Wall Street Week with Louis Rukeyser; 2731; The 1998 Economy

We are. For nearly three decades America's most trusted and widely watched source of economic sense and financial advice. Wall Street Week With Louis Rukeyser is made possible by B annual financial support from viewers like you. By Prudential Securities. With more than 50 600 financial advisors nationwide securities provides solutions for a lifetime of investment needs. That's the power of the rock at work for you by A.G.

Edwards committed professionals providing a full range of financial services and investment advice. A.G. Edwards trusted advice exceptional service and by Oppenheimer Funds. Every year millions of Americans place their financial futures in the hands of one mutual fund a company. Oppenheimer fund. He produced Friday January 30th. Tonight special guests dark and Hyman chairman of ISI Group Incorporated. Lawrence Kudlow chief economist American Skandia life assurance and Edward your guinea chief economist. Don't you Morgan Grunfeld in a van on Louis Rukeyser This is Wall Street Week. Welcome back. And folks I don't know about you. As always I hope you are fine but I'm feeling

a bit neglected tonight. But this was the week when our first lady informed us that all this national merriment about her husband's alleged serial misbehavior was coming from a vast right wing conspiracy. And friends are miffed. Because nobody has asked me to join. I mean clearly this malicious biased reporting involves every other known right wing conspirator in America. Like for example NBC ABC CNN The Washington Post. Guys you know what a bunch of notorious right wingers they are. Newsweek magazine practically a mouthpiece for Miscellany. And so on into the night and that's even before you mention such well-known neo fascist hard liners as Jay Leno David Letterman. They have been absolutely shameless in fronting for this conspiracy. But not one of them has had the courtesy even to just pick up the phone and invite me to drop by smell the

incense and join the vicious cabal. What's the matter with them. Don't they think I'm good enough to do some after hours conspiring against the White House too. It's dawned hurtful. It's well known that all the terrible media people are out to get the president. After all only a disgracefully low Eighty nine percent of the Washington press corps voted for him in 1902. And if these infamous conspirators plotting all this in secret assembly it's just not fair to exclude the rest of us. Actually it turned out to be a remarkably good week for the president. His approval ratings have never been higher suggesting that if only two or three more scandals can break between now and Washington's birthday he'll have every American behind him his State of the Union address which began with a plea for fiscal responsibility and continued with an extensive laundry list of brand new ways to extend governmental power and spending seems to have played beautifully in Peoria

not to mention Poughkeepsie in Palm Springs. If the country was ready to forgive and forget. So was the world of money. The dollar recovered the bond market rebounded and stocks celebrated happily. All was well with the world. Unless you count count Starr. And the makers of Teflon may at this very moment be infiltrating the White House to find out what miraculous secret ingredients have been added to their product there. The most plausible reason for the president's spectacular Dura ability at least for now may be the widespread feeling that while he may not be the ideal choice for say Girl Scout leader that's fairly irrelevant when you consider the good shape the economy is in. Indeed the week was capped off not only with mostly soothing testimony from Federal Reserve Chairman Alan Greenspan but with a report that 1997 showed the strongest U.S. growth in nine years and the lowest inflation in more than

three decades. With the economy riding high for now and the country overwhelmingly united against Saddam Hussein. The president's putative peccadillos were exciting fewer and fewer people with each passing headline. I guess you could relax if it weren't for that dorm conspiracy. We tonight will get to the heart of what really matters. Where is that economy headed and why and just how much does the embattled president have to deal with it. In the Company of perhaps the three best financial economists in the country. But before we get that in-depth look let's check out the somewhat shallower precincts of Wall Street as the president's problems seem to mean is the Dow Jones Industrial Average at mid week romp through its best three day spree since November aided by a ray of better than expected earnings reports while it faded a bit on Friday. The Dow's relief rally took the index up more than 205

points for the week to seventy nine hundred six point five zero. Bringing it back to within two points of where it started in 1998. And the two biggest broad indexes the S&P 500 and NASDAQ are finishing January with gains for the year with the S&P setting an all time high on Thursday. Our elbows are on chains for the fourth straight week at a consensus plus four on the Dow's next three months and five of them get halos for being correctly neutral. Three months ago. Concerns that Asia's troubles may cause a more serious slowdown in the American economy have slightly checked the enthusiasm for stocks. But I take it as just another piece of good news for bonds as the yield on the benchmark 30 year Treasury drops steeply this week taking it back down to five point eight percent. The threat of a U.S. attack on Iraq brought buyers into the long sinking oil market. But many departed on Friday in the biggest one day drop since November after both

Russia and China voice their objections to the use of military force. And is that enough irony for one half hour. Those who think the prurient interest in our chief executives private life is a sign of the excessive frivolousness of our times. Unexpected boost from Mattel of all people as the toy maker revealed a more serious look in Barbie. Barbies newly sculpted and repainted face made its debut appropriately enough in London where you'll recall Queen Victoria first sternly announced. We are not amused. To enlighten and possibly amuse us about the true outlook for the U.S. economy we've assembled tonight a trio of expert economists who have called more than their share of economic turns over the years and who have the added and rare virtue of being able to express themselves in understandable English. At home minister chairman of the ISI Group where he runs close to a billion dollars in bond funds has been voted Wall

Street's number one economist for an astonishing 18 years straight edge of identity who is coming off another year of remarkably on target predictions exposed the economy and financial markets for Deutsche and Morgan Grunfeld. And Larry Kudlow whom we might describe as an unrepentant Reaganite is chief economist for American Skandia life assurance. Gentleman let me begin by asking each of you the extent to which the twin front page crises in Asia and at the White House are likely to affect the U.S. economy in 1998. I think that the Asia problems are going to be. Monumental for this year. I think the packman economies in the next six months are going to virtually collapse. And I find it hard to believe there won't be an impact here. Lou I think that the impact is going to be more on inflation than on real growth. And on the good and on the political front I think it has probably peaked.

But we'll stick around. Are you predicting a depression in Asia. I think they're in a depression now by depression. I'm defining a contraction of about a 30 percent annual rate for three or six months. Is there a danger this will push us at least into recession. I don't think so. We are the only game plan is to export their way out. And so I think that we'll see a wall of exports come this way at cheaper prices. And if you have any What's your assessment. Well in November of last year when it was clear. The magnitude of the Asian crisis I lowered my GDP projections from 3 percent to 2 percent for 1998. And I also lowered my inflation forecast which was always was which was already quite optimistic I was looking at 1 1/2 percent for the CPI and I'm looking for 1 percent. I also think that's going to be very good for the bond market so I agree I think that the initial impact of the Asian crisis is actually probably more of a

positive than a negative sure it'll slow the growth of the economy down but lower interest rates will offset some of that. My main concern is as the year wears on that profits are going to get hit because pricing is going to be so weak there's only so much competition from from these Asian imports. And that in turn could lead to another wave of restructuring which means a rising unemployment rate maybe by the end of the year. Do you think the stock market might react negatively to that. Well you know the stock market has had a great deal of volatility volatility recently because of concerns about profits. I think that we're almost through this fourth quarter profit season and now we're going to have a few months where we don't have to think that much about profits if profits turn out to be as disappointing as I think they might be relative to what the market expects. We're also going to get lower interest rates. So I still think we're going to eke out a return of a positive return of maybe 5 to 10 percent the stock market this year. We may get a bigger rally in the first half of the year and then give a big part of that back in the second half.

Well Rico What's your view. Well I think that the United States economy is fundamentally quite sound. I think we have. Price stability zero inflation even some mild deflation in commodities and goods and I regard that as having a tax cut effect on the economy. I think it's going to boost real incomes and unit sales and actually unit profits was we have to adjust properly for a touch of deflation and I don't think some of the analysts are yet doing that. The capital You mean they're better than they look. I believe they're significantly better. You know some industries the selling prices of their goods are down 10 to 15 percent. And I don't think people are building in what I call the deflation adjustment. And I think it's a better story than many do. And of course the capital gains tax was cut in the low inflation rate means the effective capital gains tax is way down. That's going to boost entrepreneurship technological innovation and

investment. And I think the information economy will even be strengthened further by the drop in interest rates I think interest rates across the board are going to be coming down in the next 12 to 18 months. How much impact do you see from what's going on in Asia. Well you know. It's a tough problem but you sure don't see anything yet. You know it's quite interesting to me. The crisis is about six months old and really it's had no powerful effect on the economy. I agree that the Asians are going to suffer the brunt of this with rising inflation over there and contracting economies. But I think the spillover to the U.S. is going to be very mild. I think it's an overrated factor. We have the strongest currency in the world I call it King dollar it's the only adult currency in the world and I think capital flows to our high returns and our strong money. And also I think Europe is improving and I think total sales is much greater to Europe between the domestic head offices and their affiliates. And I also think Latin

America is going to prove to be surprisingly good in 98 so in general I think Asia's got to restructure and transform their state directed economies they're going to go through a rough patch. But I think the United States going to just fine. Let's harm let's start with you on this one. Let's look at the president for a minute. What grade would you give him the job he's done on the economy and how much credit do you think the objective Lea deserves for the state of the economy. Oh I have to say I'm coming at this from the Republicans point of view. But with that said I think you're going to this vast right wing that invited either but I think the guy's done a fine job and he was dealt a good hand. But I think that he's added some particularly on the front of in my view of keeping government spending under good control and the policies at the beginning to try to encourage the bond market I think were effective so I've to give him pretty pretty good pretty good grades you.

Want to give him a grade. I give him an A minus. If you had any with you I would give him a B partly because he doesn't deserve all the credit for our economy doing so well. We have a tendency to you know assign too much responsibility to administrations for how our economy performs. I think we'd have to probably go believe it or not. Maybe even back to Jimmy Carter I mean he started some deregulation in some industries. Ronald Reagan of course liberated the economy from government regulation. I think we actually had some setbacks during during the Bush years. But what I've been very encouraged by by this administration is they've been very supportive of free trade and I think that's an essential policy that ultimately leads to prosperity. Do you think they'll be able to stick to that policy which seems to be getting a little more controversial in Congress. Well I think we're going to stress test that because you know during periods of prosperity everybody's in favor of free trade as long as we're creating jobs and the unemployment rate is low. But if the

Asian situation really. Does cause some problems for profits later this year and we start to see the unemployment rate going up there undoubtedly is going to be some political sentiment for more protectionism but I think our political process will come up with the right conclusion which is to maintain the free trade regime we're in. FESSLER Kudlow How do you market. Well I agree with Ed Yardeni that it was Reagan who launched this long way said Jimmy Carter. I thought I thought of it. I was older I get I have a hearing problem. Perhaps I hear what I wish to hear but he was doing very well on it. You know I think Reagan really gave. Bush and Clinton the economic high ground I think Bush made some tremendous mistakes. Clinton on the other hand has some good and some bad. I think his tax hikes of 93 were not good and necessary and indeed my principal concern is there's a certain tax bracket creep developing in our economy which could create some fiscal drag in 98. I do however give Clinton good marks.

He works well with Greenspan noninterference policy with the Fed and that's helped to get the inflation rate back to zero. He and Ruben have supported the strong dollar policy I think that's very very positive. But of course then back to the negative side I think his attempts to nationalize health care were just dreadful and frankly his State of the Union speech in my view was very disappointing. He's veering sharply to the left. After sitting in the middle of lots of new programs at least 50 billion dollars a year maybe more. He didn't get that kind of mandate in 1906 and I believe he's not going to get it through Congress in 1998 but we sense you're not his biggest of those is so what's the word. Well actually given the inflation and the free trade I would echo and working with Greenspan. I'll give him a C-plus. And I would rate him I might add just in the spirit of bipartisanship I believe he's been a better economic president than his predecessor George Bush rightly who get no votes tonight.

Right. Ed Hyman Let's try and put some numbers on this economy this year what do you see for real growth. What do you see that long bond now at five point eight percent where do you see it by the end of the year. What do you see for short term rates what do you see for inflation. I'm going to sleep unemployment I think on the growth right now which has been about four I think we'll see about 3 percent. It may be more right here in the beginning of the year than in the second half. An inflation rate look for 1 percent. And bond yields coming down to 540 from the 580. Right now I have the Fed on hold. Consider when I should put a Fed easing and I have the short rates on hold for the moment. And unemployment. I put not much difference in what it is now around for four and a half or five percent. Alan Greenspan seemed to hint this week that the next move might be down. Yes he did. And I think the situation in Asia is it is disturbing enough. That Greenspan feels he needs to at least

lay the groundwork for an easing if it looks like that. What what and needs to be done. I do I mean how would your numbers differ. Not much really. I know we're in serious trouble if you do I know I mean I'm struggling here to try to change my forecasts once and some some differences. But Ed and I have a tendency to sometimes be in lockstep here and I think we're looking at the world sort of the same way. I think I agree that age is a serious problem I think it is going to take growth I think the differences that I see taking more growth out of the economy and talking about 3 percent I'm talking about 2 percent growth. But I agree we may actually get some better growth in that maybe 2 and 3 percent the first half and then maybe something under 2 percent in the second half the bond yield I'm maybe a little bit more bullish I think see the government bond yields falling down to 5 percent. I can look into that for a long time and yeah I'm going to get it. Yeah absolutely I think we're going to get it eventually and as you know within my career career lifespan we don't know how long that careers will have been going to be but I think you have more than 12 months and I hope so. I hope so.

But yeah I think we'll see 5 percent by year end. I agree inflation is going to be down to 1 percent. You know we basically have no inflation at all for all practical purposes and a bond yield currently of near 6 percent is awfully attractive about short term rates short term rates I think the Federal Reserve going to lower interest rates and I think the lowered by about half a percentage point probably in the second half of the year unemployment a slight uptick maybe up to four point eight four point nine percent by year end. All right. Well I'm in the same ballpark I think growth will be about 3 percent it could be slightly better than that. I think the inflation rate on a producer price basis I think we're going to see some mild deflation and ideate perhaps a one or one and a half percent decline in GDP price indexes should come down to about one and a quarter one and a half percent. I think interest rates are too high. I would agree with the 5 percent long bond I wouldn't be surprised if a dip down into a 4 percent handle. I think we're heading back towards where we

were in the late 50s and early 60s during the Bretton Woods period. And I think the Federal Reserve will ease they'll take their time but might come out of the market indicators such as gold and broad commodity indexes in the strength of the dollar and the flatness of the yield curve are really all telling the Fed that money and liquidity may be a bit scarce. And I think on his own good time Greenspan will start dropping the Fed funds rate at least 50 basis points toward 5 percent maybe more than that. Introducing you an unrepentant Reaganite and I know you don't blab to that description. You have always called for lower tax rates. We seem to be moving in the opposite direction. Bush raise some rates. Clinton raised some rates and so far as I can tell nobody in Congress has lifted a practical finger to reverse that. We stuck with these high rates. Well I think the weight of the evidence is on your side although I find myself a little more optimistic. I mean we didn't get the capital gains tax rate down last

year and Clinton signed it so give him a supply side applause on that. That said I think the biggest task right now is we should be widening tax brackets and we should be lowering tax rates. You know the average marginal tax rate for the economy has moved up from 15 percent to 35 percent during this cycle. That is extremely high and it shows that we're experiencing in prosperity with a progressive tax code. People are undergoing tax bracket creep. We are punishing success. People you know at the 25000 when they cross 30 they go from the 15 percent bracket to look why don't you have to convince this group. But are you going to convince congressman to give him to the American people. Well I think you. Keep your eye on Bill Archer because he's really providing some pretty good leadership right now. He has talked about across the board tax rates and bracket widening. In addition to that I don't think Clinton's going to get a spending I think the Republicans want to take the budget surpluses which I believe will be substantial I

think we could have a 50 to 75 billion dollar surplus. And they want to at least start turning some of that back in the form of tax relief. I just hope they do it efficiently and cut tax rates across the board. We're running short on time you have all three given this a pretty optimistic outlook. Some slowness but certainly not a recession. So we're not deflation. I don't hear from any of you what could change that is what's the accident that could change your forecast. Yeah well the obvious one for me a little be if the situation in Asia. You know drags us down. But. The problem I have right now is as you can hear here is that everybody is in agreement on that side. And so I think the you know the risk for the financial markets would be that the economy particularly in the in the next few months surprises on the upside with a lot more growth than people were expecting. And that will bring back some for inflation and bring back worries about inflation and forget the lower interest rates for the moment. But you don't expect it. That's not my that's my worry not my best guess.

I do know that I guess I believe that the days are numbered for this bull market and 1998 should still be an up year for the market. But I think that we're going to have more problems in 1990 if those problems start to occur and I need to then I'm going to have a an issue. And. I have a problem of the Year 2000 problem with computers. That's what Larry and I think two events. We can't really gauge but they're right out there one is the impending bombing of Iraq which everyone is talking about which is going to have some short term problems and secondly as President Clinton's own problems there could be a reshuffling of the presidential and cabinet deck chairs which in the short one create some uncertainty although I think the economy will do quite well through it. And it concerns but basically still optimistic. Thank you very much for that Hyman Denny Larry Kudlow. I hope you'll be back again next week when we will escape the midwinter chill by checking the warmest recommendations of a strategist on a hot streak. Jim Weiss of State

Street research. So don't let the groundhog have all the fun that the forecast of a real live human expert. I mean why was there more Fleet Week. I'm Louis Rukeyser. Good night. Wall Street Week With Louis Rukeyser is produced in association with Ruth Kaiser television incorporated by Maryland Public Television made possible by the annual financial support from viewers like you. By Prudential Securities with more than 50 600 financial advisers nationwide preventions securities provides solutions for a lifetime of investment needs. But it's the power of the rock at work for you. Why A.G. Edwards providing a full range of personalized financial retirement and estate planning. A.G. Edwards trusted advice exceptional service and by Oppenheimer Funds where a long term approach to investing

has helped put financial security in the hands of millions of Americans. Oppenheimer Funds. A. Driver. For a printed transcript of this program. Send $5 to transcripts Wall Street Week With Louis Rukeyser Maryland Public Television Owings Mills Maryland 2 1 1 1 7. Transcripts are also available to subscribers of Dow Jones interactive. This is PBS.