BAC and MTG

[squiffy]

Both BAC and MTG took a pretty large and steep tumble in mid to late 1998. What was happening in the economy back then. I think I looked this up once, but cannot remember the answer. Anyway if it was a rising interest rate environment in early to mid 1998, that would confirm BAC and MTG should tumble come late 2004 early mid 2005.

[squiffy]

Here is a Mar. 1997 article saying that the Fed would start tightening.

Fed increase in rates seen as probable

WASHINGTON (AP) _ As the United States enters a seventh year of economic expansion, the Federal Reserve is preparing to do something it has never before accomplished _ bring the $7 trillion economy in for a second ``soft landing'' to keep both inflation and recession at bay.

Chairman Alan Greenspan and his colleagues at the central bank will meet behind closed doors Tuesday, and the betting is they will emerge with an announcement that interest rates are going up. The purpose will be to keep the expansion from overheating, and thus extend its life.

While a rise in rates is not totally assured, Greenspan seemed to be sending some strong rate-increase signals last week.

``He left no uncertainty in my mind that he is going to tighten,'' said David Jones, chief economist at Aubrey G. Lanston & Co. in New York. ``He basically said that the economy is growing a lot stronger than we thought and the Fed needs to act now.''

In congressional testimony, Greenspan stressed what he called the ``importance of acting promptly _ ideally pre-emptively _ to keep inflation low.''

That was the same reasoning the Fed used in its last round of credit tightening in 1994 and early 1995 when it doubled a key interest rate.

It worked. Greenspan and the Fed won kudos for accomplishing a soft landing _ slowing economic growth enough to keep inflation in check but not enough to push the country into a recession.

Only twice since the central bank was created in 1913 has it been able to achieve soft landings _ in 1966 and 1986.

Those two successes gave the United States its two longest periods without a recession _ nearly nine years of uninterrupted growth in the 1960s and nearly eight years in the 1980s.

But Fed policy-makers could not repeat either time. A second round of rate increases, instead of stretching out expansions, plunged the country into recessions.

This time, economists are fairly confident the Fed can pull off back-to-back soft landings, given the unusual nature of this recovery.

The expansion has been remarkable in the degree of wage restraint that is occurring given how low the unemployment rate has fallen.

Economists used to fear that any jobless rate below 6 percent would trigger inflationary pressures. But unemployment has been below that level since late 1994 and wage pressures are still not evident. Economists cite a variety of factors, from global competition to layoff anxieties and falling health care costs.

``We have less inflation now than we have ever had this late in an expansion,'' said David Wyss, chief financial economist at DRI-McGraw Hill Inc.

Of course, economists do not rule out the threat that some unforeseen outside shock, such as a steep sell-off in the stock market, could jolt the economy while the central bank is trying to slow things down.

A significant drop in the high-flying stock market, which has doubled since 1994, could trigger corresponding cuts in consumer spending if Americans _ 40 percent of whom now have a stake in Wall Street _ suddenly felt less wealthy.

Analysts believe, however, that any market impact from Fed rate increases will be fairly mild and temporary. They noted that Greenspan's increasingly strong warnings of possible rate increases have had only limited and short-term effects on the market.

Economists also are hopeful because of the widely held belief that the central bank will need to make only a few modest credit-tightening moves to slow the economy enough to keep inflation under control.

Joel Prakken of Macroeconomic Advisers in St. Louis estimated that two quarter-point rate increases this year, which many analysts expect, would slow the overall economy by only 0.4 percentage point in 1998, primarily by depressing demand in the interest-rate-sensitive sectors of auto and home sales.

Robert Dederick, economic consultant at Northern Trust Co. in Chicago, said chances are good that the current recovery could last for another two years and beyond _ making it the longest in history.

``There just aren't any excesses out there that would make the Fed's job impossible,'' he said. ``It will take some luck, but it can be done.''

[plj8624]

(Disclosure: I am a current BAC shareholder)

I seem to remember a Russian currency crisis in 1998. Maybe Bank of America had some exposure to the loans that got defaulted on. Also interest rates were trending up. I do not believe higher rates in 2004 will hurt large banks; indeed I think they can prosper from higher spreads. In Bank of America's latest conference call they claim that they are prepared to prosper in the higher rate environment.