Edited by Andy Zipser
argely downplayed in all of last week's turmoil is the growing possibility of a global deflationary spiral. And while the idea that tomorrow's dollar will be worth more than today's sounds attractive at first blush, deflation ultimately is more destructive than its obverse because it strangles economic growth.
Some cautionary notes have been sounded, but most economy watchers are too tone deaf to hear them. Don Hays, director of investment strategy at Wheat First, has for months advocated lower interest rates worldwide to stimulate growth and avoid deflation. Bruce Steinberg, chief economist at Merrill Lynch, likewise has been fretting about central bankers fighting the last war. "Deflation, not inflation, is likely to emerge as the next source of instability for the world economy," he wrote last week, ahead of the debacle.
That meltdown, barring a drop in U.S. and European interest rates or taxes, all but guarantees that deflation will become the chief export of emerging markets worldwide, as devalued currencies and deflated economies churn out ever-cheaper goods. But the Europeans, still fixated on their drive toward a single currency, are raising interest rates; and the Fed, while apparently willing to defer raising rates, has shown absolutely no readiness to lower them. Indeed, in his congressional testimony Wednesday, Fed Chairman Alan Greenspan reiterated his belief that "it is inflation, not deflation, which is the crucial element which serves as a major threat to this expansion."
Well, maybe. Investment manager Ralph Wanger can think of some reasons why this expansion is unlike any other. Historically, inflation is associated with wars, deflation with peace-and the past eight years have seen the first period of relative world peace since 1939. Moreover, he adds, we truly have become a global village-and that means we no longer can export our problems. "In a metaphoric sense, everyone has a Mexico to deal with and everyone has a reservoir of low-cost labor right across the border."
Just what kind of week was it? The kind in which the New York Stock Exchange, trading something close to four billion shares, had China's president, Jiang Zemin, ring the opening bell. The kind of week in which the man most widely reviled in Malaysia for driving that region's currencies into the ground, George Soros, suffered a one-day loss of $2 billion. The kind of week in which the celebrated hero was not Soros or Greenspan or the professional money manager, but John Q. Public, asking if this was a good time to buy great stocks cheap.
Maybe. Maybe not. Despite renewed optimism at week's end that the market had stabilized, following Monday's 554-point plunge and Tuesday's 337-point ricochet, the Dow is off 593 points since Oct. 23 and the overall trend since August has been down. Overseas markets likewise seemed to stabilize, but at significantly lower levels, and their underlying economies are a mess: Thailand's currency closed at a record low, amid predictions of a recession, and an international $23 billion bailout was being rushed to Indonesia to avert a similar disaster. Now the big fear is that the storm will wash over Latin America, with Brazil's bourse already down more than 30% and its currency under pressure.
All of which is another way of saying that John Q. may be in for a long ride.
Who Got Railroaded?
Union Pacific /zigman2/quotes/209717171/composite UNP -1.23% is on a cannonball run-and the brakes don't work. The Surface Transportation Board last week heard a growing chorus of complaints of overflowing grain silos, dangerously low coal stockpiles and a West Coast logjam of freighters unable to deliver their cargo, all because of the railroad's gridlock. Although Union Pacific officials insisted they're straightening out the system, the hearing came two days after two trains collided near Houston, injuring four crewmen.
Job Volatility, Too
Amid reports of a Harris Poll that 17% of American workers expect to be fired or laid off, last week's layoff announcements gave fresh credence to such fears: more than 3,500 atLouisiana-Pacific /zigman2/quotes/204620507/composite LPX -1.93% 700 to 1,000 at Silicon Graphics , 1,000-1,500 at Imation . Things aren't much better overseas: Roche said it will trim up to 5,000 jobs worldwide.
Merger Plans Still On
Any chilling effect on mergers from last week's market action has yet to sink in, judging by the latest round of announcements: the $362 million acquisition of Eagle Financial , by Webster Financial ; the $460 million purchase of closely held Merit Behavioral Care by Magellan Health Services ; the $1.23 billion acquisition of HomeSide by National Australia Bank ; the purchase of Onbancorp byFirst Empire State for $872 million; the $7 billion acquisition of MedPartners by PhyCor ; and the $790 million acquisition of Carson Pirie Scott by Proffitt's /zigman2/quotes/201848718/composite PRFT +1.02% . ACC , meanwhile, is mulling an unsolicited acquisition bid of $875 million by Tel-Save Holdings .
Bread and Circuses
House Speaker Newt Gingrich on Friday proposed sending every taxpayer a questionnaire seeking his or her opinion about the IRS. "I think it's going to be very popular," he explained. Uh-huh. Useful, too.
Odds 'n' Ends
Boeing /zigman2/quotes/208579720/composite BA -1.65% , only a week after confessing it can't keep up with a tidal wave of new orders, signed a three-year, $3 billion deal with China to build 50 jetliners.
Marvel Entertainment filed a lawsuit against Ronald Perelman, Chase Manhattan and others, accusing them of causing its financial collapse.
Ameritech /zigman2/quotes/210284380/composite AIT -0.30% said it will buy a third of Denmark's telephone carrier for $3.2 billion.
Oxford Health Plans was sued by shareholders claiming it concealed computer problems and overinflated membership rolls, resulting in unexpected projections of a third-quarter loss.