The rock and a hard place gets tighter

By Duru

February 21, 2001


Dear fellow subjects of Bush....

Well, could all bets be off!?!?!

The inflation numbers are coming in much higher than expected. The hardcore optimists are claiming we do not yet have enough evidence that inflation is enough of a concern for the Fed not to continue reducing rates. The skeptics amongst us know that worse times are likely around the corner.

As I have repeatedly feared in past emails, the Fed is aggressively lowering interest rates into an increasingly inflationary environment: low unemployment, continued wage pressures, continued robust consumer spending (especially in the housing sector), negative savings rate, and higher energy prices. Add to this a slew of companies experiencing slower growth who would LOVE to increase prices to shore up their bottom lines. The continued plunge in the market reflects a new fear, STAGFLATION. This is when the economy suffers through slow growth AND high inflation. This is truly the worst of all worlds, and the Fed will be sweating out the next few months as it tries to figure out how much more aggressive it can be in lowering rates. The "Internet Depression" prescribes continued aggressive lowering of rates in the face of mixed economic signals and inflation fears. Let us just say, we are at the brink of quite a precarious, and confounding, moment. All players in the government that have their fingers on the economy will have to be much bigger risk-takers than they are used to fix our growing problems.

Other concerns: venture capital is quickly drying up, the majority of financial reporters remain extremely bullish, global markets are slowing down (again, I have been concerned about this from the beginning because it is apparent to me that global markets mainly rely on AMERICAN spending...our trading deficits seem to be slowly reducing meaning we are becoming less and less of a dumping ground for the world's excess production), continued decline in consumer confidence, increasing layoffs, take your pick!

Reasons why you may not fear being unemployed, at least not for long (but do not continue to expect to gain wage premiums): overall job market remains robust, consumer confidence has not declined to recessionary levels, yield curve is steepening (meaning the recession this curve predicted back in December/January could be short), and a Fed that insists it is committed to keeping the US out of recession (however, even THEY might be too optimistic right now in trying to talk up the economy), others....?

In my last missive, I recommended being a cautious bull. This still applies, but only the most aggressive and most long-term investors should be moving money into the markets at this point, and you should ONLY be doing it in slow, measured chunks. Anyone who tells you things will turn around in the second half of 2000 is being extremely optimistic. The realists are already looking to 2002 for a glimmer of hope (for example Fed easing should be fully felt, tax cuts might begin to be felt, etc...). For the majority of people, it will likely be wise to wait for some big positive event, or at the minimum, corporate earnings reports in April to see whether equities deserve more of our hard-earned coins!!! If you do short-term bets (like professional traders), this market is GREAT, because it is very volatile and choppy giving plenty of room to play things going both up and down.

All I can say is at this point, be safe, be careful, and be prepared!!!

(what else is new?!?!)


Much love!