Wall Street Week with Louis Rukeyser; 2246; Why Clintonomics is Wrong

Laura Laura. Wall Street Week With Louis Rukeyser

is made possible by the Corporation for Public Broadcasting and by the annual financial support from viewers like you by the travelers over 30 million Americans benefit from our insurance investment services and managed health care. But travelers America's umbrella by n f s and FS helping usual fund and institutional investors achieve their financial goals since 1924 and by Prudential Securities we believe the most important thing we earn is your trust provincial securities produce Friday May 14. Our panelists are Howard P. Kowloon Lewis Holland and. Carter Randall tonight's special guest is Lawrence he Kudlow chief economist Bear Stearns and company. Good evening and I'm Louis Rukeyser This is Wall Street Week. Welcome back. It may have been a tough week for shoppers workers and investors but it's a

heavenly seven days for beer drinkers don't you just love it when a country has its priorities straight. First there was the news from Washington that the folks who apparently have a thirst for taxing everything from income to output. Finally met a tax they didn't like. A tax on beer. Oh they'd consider it all right. After all drinking is a sin isn't it. BUT WAIT DON'T TELL ME. I'll be back to you a little later for the answer. And what could be politically easier than raising the taxes on the wages of sin. Seventy five percent of the American people say they're all for increasing taxes on cigarettes for example which by sheer coincidence I'm sure almost precisely matches the percentage of Americans who don't smoke. As for alcoholic beverages a country moving inexorably toward an all tofu diet is presumed not likely to balk at higher levies on Scotch. So being on. That then what do you know. Some

Washington genius concluded that beer is uniquely the working person's drink and the prospect of Joe and Jane six pack marching angrily and dry throat into the polls led administration officials to say that whatever was proposed in higher taxes on presumably Cissie or drinks beer was likely to be excluded. Well I'll Drink To That. But that wasn't the only way that beer found its way into the news. But this is the final week of the television sitcom Cheers set in a Boston bar that is never been renowned for its booze cafes side cars or Bombay martinis. But which is absolutely glorified beer on tap. Could it be that the real reason they're publicly abandoning the idea of raising the beer tax this week is that they're perfectly willing to irritate business labor and the Republicans but they have understandable qualms about taking on norm.

Elsewhere in the news there were plenty of things that might drive a fella to drink. Shoppers who have been able to console themselves in this painfully slow recovery with assurances that inflation was dead and buried were jolted by unexpectedly high reports on both consumer and producer prices. Reports that while they were pooh poohed by the White House and indeed by most economists frighten the bond market and helped send gold to its highest level in nearly 18 months. Workers meanwhile had to deal with some reduced forecasts for 1993 growth with the official report that real worker earnings have now fallen for two straight months. And with news of stalled factory use and declining consumer confidence. None of which was regarded as an occasion for Celebrate Tory cakes and ale. On Wall Street. We tonight will chat with a guest who not only has a great deal of influence in Wall Street in the 90s but who had an important role in what happened in Washington in the 80s. So we may need

something stronger than beer before we're through. First though let's see who was trying to get ahead in Wall Street. In the past the Dow Jones Industrial Average was the premium brand again this week reaching a record high above 34 82 on Wednesday. And despite the end of the week we'll ease overinflation holding on to finish with a gain of just under 6 points at thirty four forty three point zero one. But results were less filling in the broader indexes except for the Amex whose gold and other inflation hedge issues propelled it to two record closes during the week. Our elves who are not so much gold coated as coated with brass didn't move a muscle. Their consensus on the technical outlook for the next six months remains a mildly bullish plus to rising interest rates cause this week by the twin inflation bubbles Hurtt bonds and stocks but added to the attraction of holding the American dollar which rose against all other major

currencies. Still the message of a longer term decline in interest rates in the 90s continues to be as beneficial to borrowers as it is disappointing to savers. According to a Fannie Mae survey half again as many young Americans as a year ago now believe that homeownership is an attainable goal for their generation. And that's not just sort of pop. Quite a Randall have interest rates now seen their bottoms for this cycle. I think short term rates have come pretty close to it if not already seen it I'm not sure of long term rates have yet. I don't think inflation is coming back in the very near term I think maybe a year from now it will but the next major move in interest rates is up not down. Why. Oh inflation. We're sowing seeds for inflation and they will occur in 1905. They'll start to grow and that's when rates will be going back up again. So if I were an investor in bonds for instance I would either stay relatively short term or I might

buy some so-called Christian bonds which means bonds selling at a premium over and above their call price but not call bull for a few years. I could ask corporate bond you don't know AT&T eight and eight selling at a premium of one hundred seven but not callable till 2000 and 2008 example a way to lock in today's interest rates. That's right. OK little how and what do you make what's gone. Well I think that inflation probably is not going to be as bad as maybe the market's indicated this last week. The world basically is in recession and the companies that I own for example very few of them have been able to get any price increases. So basically there is really any link between the fact that you only as companies a lot of the banks right and I think it is generally true across all companies at this point so I don't see inflation being a big problem. However I do agree that I think we've seen probably the lows on short rates. And I do think that the long bond we probably have not seen the low on that. So we would still be a buyer of the long run.

I think so probably over 7 percent or above. People who you have followed precious metal closely over the years. Is this an inflation scare is it just a supply and demand situation. Because so James Goldsmith by a lot of gold what's going on. Well it's very hard to figure out the gold market always and I think that applies now. I am not particularly interested in gold as an investment vehicle here I think you have a short run. My advice to investors here would be to put half some money overseas and the trend we've seen so far this year with the index of foreign stocks heat index up 22 and the S&P 500 up 2 percent is a trend we're going to see and I would tell people to put here some money and the foreign stocks where you are going to buy them. I would go to an expert. I would go through a no load mutual fund like the T Rowe Price International Fund or the harbor international fund where you get an expert and a diversification and someone else looking at the currency risk. Is this because as Lew suggested we've been in a worldwide recession and these countries are farther behind us and coming out of it their forwards really are in their stock cycle that is true.

Another very important point as as both Lou and Carter said they expect interest rates to rise in the United States in the next year. I believe that's true but interest rates abroad are generally going to be falling and that means that's good for stock markets abroad and bad for the U.S. stock market here. Already In any event perilous it is time now to pick a few spring flowers for our viewers. Carter Randall even Reed of Seattle likes to use so-called covered calls in other words he sells options to buy stocks that he already owns. He says he has found it a good way to increase his income and also provide some insurance against market corrections. But he wonders whether you could give him a clear and simple guideline for deciding when the price is right to make such transactions and sell covered calls. Well it's almost impossible to give a clear and concise guidelines but let me give him a couple anyway. First of all I approve of his doing that. Secondly I think you should stay with only the sale of the money call options. Third I think his strike price should be at least 5 percent above the current market.

Fourth if the stock goes through the strike price I think they should be ready to buy the option back. And lastly he should have a psychology that tells him that he hopes to lose money by selling those options because he'll make more on the stock than he will lose on the options. All right. It should be a comfort to him. We will haul in Roger Bowen of Bronxville New York describes himself charmingly as a filthy capitalist. And he asks Is there any way I can take financial advantage of the fact that Russia has the most oil and mineral reserves in the biggest gold stockpile in the world. I don't wish to help the Russians. I wish to rip them off. Well anything for international amity. But do you think we have never ripped anyone off I mean we've always been on the handout side of the equation. Basically the Commonwealth of Independent States the World Bank says they're going to need about 50 billion dollars for example to improve their oil development. Basically they have not done well in terms of the production of it they've had problems it's been

deteriorating and so there are some companies basically that would benefit here even though I think we have to understand the political risks of dealing in this part of the world. But there are some companies dresser industries is one Schlumberger Baker Hughes are all of these companies should benefit somewhat but again they're doing a lot of business in other parts of the world so it's relatively small the Soviet Union portion. I think we're basically not reported we're ripping news we appease people who and how would you respond to William estus of Shelton Washington who writes as follows in my left ear there is a $700 hearing aid. Soon I will need one for my right here at a cost of eight hundred to a thousand dollars for a standard model and up to $2500 for State of the art model with the hearing loss associated with the aging of the population and with loud music in the case of younger people. It sounds to me like this industry might be poised for explosive growth. Have you heard of any investments that might profit from this trend. I would like to make a few bucks to help pay for my next hearing aid.

Well he missed Estes has his ear to the ground Lumet is going to be hard to tune in let me explain why. First the growth rate is not as great as you might think because only about 20 percent of the people who have a hearing problem are willing to buy hearing aid of some sort and second it's very hard to get a company that's publicly owned this focused of the three largest companies in the business to a privately owned and the third call Dahlberg is in the process of being acquired by Bosh and loam and therefore a loss to a big conglomerate and outside play in the industry is a company in Canada called Genom and un a very small company that makes the chips that go into hearing aids. So while the idea sounds good it isn't heard on Wall Street. What is it. If you'd like to get the wax out. If you're looking for sound investments that will bring in success. If you're smiling from ear to ear we hear you loud and clear so don't leave us dangling send your most piercing questions to us here at Wall Street Week Owings Mills Maryland 2 1 1 1 7 that's Wall Street Week or weans Mills Maryland 2 1 1 1 7.

Now before we meet tonight's special guest let's take a look back at some of the economic realities of the 1980s to see whether it really was the dreadful decade of current American mythology or just a stunning example of how quickly we forget. Take the question of whether the average family actually moved forward or backward during the 80s. The factual reality is that median family income dipped dramatically during the deep recession of the early 80s. But then soared through the rest of the decade. Meanwhile the best measure of our private wealth the real net worth of Americans climbed dramatically right through the decade. Similarly real per capita disposable income which simply means the buying power of the average American actually increased by an impressive 17 percent between 1980 and 1900. But how about the claim that all this private prosperity was accomplished by starving the government of needed revenues. Not so according to this chart of real federal budget receipts which confounded the

doubters by skyrocket in following the early 80s tax cuts and the economic recovery that ensued. And only began to decline in the wake of the 1990 tax increases and the recession that followed. But what about the question of tax fairness. Well here is the average federal tax paid at all the different income levels in 1990 before the Bush administration tax increases as you'll see and directly contrary to the conventional political wisdom. The more people made the greater the share that went to Uncle Sam. Indeed though you seldom hear it mentioned in Washington. Upper income tax payers paid a higher percentage of our total taxes after the 1980s tax cuts than they did before. And the actual factual results of capital gains tax cuts in 1978 in 1981 was similarly let us say counter-intuitive as the top capital gains rate descended from 43 percent to 28 percent and then to 20 percent. People took more and more capital gains and the government got ever

higher revenues from this tax. What's more since 1986 when the capital gains rate was raised from 20 percent to 28 percent. The reverse has been true. So is the answer just to cut taxes and get out of the way of the private economy. Or do we really have to spend the 1990s atoning for the presumed sins of the 1980s. For some thoughts on that let's go over now and meet tonight's special guest Lawrence a Kudlow. Larry welcome back. I see you again. Thank you Larry. I see you. Lawrence Kudlow is now on the outside looking in albeit from the lofty perch of chief economist and chairman of the investment policy committee at Bear Stearns. But he was a key figure in the development of Ronald Reagan's tax and budget policies a dozen years ago. The policies that are now so widely scorned in today's Washington. LARRY Well the 1980s were in fact a much better economic decade for the average American than either the 1970s or the 1990s. Many people believe that the price of that prosperity was the irresponsible growth of the

federal deficit. Could they be right. Well I don't think so I mean I think that's a simplification in my judgment that the biggest source of the deficit problem in the 1980s was the dramatic decline of inflation which fell from roughly 15 percent at the start of the decade to an average of three or four percent through the middle and later years of the decade. Now that of course benefits most people in business and savers and investors but governments get the short end. If inflation falls then inflated revenues decline even while real revenues might be going up. And the way the government manages its books. That was the biggest problem the decline of inflation and the decline of inflated revenues which in my judgment was one of the main pluses for the economy over the course of the decade. So how would you balance the budget by inflating. Well you could try again we did that in the 70s and it absolutely wrecked the economy. I think the solution to the budget deficit problem is really

twofold. Number one create a strong sustainable economic growth by as you said getting out of the way of the private sector support entrepreneurship investment incentives and so forth. Number two we've got to restrain federal spending and I think on this point there's a lot more work to be done. We need to restructure downsize modernize federal government the operations of the different departments eliminate the subsidies. We've got to bring oncle Salman's of the 21st century the way so many private firms have done in the last 10 years. Ronald Reagan said we could cut taxes increase defense spending and balance the budget. Turned out to be wrong. MR. We're not born when Bill Clinton went to Washington with him. Well I think it's true that President Reagan was unable to balance the budget. It is also true that he was unable to get a lot of his spending cuts and his enforcement procedures line item veto balanced budget amendment and so forth. But I feel that Reagan was right in this important respect. We had to revive the animal

spirits we had to revive entrepreneurship. We had to revive growth and new business start ups and capital formation and at the same time we had to revive our presence in the global community. And I believe Reagan succeeded beyond a shadow of a doubt. He will go down in history as a great economic leader as well as a great foreign policy leader. As long as his legacy is not squandered. Why do you think the House of Representatives at least through its ways and means committee already is will be through nearly all the Clinton tax program if Reagan nomics was such a demonstrated success. Well I think there's a lot of people in the current House leadership including Chairman Rostenkowski of the tax committee have for many years tried to make the case that we've got to raise taxes in order to deal with the deficit problem. I might add many of these same people have very poor spending records and are always trying to raise taxes in order to support higher spending more government and more government regulation. We have only to look at the recent experience in this country in

1990 where the large tax hikes didn't reduce the deficit indeed raise the deficit. The revenue estimates came in lower and the economy floundered. We have only to look to the north of US and Canada. We're an across the board general sales tax created higher unemployment and higher inflation simultaneously. And I think the House Ways and Means Committee is on the wrong direction. If Clinton is such a disaster why are stocks and bonds so high. Well I think stocks and bonds are benefiting from one crucial development which may be giving way and is cause for some concern at least on my part. We've had excellent leadership from the Federal Reserve Board under Alan Greenspan who was probably the best chairman in my professional memory. We brought the inflation rate down at least until recently to something like two or two and a half percent. That of course helped to bring interest rates down. That by the way has also brought the effective tax rate on real capital gains down which is helped to restore some investment. Unfortunately my concern about the markets right now is that inflation is heating up not just the

April numbers the first four months of the year we're running better than 4 percent inflation. And I think the gold market is picking up that gold is an excellent indicator of inflation and monetary value. The Fed probably has overstated CDs probably creating too much high powered money supply. And this is going to have to be curbed. I like to see the Fed take immediate action at their FOMC meeting this Tuesday to cut the gold rally off at its knees and preserve the long term inflation outlook. Let me bring in the high powered panel starting with quote of a very Given your fears about inflation and about the lack of over strengthen the economy and so on. What would you advise investors to do invest in tangibles. Well at this particular moment I think investors have to be very cautious. And I'm sure there's going to be some diversification into so-called tangible and come out of the ass it's already started. Gold stocks have done very very well so have related precious metal type stocks. On the other hand if the Fed acts responsibly

and ignores the poor advice that was given today by President Clinton and Treasury Secretary Benson and takes action to withdraw some of the excess of money they've created then I don't think we have to fret about a long term inflation. But I will say this. The tax bill now before the Congress is an inflationary tax bill. It will raise prices and reduce growth. So it's going to be a tougher period for investors in my judgment. What is your outlook for interest rates you're sort of of the view that inflation might be coming back so what do you think's likely to happen to interest rates. Well I think in particular short term interest rates are way too low. I think they're probably one to 200 basis points too low. And indeed Treasury bills right now are showing a negative real return and I think that's a problem for longer term rates will depend more on the inflation outlook and the Federal Reserve and of course this tax bill overhanging the market. But my guess is long term rates can rise about 50 or 75 basis points

that we have at the moment a very steep yield curve meaning short rates as we've just said are very low and longer rates are much higher. And in this situation the Clinton administration is saying that they want to do government financing at closer in shorter maturities as opposed to where the government used to finance regularly at longer maturities. Is this a good idea here and if so why. I think it's a very poor idea and I think the timing couldn't be worse frankly. I mean throughout corporate America. Large medium and small companies not to speak of families and households are refinancing to take advantage of lot of low long term interest rates and lock them in for as long as possible. I believe the Treasury would have been better advised to stay with their debt management maturity schedule even lengthening a bit. This is going to be a tough period for short term interest rates. If the Treasury Department is front loading a lot of new offerings at the short end it's going to make the Fed's job tougher. And it may create more a progression for short term interest rates I have not agreed with this

policy. We have less than a minute left if it's the Federal Reserve does what you suggest raises short term interest rates by one of two percentage points. Won't that choke off the stock market rally. Won't that business confidence to an even lower ebb. There is there is some short term rest of that story but mainly with respect to the stock market and the economy and future prosperity Clinton's tax bill should be defeated. Dall camp Ross Perot and others should get together and defeat this bill. We should scrap it and start over again put some incentives into investment and capital formation and then the stock market can perform beautifully over the long run. But the bill has to be defeated. I have never seen a situation in economic history where higher across the board taxes and regulations did any good for jobs the economy or the stock market. Thank you Larry Kudlow for giving us the view of one who is not totally enthusiastic about the Clinton economic policies and I would be surprised disappointed to hear it. Thanks to the panel. Hope you'll be

back with us again next week. Then we'll get dressed up in our Sunday best for a look at what's truly going to be in style in the months ahead. My guest Josephine Estival is a top analyst of apparel companies and she'll be giving us a look down the financial runway at what we're likely to be wearing and who's going to be making it in the parade of fashionable profits. Meanwhile this has been Wall Street Week. I'm Louis Rukeyser. Tonight. Wall Street Week With Louis root geyser has been made possible by the Corporation for Public Broadcasting. And by the annual financial support from viewers like you by the travelers providing American business with insurance investment services and managed health care the travelers America's umbrella by FS and FS helping you to a fund and institutional investors achieve their financial goals. Since 1924 and by Prudential Securities we believe the most important thing we earn is your

trust. Prudential Securities for a printed transcript of this program send $5 to transcripts Wall Street Week With Louis Rukeyser Owings Mills Maryland 2 1 1 1 7. Transcripts are also available to subscribers of the Dow Jones news retrieval service. Wall Street Week With Louis Rukeyser is produced by Maryland Public Television which is soley responsible for its content.