had the
stock market crash. The last thing he wants as a legacy is another crash on
his hands. The Fed is in a precarious position. If they can find a way to
squeeze out the Y2k liquidity with minimal pain to the financial community
and put a cap on the stock market for a few quarters, they will have gone a
long way in addressing these potential problems.
The "bubble" economy is a bit of a misnomer. There is plenty of money that
could yet be allocated to stocks and/or bonds. So a bursting of the bubble
in the short term is not the issue. You can't stop a flood. The question
should be, will the levee hold, and what are the implications if it doesn't?
I have truly enjoyed reading the exchange of ideas over the last two months.
Any constructive feedback would be greatly appreciated. Good trading and
health to all.
Mike Knapp
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