April 25, 1997

Dear Sir:

When you read the following letter I want you to think about something. The US economy is extremely important to each and every American. With higher interest rates comes a weaker economy and without a strong economy we won't be able to deal with the deficit problem, with welfare, or social security. Higher interest rates also brings higher unemployment at just the time when we were finally getting most Americans jobs.

If Alan Greenspan and the Federal Reserve have raised interest rates based on theories and beliefs that are no longer applicable it could cost us all dearly.

Moreover, the evidence is in the news, that shows Wall Street is already catching onto the Greenspan bandwagon. That is, even though the facts and data are not there to support Greenspan, Wall Street is now starting to interpret new data in a way that it makes Greenspan's assumptions about inflation seem true.

If Greenspan turns out to be wrong, we will all pay. Make sure you put the blame where it belongs and maybe next time we won't have to go through a unnecessary slowdown again.

Sincerely,

April 25, 1997

President Bill Clinton
The White House
Washington DC 20500

Dear Mr President:

Is the Federal Reserve creating inflation?

Last January there was no signs of inflation. The Economy and the stock market were doing fine, and the 30-year bond was at 6.75%.

At the end of last year Alan Greenspan, the Federal Reserve Chairman, said stock market investors had irrational exuberance. The stock market paid no attention to Greenspan's words. There simply were no signs of inflation. The economy and corporate earnings were good and the future was favorable for the economy and corporate earnings as well. Then in February, Alan Greenspan gave his semi-annual Humphrey-Hawkins address before Congress.

Greenspan made remarks about the stock market and inflation. The most profound remark was that increased wage costs could cause inflation sometime down the road. He didn't have a clue when the wage increases would occur, nor did he have any sound facts to back up his thoughts in the first place. The only thing he had going for himself? He was Alan Greenspan, and he was the Federal Reserve Chairman. Even after Greenspan gave his testimony before Congress the markets did not really react, the markets got nervous, but barely moved.

Greenspan could see that the market was not going to react to his words alone. The market wanted facts and data and Greenspan couldn't produce any facts or data to support his claims. However, since Greenspan was the Federal Reserve Chairman he could raise interest rates. Even though the economy, inflation, and the stock market were all doing fine, Greenspan raised interest rates. Now, the markets had the facts and data (manmade by Greenspan) they wanted and they reacted. Since Greenspan raised interest rates, only a month ago, the S&P 500 is down 6.5% from its high last February. The interest rate on the 30-year bond is now over 7.1%. And more importantly, the financial news media, economists, and Wall Street have all shifted from a positive outlook for the economy to a doom and gloom outlook. This will only reinforce Greenspan's beliefs. It doesn't seem to matter to anyone if Greenspan is a genius or stupid, they are going to make him a genius by creating inflation.

I want to address the issue of inflation. Unlike Greenspan, I want to talk about facts. In 1967 General Motors made cars, when demand for cars went up GM raised its prices. In turn with higher prices, workers wanted higher wages. Low and behold you had inflation on the rise. Now, it's 1997. Is GM going to raise prices, not likely. Foreign competition is already eating away at GM's market share. With a rising dollar it would be suicide for GM to raise their prices. On top of that, if GM wants to make more money why not do it by outsourcing. If GM raises the prices on its cars they will just lose market share and in turn lose money. However, if they outsource more, they will cut their manufacturing costs and in turn make more money without losing market share.

When it comes to manufacturing, 1997 is different that 1967. Foreign competition is everywhere forcing American companies to keep prices down. And just like GM other American companies are outsourcing for parts and labor.

Another issue regarding inflation is technology. Technology is now between 30-40% of GDP. In the 50s a good TV would cost your $500, guess what, in the 90s you can still get a good TV for $500. The scientific calculator came out in the 70s, they cost over $100, now you can get one for $10. In the 80s when VCRs first came out they were over $1000, now you can get one for $150. Manufacturing costs associated with technology become cheaper and cheaper with time. With technology becoming more and more of the GDP, inflation will be restrained.

Greenspan also talked about the irrational exuberance of the stock market. The financial news media immediately followed with statements about the stock market being overvalued. These are completely misleading statements. Many individual stocks have not performed well for the past 16 months. The NASDAQ stock market is up only 14% in the past 16 months. The Russell 2000 is up only 6% in the past 16 months. Year to date the NASDAQ is down 6% and the Russell 2000 is down 7.4%. Even the mighty S&P 500 is up only 3.2% (YTD) and that's coming off one of the best first quarter earnings ever.

Price earnings ratios are a key factor in determining stock valuations. Right now the PE of the S&P 500 is 19 and based on earning for the next 12 months it is only 16. That is 13% less than what it was in 1987. When the Japanese stock market started heading south its PE was over 200% greater than the S&P's.

Clearly, the stock market is not overvalued. The so called overvaluation of the stock market is concentrated in a few stocks. Because these few stocks are the largest capitalization stocks, the market as a whole looks like it is overvalued. For example, Microsoft has a market capitalization of $136 billion dollars with sales of only $10 billion. Microsoft's price to book is 14, 300% greater than the average stock in the S&P 500. When Microsoft reported its first quarter earnings of $1 billion the market, within days, would add almost $20 billion to Microsoft's market capitalization.

What does this mean for the overall stock market? It means capital is being taking away from smaller and midsize companies and given to the bigger companies. It means the overall market is being falsely called overvalued, when the overvaluation in concentrated in a few stocks. It means stock-pickers which mainly consists of institutional investors are putting their money (which is mostly ours) into a few stocks instead of diversifying it.

Greenspan should be talking about the overvaluation of a few stocks. He should be telling investors to continue to invest in America, but to be selective of the stocks they buy. Even in Greenspan's own words, "In the long run, the price [of a stock] is determined by how good a company it is." And if he or any other governor on the Federal Reserve doesn't want to comment about stocks or the stock market then they shouldn't ever, not just when they don't feel like it.

The vast majority of those in the financial news media and most of the so called stock market gurus support Greenspan even though the facts and data are not there. These people don't really care if Greenspan is right or not, they only want change so they can report and continue to make projections. They don't care if Greenspan raises interest rates and in turn inflation heats up and puts the country in a recession.

These are the same people that recommend buying bonds when interest rates are going up. Why would you buy bonds if you anticipate yields are going up? The stock market should not be concerned about rising interest rates at these low levels, 7% on the long-bond. Investors should not start buying bonds (pulling money out of the stock market) until they think interest rates are going down. If Greenspan get his way that won't be for awhile.

These are the same people that are saying second quarter earnings are going to be weak, but are siding with Greenspan on slowing down the economy because of possible wage increases. Real wages for workers are up only 0.7% in the past two years. After 20 years of stagnation, it looked like the average American worker was finally going to get a raise. Greenspan did the one thing that could stop it. He raised interest rates.

What does all this mean to the average American. It seems that editors of news programs think that the American people are interested in O.J. Simpson more than they are their pocket books. The editors couldn't be more wrong. Just because most Americans don't follow the stock market doesn't mean they don't want to know about the Federal Reserve creating inflation especially if they knew what it meant to them.

It means that even if you get a raise, corporations will immediately start raising prices, eating up the raise you got. It means you will have to pay more for your rent or mortgage if you have an adjustable rate mortgage. You will have to pay more for loans for cars and your child's education. Even the government will have to pay more. The government through piss poor fiscal management has debt that costs the American taxpayer $230 billion a year in interest. Right now the government is having to pay more to refinance its debt thanks to Mr. Greenspan. Remember the Federal Government, even during these best of times, is having a difficult time in balancing the budget. The government will most likely still come up about $100 billion short of balancing the budget this year and that's if interest rates stay where they are now.

It also means the GDP will not grow as fast and may not even grow at all. That means jobs will be lost. The government is always talking about job creation and now, right about the time when just about everyone is working, Mr. Greenspan says we can't have that.

To make matters even worse another governor on the Federal Reserve Board, Alice Rivlin, is saying that the CPI overstates inflation. She says this economist and that economist says so. I wonder why the governor doesn't go out in the real world and ask the people on Social Security if they think they are getting too much money. Or better yet why don't we give Alice an average wage based on what Social Security pays and see how well the governor can live on it. This in itself would be a great story for a program like 60 minutes. Or don't any of you care about how this country takes care of those on Social Security?

I have enclosed a forecast--US price growth seen benign 1997,1998. This report game out last Thursday. The financial news media said nothing about it, the report didn't support Greenspan. However, on the same day someone talked about rising interest rates and the media jumped on it and in turn the stock market nose-dived.

You don't have to believe me, read the forecast and watch the economy. If you see interest rates rise, prices move up, the economy slow, and an increase in the unemployment rate you will know why: ALAN GREENSPAN AND THE FEDERAL RESERVE CREATED INFLATION. In your news stories in the future, remember to put the blame where it belongs.

Sincerely,