1994 Redux: The Source of the Pain

Let's get down and dirty. What didn't work in 1994? What killed you? What would occasionally rally and then just fail and cut your heart out? What was a good sale every time it rallied?

First, remember the context of 1994. Then, as now, the Fed had been too free with liquidity in the past. Then, as now, the Fed had to tighten aggressively in order to keep inflation under control. At the time the inflation in 1994 was mostly in commodities . This time the inflation is commodity-based, but all stock-based. Remember, the Fed thinks the consumer is spending too hard because he has too much of a wealth effect.

You may think the Fed doesn't know what it is doing, but when a company like Wal-Mart (WMT Quote) says what I am hearing out of the mouths of Fed governors, I am going with Wal-Mart. (Many of you e-mailed me to say that Wal-Mart is not representative of the economy, to which I respond: What rock are you living under? Wal-Mart is the economy!)

So, we have to keep in mind that what may have been the enemy in 1994 is not necessarily the enemy in 2000. But the tightenings are designed to cool off everything, so lots of things get hurt whether the Fed wants them too or not, because the economy is pervasive in our lives. ...