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April 30, 1999
Consider the following to be a rate warning -- at least advice not to expect a return to the sixes. Markets got a pleasant surprise on Thursday when the Employment Cost Index for the first three months of 1999 rose only .4%, half the expected level. The Bond market's great fear during rapid economic growth is wage acceleration leading to inflation, but this ECI says... not this time. Big bond rally, long Treasuries under 5.50%, mortgage rates trying to break below 7.00% again.
Then... this morning. Economic growth was supposed to have slowed to 3.5% or so in that same 1st quarter of 1999. Instead, scrolling across CRTs: ...FLASH US COMMRC DEP 1STQ GDP UP 4.5%...US CONSUMER SPENDING 11YR RECORD...1STQ DEFLATOR UP 1.4%.... At every bond desk in the world traders lurched for phones to dump yesterday's profitable portfolios, and then some. Bonds back to 5.66%, and rising. 4.5% GDP growth could have been shrugged off, but the GDP deflator -- a good measure of inflation -- jumped 50% from the .8% in the last quarter of 1998 to 1.4%. The most frightening number was consumer spending at an eleven-year record. How can this be -- at the same time wage growth is supposed to be slowing down? The loony stock market accounts for some of it, sure. No one under age 30, and damn few under 40 have any idea what it is like to see the value of a stock portfolio fall from one year to the next. Or the value of a house. They don't even know what it's like to watch the value of those assets stay flat for, oh... three years in a row. Traders are a tough bunch, but if you throw enough data haymakers at 'em, even they will lose faith in the technology-productivity-everything's-cool equation.
Kosovo is weighing on them, too; financially and morally. The Kosovars' homes in Kosovo have been destroyed, and NATO is tossing around rebuilding costs in the $30 billion range; and the all-inclusive costs of the air campaign will reach $20-30 billion in another couple of months. Even if we succeed in bombing Serbia back to the Stone Age, Mr. Milosevic appears perfectly suited to that epoch. It has not officially occurred to NATO that it might be a better idea to re-build the Kosovars' homes in Albania, and knock off the air war. All NATO's horses, and all NATO's men won't put Kosovo back together again. Today's news: B-52's are deploying from the U.S. to "area bomb" Serbian troops hidden in forests. That's 500-pound "dumb" bombs, 50-90 per plane per raid, "area" as in rug and carpet; and there are people hiding in those forests besides Serbian soldiers. The failings of national memory are not limited to financial markets.
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