Wall Street Week with Louis Rukeyser; 3103; The Kudlow View

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produce Friday July 20th. Our panelists are Frank Caprio Tom Gallagher and Martin's Wygant. Tonight's special guest is Lawrence Kudlow CEO Kudlow and company. Good a man I'm Louis Rukeyser as of Wall Street Week. Welcome back. Economics said the late AFL CIO leader George Meany is the only profession where a man can have a lifelong reputation as an expert. Without ever being right. Where is meaning when we need him. And it was the eloquent Harvard economist John Kenneth Galbraith who once admitted. Economists predict. Not because they know but because they are asked. From Harvard to Wall Street and around the world again. This is been a particularly difficult period for previously renowned forecasters.

Alan Greenspan reached the height of his reputation in Washington just when he was about to prove that anyone who called it economic science. Had to have been kidding. The Fed chairman mis read the economy signals so embarrassingly in 1999 in 2000 that he was raising interest rates to guard against inflation when he should have been lowering them to go up against what has proved to be the biggest economic collapse in a decade. But he was scarcely alone. Wall Street forecasters by and large distinguished themselves by their myopia mostly failing to see the earnings downturn coming and then almost unanimously failing to sense its severity and duration. Nor have corporate leaders come off looking like economic geniuses. Throughout the technology sector. Until recently the greatest haven of intellectual arrogance since the fall of the Roman Empire. Once cock sure a CEO is

have lately taken to mumbling an acknowledgment that they barely can see around the next corner let alone the next quarter. Meanwhile up in Redmond Washington Bill Gates give us and Bill Gates taketh away. As Microsoft would cheer the market with an upbeat talk a week ago turned around and depressed it with downbeat talk. A week later people were so angry that they forgot the excellent possibility that the company which shares with Intel the distinction of appearing in all three major indexes and has been the single best performer in the Dow Jones industrial average this year. Might well have been wrong both times. As for the president of the United States occasionally considered at least a reasonably important figure in economic forecasting. He was off doing important international business in Genoa and hardly any investor even seemed to have noticed

as inquiring minds demanded to know precisely when if ever a real economic recovery was to be reality and not just forecast. That event seemed ever more elusive and the date of its arrival seemed to reseed with each new forecast. Indeed while there may have been a shortage of solid economic turnaround news there was absolutely no shortage of economic forecasts. Some people may think that the root cause of our current slowdown is over production but the way it looks to me what America is really suffering from right now is over a prediction. Tonight we'll discuss that phenomenon with one of the sharpest economists on the scene and get his view on why so many keep missing the boat both when it's speeding up and when it's taking on water and what all this truly means to investors. I forecast a lively evening.

But first let's see just how much all this confused Wall Street. Quite a bit it would appear. The Dow Jones Industrials put a generally positive spin on the mixed economic news moving to their highest level in a month. And then hanging on for their first weekly back to back gains since early May. For the week the Dow edged up 37 points to ten thousand five hundred seventy six. The broader indexes were mixed and mixed up. As typified by the tech driven Nasdaq which hasn't moved two days straight in either direction for a week. And speaking of genius forecasters How about them L's. The faulty fellows lose one of their Dow Bulls tonight as well as the Bahraini killed pitcher lates after an astounding two hundred thirty eight weeks. Moving to neutral on the next three months on grounds that the market shows what he calls precious few signs of recovery and is placing too much faith in

Greenspan policies that Laszlo says have shown little impact to date. Neutral was the halo winning call three months ago by three of our elves. Since the Dow has moved less than 5 percent since then. Indeed it is barely budged. But the strain ran out for the wildly swinging Nasdaq which had produced halos for the bullish shelves for six weeks running. But this week is down a bearish six percent from three months ago. The bond ghouls love an economy without pizzazz of course not to mention the Greenspan hints of another rate cut next month and long term Treasury yields fell Wednesday to their lowest levels in more than three months. Both the dollar and the oil price we can see. And in case you ever wondered why the federal government decade after decade generation after generation comes up with so many unbelievably harmful and counterproductive economic ideas. The truth crept

out this week. The U.S. Treasury it was revealed is infested with rats. A renovation project in the 19th century building has uncovered far more vermin and insects than were previously believed to be living there. Golly folks why does this somehow not surprise us. My is where I get the pleasure to have you back as the market surprised you with its failure to recover more convincingly. Surprised somewhat. It's very frustrating because once the Fed really gets aggressively into a cutting mode listening mode the market usually doesn't take too long to do very well. It did take a fairly long time in one thousand fifty seven to fifty eight but that was more of a sideways move here we had the big down earlier in the here and it's been kind of sideways recently. Is there ever been a comparable period of cutting that did not lead to economic recovery. Good question. Since the Fed started in 1913 there's never been a period where the

Fed has cut aggressively and allowed the money supply to grow where the economy didn't soon recover. The early 30s a lot of the money supply to collapse in the banking system to fail. You have always said don't fight the Fed you've also always said don't fight the tape has gone one might have gone the other way and strangling me. Well the tape you know had a pretty good move there in April in May and I would rate the tape now as neutral I mean some of the Nasdaq stocks might look poor but the advance decline numbers have been pretty good and it's been more new highs and new lows almost every day. So the tape is not that bad it's just that there are some pockets that are horrible. We were doing this show for 31 years. Periodically we have bear markets. When we get them the mood of the public turns a little more surly than it has been. I get a lot of mail from people saying why don't you tell us to get out. Why are we out. Well what do you tell people right now what should they be doing now. I would buy some stocks I would never put all my money in the market. In any case but I would be in stocks particularly value stocks and some decent growth stocks

and I'd probably keep some cash just because it always keeps on going. You know give me a couple of favorites. Well Philip Morris Pfizer I think it's a good growth stock a Washington Mutual I like a lot. So that's a pretty diverse group with rain. Well give you a couple were Citi Citicorp. I like the financials basically engines and other ones. The only cure to a downbeat but it also doesn't sound like you're too focused on tech yet. Well Bush and I'm bloodied and we own some testosterone with some other bank capital. You're bullish I know you also but if somebody is like Marty I think what's surprising is that indeed the Fed has cut and cut aggressively and we haven't seen the action but this is one of the things that makes the market you've got to have patience. Every time the Fed has done this we've eventually got a recovery a little tougher now because the problem is capital expenditures the consumer is in good shape. The

fear is if the consumer starts to worry then we're really in the soup and that's the I think that's the barrier that we have to look at as you know in our impeccable the elves and the ex. It's only this year that we start a given haloes for the Nasdaq over the years that predictions were just for the Dow. And in fact extreme bearishness would never have been accurate on the Dow including last year when it was a record almost a time Mahdi was one of those who made it. What are these two different markets entirely. They're never going to move in sync. Oh absolutely. They are different markets what we're going to see when the market really rallies is we'll see some rally in techs but I think the techs will fall by the wayside for a while as the rest of the old economy moves forward. But I think if you have a patience of a year 18 months there are stocks out there you can buy and be sure that you're going to see the recovery in Microsoft would be one of them. IBM would be another some of the drug stocks some of the drug drug stores like CBS. All of those stocks will

eventually recover. But the impatience is there because people are saying how come nothing is happening. And the answer is we had a big bubble and we're working through it. Not many of us saw the bubble as a matter fact I'd like to find someone who did see it and should have told me but they didn't. Somebody who saw the bubble and hadn't seen it for years and years before that when they saw in the Senate. Exactly. That's true. So you watch the retail sector closely over the you know what you think of it right now. I think the retail sector is one of the prime sectors that's where we're putting some money. There are some very attractive stocks out there like Federated. Again the fear here is the consumer eventually gets worried but so far the consumer has been pretty solid. Retail sales are still good. Mainly in the apparel and. And I would say that this tax cut doesn't do much good but it does bolster the retail sector gives the consumer a little more money. It's not a panacea but it helps. So I'm high on the retail sector is the feeling in Washington the American people are going to be so thrilled and grateful for these

300 signal effects they're going to be getting the economy going to turn right around. I think that the tax cut does play a role. People are hoping that it that it does. I look at it this way the interest rate cuts have anywhere from 6 to 12 month lag and having the impact of this tax cut is almost like a bridge loan to get the economy over until until the rate cuts start to have their full effect so I think it will have some impact positive impact on the economy in the second half is the likelihood of any further tax reduction dead for the next couple years. I think in all probability I think it is. I think that it's in part that you've got the Democrats in control the Senate tax reduction as a high priority for them but it's also that Congress and everybody in Washington has this fixation on not dipping into the Social Security trust funds. So there's really no money available or at least the way politicians have defined it and I think that could lead to some perverse outcomes. It could lead to budgetary restraint at a time when you actually want a little more stimulus an economy that's kind of a worrisome trend in Washington so not dipping into the so Security trust funds.

Where would I find those funds. Probably with those rats at the Treasury Department. It's physically on paper in their mind and they said that's right but in terms of an IOU it is but Congress for years was still using the trust fund surpluses only in the last few years when it became achievable not to use that became a priority for politicians of both parties to try to protect those and their intent that's guiding their budgetary decisions now. Microsoft indicated tonight it might get a little more aggressive in its battle with the government on legal issues. Do you have any further word on what may happen there. Just that the legal decision probably wasn't positive for Microsoft as they'd hoped. Even though they threw out the judge doubt that the Court of Appeals threw out the remedy that in throw out the decision that they had violated the law the government since then has said that they want to go into negotiations but it's not going to be quite as smooth of a path in trying to negotiate a settlement there. All right then remember the person who always comes most around here is no one but you and we love to hear from you. Your Wall Street Week in the Mills Maryland 2 1 1 1 7 and now let's go right over and meet tonight's special guest we're going to cut.

Welcome back. Thank you Lou. I think you know your way to the couch over here and. Larry Kudlow is a veteran Wall Street economist who is tonight making his sixth appearance as my guest on this program. You started as a staff economist with the Federal Reserve Bank of New York went on to a distinguished career it of alternating between government where we show to fund those for any Republican who wanted to cut taxes and finance as chief economist for a number of Wall Street firms this year. He launched his own which he cleverly decided to call Kudlow and company. But Larry when do you expect to see a clear improvement in this economy and why. I think we're going to get some improvement next year. We might see a smattering of it towards the back end of this year. But my worry right now is that mistakes in both monetary and fiscal policies are going to hold this

recovery lower than is normal and keep the economy be well below its potential to grow. Let's look at each of those areas what's the mistake in monetary policy. Well I think of course the Fed was just far far too tight in 2000 and arguably even before 2000 too much fine tuning by the Fed. Using models that you know too much growth causes inflation these old saws that have never proven right. And regrettably they deflated the economy they deflated the stock market we're still feeling the after effects of that. One of the problems here is there's a tremendous a version to investment risk going on throughout this economy. I know the Fed is coming back strong there now jamming down the accelerator this year after jamming down the brake last year. But I still think commodity signals and the Treasury yield curve are telling us the policy remains too tight. Commodity signals meaning that the goal place doesn't run up well it's gold has been flat but.

CRB futures indexes are about to break new lows Journal of Commerce metals Dow Jones spot you know there looks to me like there's a scarcity of liquidity in the economy not enough money. It looks to me like there's a bit of a deflationary ripple running through. What do you think the Fed should do. Well my advice to them is right now just knock the Fed funds rate down about three quarters of a point take it to 3 percent and tell the public they're going to hold it there for at least six months so people will stop bottom fishing for them I was financing rates but the other advice is the Fed must keep an eye on markets. Markets are smarter than Phillips curves and Nehru's and heaven forbid even university professors markets have a lot of information that they should use them. The congressional testimony this week of Alan Greenspan indicated he is still being asked to predict everything in the world of credit next year as the spring fashion and I. What does that tell you. You know Lou when the Soviet Union went down I thought central planning was over.

Sometimes I'm not so sure. What's wrong with fiscal policy. Well here too I don't think the taxpayer really gets to the heart of the question which is that absence of investment risk you know right now money market funds are exploding they're growing at twice the rate. Last year two trillion or more. You know that's sort of I don't want to malign anybody but it's sort of for little old ladies with tennis shoes it's not aggressive innovative financing of venture capital or new ideas to drive this technology miracle to the next level. I think we need tax cuts for investment purposes not consumption purposes for example. We know that business investment spending is dead in the water. Why not accelerate depreciation allowances and have faster cash write offs. We know that people are buying money market funds rather than stocks or NASDAQ or any. Why not lower the capital gains tax. You know if you sweeten reward if you sweeten rewards you create incentives and people will come in and start taking risks

lower capital cost improvements and as I think we need a lot of incentive oriented investment oriented tax cuts. I don't need to tell you the reaction in much of Washington to what you've just proposed will be this is more relief for the rich. What does this do for the poor working stiffs. How do you respond. Well you know I want to keep the so-called poor working stiff employed. If this business downturn this investment led downturn if it continues and if the layoffs continue we've had some ugly looking employment numbers. If we get another month or two of that the risk is the next shoe falls on the consumer. The point I'm making is business is not the enemy of the worker. Capital and workers have to move together. OK. Let me let me just stimulate me just take you from this area of economic policy to the bottom line for investors. Is it too soon to be buying stocks aggressively. Well of course I'm a long run optimist because I think we have a lot of you know economic freedom in this country and a lot of entrepreneurship and I don't want to downplay. Number one the

relatively low level of interest rates and inflation which are pluses. Also is Greenspan properly noted energy costs have come back down. And we do have a pretty strong technology cycle so the shampoo Tyrian revolution is alive. I would be invested low. I would be balanced. I would you know not put all my eggs in one basket. I had all these stocks. I also own some corporate bonds I also own some high yield bonds and I would make a plea to people please get out of money market funds and come back and put your money to work in the economy as I would like all little old ladies in tennis shoes to direct their protest in the government. Starting with Marty's watching Larry over say the next year or so what's your outlook on inflation and gross domestic product. I think inflation is going to be just virtually zero. Even the reported government indexes as flawed as they are are going to be dropping down to about one and a half percent on the broad measures. I think interest rates I mean I think there's a could be a

pretty good bond rally cooking based on some of these deflationary commodity activity that I see. And as far as growth. I think we can get 3 percent growth next year I'm sort of hoping for that. Like you I'm a little bloodied on all these issues but you know coming out of recovery we normally get five six or seven parts coming out of recession we get five six or seven percent growth. So this will be a fairly tepid. Recovery. Larry to that he has shifted from the Fed to the dollar. For the past couple of weeks we heard in general over the financial summits being held in Congress let's lower the dollar let's weaken the dollar. That will be good for exports what's your view on the dollar would that be good or bad right now. Well you know if if the European Union in its wisdom would lower tax rates deregulate curb spending and not protect their businesses from America's top businesses they have a stronger currency. If Japan would deregulate and drop its tax burdens they'd have a stronger currency.

So those countries have work to do on the growth side. As for us I would like to see a steady dollar. I don't want to keep rising as rapidly as it has been and I'd like to measure it against commodities This is my point. When you see commodity deflation that means the Federal Reserve should be printing more dollars and that will just keep it steady. But I sure don't want a major devaluation that would be a disaster. Larry you've had a lot of criticism of the way monitor positive been conducted over the last few years. When Greenspan's term as chairman is up and if he doesn't want another extension what kind of person do you want President Bush to appoint to have any specific got recommendations. I'd like to someone who would understand the need for a market based monetary policy look at commodities. Look at the Treasury curve. Look at the exchange rate. Point number two someone who believes in free enterprise business and therefore understands that more revenues more sales and more people working are not bad things.

In this family that less prescription would be shared by many people on the other side of the political spectrum. We were wrong in the saying liberal conservative Republican Democrat on these issues. Well you know I don't know that those labels necessarily apply. I mean unfortunately a lot of Democrats are bashing businesses I think that's one reason Al Gore got beat last year. Some Republicans are much better on the subject and then there's some mixture of back and forth between the two but monetary policy is not a political issue per se. All I ask is that we place our faith in market information that's why I'm for a commodity price rule kind of monetary approach. And again I think that this kind of incessant fed tinkering and dial turning just makes no sense it really causes underperforms. We have less than a minute left. Couple of quick questions. We're going to have a recession. Well we're in a profits recession or an investment recession and we're in a production recession.

If the employment numbers fall another month or two then that will probably be the whole thing. Yes we will be in a recession. Second and last you talk about a commodity oriented policy. You have been supportive of some link to gold over the years. Is there any chance in the world that we're going to do that. No and I don't think gold will ever have that central role but I think people need to look at gold. But you know take a good come out of the index and you'll get the whole picture right now commodities are slumping the Fed should be looser. Thank you Larry Kudlow thank pound let's hope you'll be back with us again next week when my guests will be one of the finest performers in an area that lately has shredded far more managers that have rewarded aggressive growth. He's wrecked lane of the Milwaukee based FMI Focus Fund. Tell us what he remember the others forgot where he's turning his aggression next. Meanwhile this has been Wall Street Week and with the geyser. Good night. Wall Street Week With Louis Rukeyser is produced in association with Kaiser television

incorporated by Maryland Public Television made possible by the entity. Today network economy. Business response. While opportunities along. Solomon. 40 business services the answer is the people of the Leuven to. Buy Oppenheimer Funds. Insight teamwork discipline. The strategy Oppenheimer Funds uses to achieve long term performance. Oppenheimer Funds the right way to invest by A.G. Edwards providing a full range of personalized financial retirement and estate planning services. A.G. Edwards trusted advice exceptional service by the Federated government funded the experience of Calphalon the resources of Federated Investors managers of over one hundred forty five billion dollars in assets over 440 transcript of this program send

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