So sayeth Yogi Berra. Well, the election is finally over. The campaigning has been going on for over a year, but it seems like four years. Congress should pass a law whereby campaigning can only start three months prior to the election. Now maybe we can all get on with our lives.
The Fed met again last week, and as expected, raised the Fed Funds rate 25 basis points to 2%. Why? We must be missing something. The Fed has stated that they believe that globalization is essentially deflationary, and that information technology continues to change the nature of jobs and prices. That means the current recovery will not be like past recoveries. We expect steady consistent growth with lower inflation. It may just be that the Fed wants interest rates higher than inflation.

China is doing its part. They raised their interest rate for the first time in nine years in an effort to rein in growth. The People’s Bank of China raised its benchmark rate on one-year Yuan loans to 5.58% from 5.31%, so its bond equivalent rate is just above the 5.2% consumer inflation rate. Monetary policy is still accommodative and will not likely have much of an impact on growth. China’s economy grew 9.1% in the third quarter, and inflation is up from 3% at the start of the year. This could be the real factor behind the Fed’s interest rate policy. Because the Yuan is tied to the dollar, China is basically outsourcing its monetary policy to the Federal Reserve. At some point China needs to let the Yuan float free of the dollar. China continues to try to rein in real estate speculation and overdevelopment. We continue to believe they are facing a banking crisis. Remember Japan which now looks to be coming out of a decade long deflation.

The new economy. Very quietly, there is research emerging from the Fed branches and from Alan Greenspan directly. The Fed seems to get it. We are in the early stages of a shift away from a national economy and toward a global economy. Information technology (IT) is leading to a much more efficient and stable economic structure. IT is drastically reducing the extremes in the economic cycle brought on by inadequate information of various economic factors, primarily corporations not knowing how much to produce. Corporations and small businesses are now able to take advantage of software to calibrate inventories and supply/demand factors on a global scale. This results in lower costs and a higher standard of living. More people are now able to afford more things than ever before in our history at least in material terms. Pay attention to speeches made by Alan and other Fed members.

The dollar continues to make new lows prompting Japan and others to keep buying dollars to hold the value up against their own currency. A lower dollar of course aids our exports and hinders theirs. According to the New York Times, “The combined dollar holdings of Japan, China, Hong Kong, Taiwan, South Korea and Singapore are $1.1 trillion, up 22% from the end of 2003.” As the dollar declines against all foreign currencies, it puts the squeeze on their business. If China would allow the Yuan to float free, and all other currencies do the same, it would go a long way toward global stabilization.

To all of you, from all of us, Happy Thanksgiving!

Random thought for November 2004:
“Tonight is not the end, or even the beginning of the end, but it may at least be the end of the beginning.”

- Winston Churchill

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