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>From Comstock daily comment, an alternative view often worth considering.
http://www.comstockfunds.com/
Deflationary Wage-Price Spiral?
11/01/01 6:00 PM
The Treasury Department's decision to suspend the issuance of
new 30-year Treasury bonds is an act of desperation in reaction to the
continually weakening economy. The decision accomplished the desired
objective of sharply lowering the yields on both the 10 and 30-year bonds,
but is a definite indication that the economic authorities agree with
Comstock's long-held view that the previous efforts at monetary stimulus was
not working. Although the move certainly accelerated the downward move in
yields, we think that this was happening anyway as a result of severe global
economic weakness that is creating a soft pricing environment and even some
unusual pressure on wages. Various releases over the past two days painted a
gloomy picture of the economy. Quarterly GDP was down for the first time in
eight years, and consumer confidence plunged. Consumer spending was off 1.8%
while personal income was only even despite the continuing payout of tax
rebates. The NAPM Index fell to its lowest point since February 1991 with
its new orders component dropping sharply. New construction declined for the
5th consecutive month. Jobless claims continued at uncomfortably high
levels, and continuing claims were at a nine-year high. Tomorrow morning's
employment report for October will probably indicate further weakness. The
weakness in the global economy combined with a huge amount of overcapacity,
particularly in technology, is putting significant pressure on corporate
pricing power. In this case, however, lower inflation is not necessarily
good news as the specter of deflation is becoming a distinct threat, and, as
we see in the case of Japan, deflation can have dire effects in dragging the
economy into a liquidity trap with no easy solution. The recent University
of Michigan Survey showed a sharp decline in consumer inflation expectations
while the prices paid sector of NAPM Index plunged to its lowest level in
more than 50 years. Throughout the nation we see business lowering prices
and offering special incentives to get reluctant consumers and corporations
to spend. Even more unusual is the beginning of pressure to lower wages.
Economist Ed Hyman of ISI has counted 57 pay cuts around the world over the
past six weeks. Ominously, he added that he couldn't recall ever seeing
anything like this, and that it opens up the possibility of a potential
wage-price spiral. In view of all these developments we think that the stock
market is jumping the gun at seeing the suspension of the 30-year Treasury
as a positive. It's significant that despite today's strength the market has
not taken out its October 26th highs. The rally looks extremely tired at
this point, and is most likely, in the process of topping out.
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