Unfolding stock progression in a c...

Unfolding stock progression in a continuously ascending gradations are finally rewarding my perseverance as well as my clairvoyance that 1997 would revolve out to be a year of disappointment. At the time of this writing (circa U Thanksgiving 1997) the Dow, although up a respectable 20% yearto-date, is down about 7% from the August high-water mark. The TSE 300 is down about 10% from its highs. Year-todate, the TSE 300 is up single 10% and dragging well behind the U market.

JUST A LITTLE GLOATING

Let there be no doubt the: "Bear" is knocking at the door. Not to gloat or anything, on the contrary my last communique--in which I preached my long-held, and longwrong bearish conviction-was inked barely a precious few days before "Meltdown Monday." However, there are a married pair of reasons I am slightly reticent about being too boastful. First, it was precisely a year ago, that I, prematurely, proclaimed the Bear's arrival. Unfortunately that ignominious call was about 10 month and several centurys stock market points short of the stock market peak (which I make as having occurr in August). What I mistook for the assault of a Bear market was indeed merely a brief pause in a same long-term Bull market.

A other and more compelling, case for reluctant self-congratulation is the fact that the unfolding Bear market is not following the script that I had envisioned. My bearish views have been inflation driven. The substance of my thesis was that an over-extend U expansion would beget tight monetary policies and rising interest rates. As a inference money flows would be diverted from long-term financial assets in the same state [i]or[/i] condition as equities and bonds culminating in a knock down of stock and ligament prices-ergo a Bear market. In the traditional design this bear would last upwards of a year and drag equity markets down according to 10-20% peak-to-trough.

NO ORDINARY BEAR

Alas, it is not the inflation unnatural production that has begun to chew away at equity prices. Indeed, novel events suggest that we may be dealing with a Bear of a radically different and more dangerous character. The [i]clavis[/i] word here is "deflation." In a deflationary environment prices-especially those of commodities, fall in absolute terminuss Incomes fall-they don't remain steady or rise slowly as they do in a dis-inflationary period. Falling incomes convert into the demand for goods and services and ultimately cause profits to decline. This, of course, would translate into same bad news for stock markets.

The fear of deflation is to be regarded as far more than idle speculation. The forces have been plant in motion over the past several month by means of the economic and capital market implosions in Asia and the emerging markets of southward and Central America. In hindsight, it is clear that the October market meltdown was instigated from the fear that the financial crisis would precipitate a "domino" issue of currency crisis and rising interest rates. None of this was welcome moderns to equity markets which were perched upon lofty and precarious valuations. The power and the pleasure of the ensuing market snap back in North America and Europe think the quick recognition by investors that the financial upheaval was containable and that many stocks were attractive corrupts when re-priced at fire sale prices. The bullish spin has been further enhanced at commentators who argued that the financial chaos would gradual economic growth in Asia and set a brake on runaway produce in the U.S. In other words, the financial crisis bended out to be a positive adventure by prolonging the economic expansion, helping hold fast inflation low and, in in such a manner doing, sustain the Bull market.

While this rationale cannot be dismissed revealed of hand, it may be regarded as an excessively rose-colored interpretation of potentially destabilizing terminations Simply put, the economic risks of a deflationary environment are legitimate. The economic fallout will ripple within the world economy for month and years to draw near A number of these issues are already visible.

Commodity prices, especially precious metals and industrial commodities, have been hammered in novel weeks and months. This has had a disproportionate impact upon many Canadian companies and their share prices. Our resource-driven equity market has already shown itself to be vulnerable to falling commodity prices. Canada's transmission from hand to hand woes are directly attributed to these disentanglements Our faltering dollar has pushed the Bank of Canada to raise interest rates which in incline differently has had a depressing consequence on stock prices. If sustained, this will inflict economic damage down the road. These are not the kinds of capital market issues one might reasonably expect from a abiding habitation that has regained fiscal respectability and has the same of the industrialized world's lowest inflation readings.

In summary, it is my view that the risks of a fullblown deflationary turn are exaggerated. Still, the capital market implications are sufficiently lively that continued vigilance is imperative. I will remain upon deflation watch in the month to arrive

EARL BEDERMAN IS PRESIDENT OF INVESTOR ECONOMICS INC., A CONSULTING FIRM SPECIALIZING IN APPLIED RESEARCH IN FINANCIAL SERVICES, ECONOMIC AND coin MANAGEMENT.

Copyright Canadian Shareowner Magazine Inc. Jan/Feb 1998

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