Red is still the popular color
in China and Russia. Putin has taken a step backward from
capitalism by trying to nationalize at least a part of the
oil industry. In China, the state is still in control of banking
and several other major industries. It’s very difficult
to have partial capitalism as both of these countries will
find out.
China is under pressure from the rest of the world to let
their currency float, and they have said they will, but no
timeline has been assigned to that promise. China would like
to be a member of the G7 group of nations that basically set
global economic strategy. More importantly, on January 1,
2005 the ten year delay in the barriers to trade established
by the World Trade Organization (WTO) expires. Barriers that
have been in place since the Boston Tea Party keep cheap imports
out of the US. These barriers will come down around the world
on January 1st as the WTO tries to integrate the whole world
into one economy. China began to devalue its currency ten
years ago in anticipation of the removal of the trade barriers
to position themselves as the dominant industrial power in
the world. Wages across the globe are sure to decline in order
to compete with China. Nevertheless, we do not believe Red
China will succeed in this endeavor as they have too many
structural problems in their banking industry. However, in
the near term we are likely to see some fireworks, and then
the playing field will level off.
The debates have begun, and now President Bush is looking
to lock in the red states while Senator Kerry hopes to make
him blue. Wall Street would welcome a Bush victory, hoping
to keep the tax cuts and the tax benefits for small businesses
permanent. But, the election will probably turn on voters
feelings about the war in Iraq. Why does anyone want to be
president?
That brings up another red flag – the Fed. The worst
kept secret on Wall Street has been that the Fed will raise
interest rates. Well, they have and three times at that. The
Federal Funds rate (the rate banks charge each other for overnight
loans) has increased to 1.75% from 1.00%. Interest rates in
general have thus increased. This is good news for holders
of adjustable rate mortgages (ARMs) as the yield on these
securities rise with rising rates and prices of these assets
stay relatively stable. It may be the first time in history
that the Fed raised interest rates while a sitting President
is running for re-election. Maybe they are trying to solidify
the impression that the economy is strong. There seems to
be a contradiction here, as on the one hand the Fed says inflation
is tame, but on the other hand they are raising rates which
they normally do to fight inflation. Cheap goods from China
and the rest of Asia have been and will continue to keep inflation
at bay. The Fed may be building a cushion in case they need
to lower rates in the future. In any event, we expect a continued
mild increase in inflation (the price of oil not withstanding)
and a slow rise in interest rates in the near term.
October has been a month when the stock market makes a pivotal
turn in direction. However, the market has been directionless
all year so it is hard to project a dramatic turn either way.
The market may have spent all year consolidating last year’s
gains and be setting up for an upward bounce in 2005.
Random thought for October 2004:
The statistics on sanity are that one out of every four Americans
is suffering from some sort of mental illness. Think of your
three best friends, if they are okay, then it’s you.
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