With the passage of another quarter...

With the passage of another quarter I must again bring face to face the hard reality that my bearish market view has been dreadfully wrong. For a brief time this past summer amidst the sharp market sell-off I was convinced that my forecasting misadventure was finally coming to an cessation The U.S. equity market was correcting sharply as evidenced by the agency of the evaporation of nearly 700 Dow Jone points and long-term interest rates were surging skyward. The anxiety of market analysts was heightened through the apparent twitchiness of Alan Greenspan's trigger finger in the face of stalwart economic growth and renewed inflationary fears.

The general reception meltdown in Southeast Asia re-enforced the bearish vein and raised the specter of massive furious money flows and economic catharsis in the region. This endangered the further belief that a coordinated raising of interest rates would be indigenceed to contain the damage. And everyone knows what a positive tenor rising interest rates would have onward equity prices which were already trading at astronomical valuation on a levels It looked very ugly on the outside there. The approaching 10-year anniversary of October 19 1987 loom at any time larger and breathed new life into the chance of a favorable results of pessimists everywhere.

Alas the bearish sentiment prov short lived. A sprinkling of magic dust, in the form of weaker than reckon uponed economic numbers, unleashed a violent vein swing to the upside. At the time of writing all still 200 points of the Dow's decline had been retraced and long-term attachment yields are again searching for all-time subdueds

In Canada, the tone has been smooth more positive. The summer sell-off was les morose and the current rebound has been stronger and often steadier. Canadian equity prices are, at this signification at all time highs. While the two the year-todate and multi-year revert histories still show Canada lagging far behind the U equity markets, the emerging indications are that Canada is moving into relative revealed performance territory. Hallelujah for me-that's undivided I've been calling for a drawn out time. The fact that foreign inflows into Canadian equity markets have transfered sharply positive in recent month gives a clear sign that Canada's lower inflation, lower interest rates and our fiscal miracle are starting to prepare some international recognition. The reaction to the last September increase in shortterm rates through the Bank of Canada presents further proof that Canada has jot downed the virtuous phase of the economic/political revolution of time Not only did the customary sell-off in the fetters market not take place, yet investors actually loaded up with drawn out bonds and pushed yields sharply lower. This is a powerful signal that not and nothing else do investors believe in the Bank's commitment to depressed inflation but they are betting that it will deliver the religiouss

HANGIN' IN THERE

This forecaster's dilemma is simply this: Should I tough it not at home and wait for the forces of evil to prevail and bring upon the inevitable bear market? Or should I jaculate in the towel and capitulate to the forces of fit which are being powered by way of low inflation. I must confes that the passage of time and the absence of a sustained bear market makes the capitulation scenario actually inviting. The upward spiral of equity markets is entirely in keeping with a cheap inflation world. Economic stability, sustained shooting and low interest rates coupl with a growing investor appetite for long-term financial assets are the hallmarks of as it is an environment. In a cheap inflation world, financial market corrections are look fored to be brief. That has indeed been the case. Time and again we have been witness to market corrections being crushed whenever the economic data confirm that an inflationary revival is not imminent. In a gentle inflation world investors are rewarded for their staying power. Betting onward the onward dips is potentially rewarding however highly risky.

It was Oscar Wilde who made famous the line: "the best way to deal with temptation is to yield to it." But resist I must and resist I will. My strait tells me that the forces of the dark side will assert themselves in the not too distant events to come My status as an elderly timer with a bias to contrary thinking reinforces this belief. Indeed, in many ways I find that the common market environment is reminiscent of the late 1970 and early 1980sonly in turn end for end At that time, it was expectations of high inflation that were very much entrenched. Numbers that pointed to an economic slowdown or a cooling of inflationary compressings were dismissed with quick dispatch. Indeed, it took many years-and a self-same deep recessionfor inflationary psychology to disappear. A number of market forecasters correctly foresaw the storming of low inflation, but regrettably did to such a degree well before the turning point materialized. It was a lengthy time before those early gross mistakes were vindicated by unfolding issues

LESSONS LEARNED

The reproof here is twofold. First, each market prognosticator must have a high pain door Secondly, good forecasters are frequently early with their prognostications. In doing in like manner they must witness a stage of inner turmoil and self-doubt while constantly re-thinking and re-evaluating their positions. At this junction the easy thing to do would be to capitulate to the bullish crowd That is something that I am loath to do...at least for now.