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June 5, 2000

Report: Global Stocks Out of Tune
By The Associated Press

Will the Markets Ever Learn?...Weiss comments

BASEL, Switzerland - The world's stock markets are out of tune with the global economy, the general manager of the Bank for International Settlements said Monday.

"There is a potential risk if every time the economy is slowing, stocks rise," Andrew Crockett told a news conference at the annual general meeting of the BIS, regarded as the central bank for central banks.

"Every time markets have seen evidence of a slowdown, this has been countered by an increase in stocks (prices) which is wealth-creating. This is potentially unsustainable," Crockett said.

Bill White, head of the BIS's economics department, noted stocks have also rallied recently as economies show signs of speeding up.

The bank's annual report noted "an unusual degree of uncertainty about how financial markets, which have been evolving rapidly, might react to possibly adverse economic shocks."

"What is more certain is that the current growth rate of the U.S. economy is unsustainable," said the conclusion to the 191-page study. "Against this background, the recent tightening of monetary policy is welcome."

Crockett urged the European Union to push forward with structural reforms to help strengthen the euro and weaken the dollar, helping to ease economic activity in the United States.

"What we want to see is a sustainable slowing in the economy ... but we cannot discount the possibility of a hard landing and central banks should work to help minimize that," Crockett said.

In its annual report, the BIS said Asia's prospects for future growth are solid, but added that heavy dependence on the technology sector and slow progress in corporate and bank restructuring make the region's economies vulnerable to a sudden reversal of investment.

It cautioned that a sudden weakening of the dollar could shake investor confidence in Latin America, also citing current account deficits and structural fiscal problems as potential risks.

Private banks and hedge funds are now better prepared to weather a financial storm than at the time of the 1998 bailout of the U.S. hedge fund Long-Term Capital Management Ltd, Crockett said, but he warned that "memories are not always long ones."

This is just what we've been saying for the past few weeks. The U.S. stock market has actually advanced (albeit low-volume, short-lived rallies) on news that the economy is slowing down. The BIS cautions correctly that these conditions create a wealth effect - which is why we are still seeing higher-than-ever consumer confidence reports. The wealth effect will potentially be the downfall of U.S. economic growth because it can only fuel inflationary pressures on the economy. Consumers keep spending and falling deeper into debt, while the rise in demand triggers higher prices. Ultimately, this results in increased bankruptcies and a harsh economic slowdown. The Fed is attempting to engineer a soft landing, but the wealth effect is the biggest roadblock to its success.

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