Nov 19, 2004


"Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets. We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past. But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade? And how do we factor that assessment into monetary policy? We as central bankers need not be concerned if a collapsing financial asset bubble does not threaten to impair the real economy, its production, jobs, and price stability."

These famous remarks led to a 3.2% drop in the Nikkei, a 4% fall in the DAX, and a 2.3% drop in the Dow. All of which were reversed within' a week. I am not really sure Greenspan is telling markets anything more revolutionary in his remarks today. The markets certainly were due to pullback and it is important here to realize that even with the dollar weakness we are not really entering uncharted waters.

As I write yields look like they are going to put in another leg higher, and at the risk of embarassment I still believe this yield move is going to drive a currency reversal.

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