Prepared by AIC Investment Advisors, Inc.

As 1997 draws to a close, the U.S. economy continues to expand and the Federal Reserve's attention remains focused on advancing equity prices. Stockholders have enjoyed yet another year (to date) of splendid returns. Through October 14, the Standard & Poor's 500 Composite Index has advanced a lush 31.0% and many observers are looking for higher prices in the months ahead. Fortunately, equity prices are not among the items that make up the basket that is used to compute the Consumer Price Index (CPI). Were stocks included in the CPI, we suspect that interest rates might be much higher than present rates. Apparently, Mr. Greenspan, Chairman of the Federal Reserve is not fooled by the machinations of the statisticians who compile the Consumer and Producer Price indices. The Chairman understands the inflationary effects of the excess money creation and an expanding monetary base on equity prices. Whether or not current stock quotations realistically discount lower interest rates and faster economic growth that are the underlying expectations in equity pricing will be answered in due course. The pricing models used by the major brokerage houses are based on assumptions of future interest rate levels and economic growth rates. When earnings disappoint Wall Street analysts, equity prices are quickly marked down. In the past decade, layoffs were the quick and dirty methods of reducing costs and increasing the bottom line. However, we suspect that this method of higher earnings for American corporations has been exhausted. Future layoffs and downsizing may well be accompanied by failing profits as well. In any event, the year to date has been a rewarding one for the 20% to 25% of the population with relatively high incomes and increasing portfolios wealth. For the other less affluence segment of the population, the road has been much less smooth.

The structural changes that have impacted the employment prospects of Americans have been less than fully addressed by the political parties in power during the past two decades. Moreover, the present level of discussions, at least as this observer can glean from the press, are not likely to discover the problem much less find a that will be encouraging to a large segment of the American population. The seeming rush to globalization as the easy road to Nirvana is not likely to contribute to a solution. The control of the productive might of America is now firmly in the hands of financial types to a large extent–individuals for whom profit is the singular end of production. With money managers demanding ever higher profits from corporations, managements have been forced to place gains in short- term profits ahead of all other considerations. Managements that fail to drive profits higher over the short term are replaced by Boards of Directors subservient to the interests of the financial markets. This beast demands ever higher profits.

As a consequent of this focus on profits, to the near exclusion of all other humane considerations, more and more corporations will transfer production facilities abroad where costs and other aspects of doing business are much less onerous than in America. The net result will be that productive jobs will be transferred abroad. American workers will be forced to compete with upwards of 1.0 billion plus new workers in Asia for a diminishing number of jobs. The net result will be falling wages in the West and higher wages in the developing world. As robotics assume more of the mundane, burdensome and routine jobs of production, the need for labor will be further reduced. Regrettably, the fruits of the technological revolution and the computer age (the common inheritance of all mankind) will not be equitable distributed among mankind. To a greater and greater extent, the benefits of the computer age will be garnered for the benefit of relatively small group, say 20% to 25% of the populations that be benefit disproportionally from the onset of the information age and the control and benefits that will flow therefrom.

The social implication of the changes now rapidly occurring, if not speedily addressed, will engender growing waves of social unrest in the United States and in foreign lands. This social unrest will not be contained by United Nation's police actions as some internationalists seem to believe. No laws outlawing hate crimes or discrimination will be able to contain the disillusionment and growing disenchantment of those who feel cheated out of their inheritance and have little understanding of what is happening in the world.

The challenge that now faces America and the other developed nations of the world is how to distribute the bountiful wealth that the developed nations are capable of producing–and distribute the production in such a way that all citizens will have decent standard of living. Foreign nations will face the same challenges in the twenty-first century. Failing to resolve this problem will result in growing chaos which is not likely to provide underpinning for higher stock prices.

Meanwhile, investors are likely to experience greater volatility in equity prices as markets enter uncharted waters. Using gold as a denominator for equity prices also finds equity prices at all time highs. The latest reading for the Standard & Poor's 500 Composite Index is 103.61 (2.96 ounces of gold). While prices can go higher from here, caution is surely advisable.

Richard F. Maloney

AIC Investment Advisors, Inc.

440 South Street, Pittsfield, Massachusetts

Consensus National Futures and Financial On Line Index

Added to the WWW 10-24-97
Last updated on 10-24-97

Hosted by:
One Crossroads Place
610 West Maple Ave, Suite WWW
Independence, MO 64050
(816) 252-4080
sysop@kcmo.com

wmeubank@ocp.kcmo.com