Wall Street Week with Louis Rukeyser; 2237; The Economy and Clinton

Lord. Lord Lord. 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. Nearly 40 million Americans benefit from our insurance investment services and managed health care. The travelers buy an FS and FS helping mutual fund and institutional investors achieve their financial goals. Since in 1924 and by Prudential Securities we believe the most important thing we earn is your trust. Prudential Securities. Friday March 12. Our panelists are our James Grant and Mark tonight's special guest is John Lipsky chief economist Solomon Brothers incorporated. Damien I'm with the guys or this is Wall Street Week. Welcome back. Well this was the week when hindsight which by reputation is always 20 20.

Turned out to be wearing bifocals. The first lens was in evidence early in the week when the Dow Jones Industrial Average led a host of major market indexes to all time records and based on this news the explanations after the fact were downright euphoric. Inflation was a thing of the past. Interest rates were heading for Ground Zero. The economy was coming back at just the right pace. Bill Clinton was turning out to be the greatest economic genius since King Midas. Then came a sharp end of the week sell off in both the stock and bond markets and suddenly the other lens of the bifocals seemed to be seen an entirely different world a blip in energy prices and the wholesale price index up by four tenths of a percent. Nothing wild by historical standards but the biggest monthly increase in more than two years. And bond traders screamed like newborn bears. Boris Yeltsin was in a critical confrontation with the old communists of the Russian Congress and suddenly the idea that we

could now safely dismantle every military base and rifle platoon in the United States Army seemed just a hair less persuasive. And this we were told was the reason why stocks panicked Thursday and early Friday failed to explain why they were cutting their losses dramatically by the closing bell. What appeared more plausible was that both the euphoria and the panic were being over analyzed to death. And what this actually was at bottom was an example of something we've been warning you against for decades. What we've called DAY TO DAY in as in Wall Street after all the stock market had been on an incredible role not just in terms of prices but also in terms of volume and the impressive breadth of the advance and the bond market a movie didn't even dizzier pace taking interest rates rapidly down to levels not seen in a generation. And occasional pitstop to take a few profits and cool a few fevered brow. This is to financial markets what breathing is to human beings.

Time will tell where the markets want to head next and where the economy may lead them. But the real news this week was that investors in stocks and bonds set a few records and then decided to take a few profits. And my friends. What else is new. Well tonight we'll try to answer even that rhetorical question by looking at the authentic condition of the American economy and its most likely next steps in the company of one of Wall Street's most influential economists. But first let's see what color glasses they were wearing in the stock market in the week. Yes past rose colored certainly for the first three days as the Dow Jones Industrial Average march to a trio of records peaking above 34 seventy eight before selling off at week's end. Close at 30 for a twenty seven point eighty two still up more than 23 points for the week. And extending its three week gain to more than one hundred five points and multiple records also were set during the week by all our broader indexes except the over-the-counter

composite which peaked in early February. They're still grinning NL still with the consensus of 10 leading technicians on the next six months turn to a bullish plus 4 in timely fashion four weeks ago but the biggest smiles continued to come not from elves or rabbits bulls or bears Democrats or Republicans but from that fascinating subspecies known as stockbrokers. As the previous record of six straight weeks of billion share trading on the New York Stock Exchange has now been raised to ten straight weeks and counting. I have these guys would agree to kick back some of their commissions. We could solve America's deficit problem well before New Years Eve. Meanwhile perhaps the most interesting question asked in a survey this week was if you had your choice would you prefer to have more money or more time. In the survey fully 66 percent said more money. Only 28 percent more time. As for my own answer to that question I'll give it to you just as soon

as I get a minute to think about it. You're certainly making a lot of money for some of our viewers. Not only were your stock picks the best of any panelists in 1992 but your 1993 list is leading the pack again with a gain of about 15 percent in the first two months. So tell us whether you think it's time to take profits from a run for the hills. I think we're within 5 percent of the high for the year and it will occur in the next three to four months. So it depends on how greedy you want to be. I think the stocks that you do want to own which have suggested before are foreign stocks and REIT to play the depressed real estate market would you stay with those stocks or would you get out. No I would stay with those I don't think it's ever wise to really be out of the market as a whole. Well how great are you. I mean I'm pretty green but I think the big message is that people are going to realizing in the country that 95 percent of what the deficit reduction next year is going to be tax increases 75 percent of the next four years is

tax increases. And those tax increases are going to slow down the economy. And actually we're not going to get the 400000 jobs the president is looking for. And your conclusion would be the market then is close to getting ahead of itself. It's close to its high for the year and I wouldn't I would I would you get four more months max. Jim Grant Are we close to the heart of the generation whatever Howard says but what do you make of what's going on both in terms of the stock market and in terms of interest rates which I think it was it was a really interesting week in that we have had a succession of events calling this week an API the producer price index that sort of financially the function of a break ball and in pools suddenly the range of possibilities is enlarged by the introduction of inflation into the fixed income market as you noted earlier this phenomena have been consigned to the grave. And it is not and it is storing twitching. And you know for weeks months years people have feasted on what they call the yield

curve mean borrowing at 3 percent and lending at 5 6 and 7 people being bankers that subspecies and people know that and suddenly that is no longer a sure thing. And the fact it is not a sure thing is a very dramatic change and perhaps perhaps bullish for other things in stocks and bonds. The gold price which is considered by some an advance indicator of inflation is questioned at best. Do you think we are in danger of severe inflation that severe but you don't have to have a severe inflation to have some of these so-called inflation things with silver for example is a 13 year bear market below the cost of production in many cases and nobody cares. As an industrial metal it's going to wealth economy does better which I think it will. Gold similarly is I think not so much an indicator of inflation but a thing which is in a bear market and when it is not ignored it is low. Soybeans in relation to bonds and there are a lot of things that are just plain cheap and you don't need a big 978 style inflation to make them good investments.

Money is why do you sense the same whiff of inflation the Dems alluding to. I don't think so. I think inflation may go higher than it's been but I'm not looking for it to blow out. Jim suggested even if it got a little higher it would throw some of these old equations out of balance. It could if the economy were to pick up enough steam I think inflation could could heat up but I don't think the economy is that strong I think it's weaker than it was in the fourth quarter. I don't think that it's weak I just think you know maybe 2 percent growth that type of thing I don't think that's enough to ignite the flames here. Let's go through the three main areas that you've always taught if you look at the monetary side is it favorable or not very favorable but obviously if we're talking about inflation were to heat up in rates for the back up that would take care of the monetary. And how about the markets all momentum. That's positive too we had 13 out of 14 days in a row days of advances over declines which is good. And how about sentiment. That's neutral. Glad you asked. Well it's neutral but I was just thinking about we the people we're talking about here and the anecdotal stuff I get

people going to conferences. Byrnes had an article a few weeks ago pulling money managers. It's very subdued out there. Very few people are looking for the Dow or the market to explode. Well you've got to up one neutral why you're neutral in our list. I'm neutral for several reasons first I don't think the market's cheap. Second I do think it's going higher near-term but I'm not sure it'll be higher in six months. Third I like the broad market better than the Dow. If you ask me the broad market I probably would be a bull. OK well some day I'll issue a book might make you any more. This is the point of the program and we normally pause for a round of viewer questions and I thought we're going to try to set a good example for you by donating that time to your local public television station in the hope that as soon as we go off the air you will call and make a donation of your own to keep your favorite public TV programs alive and happy. We couldn't do it without you. And to prove how much we love you. We'll soon be back to answering your money questions so keep them coming to us here at Wall Street Week Owings Mills Maryland 2 1 1 1 7. That's Wall Street Week Owings Mills Maryland. 2 1 1 1 7.

Now before we meet tonight's special guest let's try to get beyond the political hot air from both parties and put the American economy of the 1990s in some kind of genuine historical perspective as we test how bad the last recession really was and how well we have been doing since then it pedalling out of the cycle. While it's entirely traditional and perfectly human to think of our most recent recession as the worst ever because its pain is so fresh. In fact this one will enter the history books as having been of no worse than average severity in terms of its official length for example. It was actually the third shortest of the nine recessions we've had since World War 2 the longest game in the mid 50s in terms of the total loss of national output caused by the downturn. The 2.2 percent setback in our last recession winds up in the middle. Tied for fifth among the nine post-war recessions four hit the economy deeper three more lightly. The latest recession ranks a notch higher on the severity scale when you measure in terms of the peak in unemployment which reached seven point eight percent.

Though that was nearly three full points lower than the unemployment level reached in the last previous recession which ended in 1982. What truly did make our latest recession unusual on the other hand was not how bad things got but how long it took them to get back to where they were before the recession began. By that measure this one is for the post-war record. It was fully 23 months from the start of the recession to the time last summer when the nation's output of goods and services finally got back to its pre-recession level. Among all nine post-war recessions only its immediate predecessor match the agonizing slowness of this rebound. Why has it taken so long this time around to restart the American economic engine. And what speed can we expect from it for the rest of the decade. Because I'm thoughts on that let's go over now and meet tonight's special guest John Lipsky. Dan welcome. Thanks so pleased to have you. Not nice to be here.

After the legendary Henry Kathlyn departed from Salomon Brothers in 1988. The position of chief economist at the firm was left vacant until January of last year. That's when John Lipsky took over he had joined the firm's economic department in 1904. Moving to London in 1989 to manage Solomons European economic and market analysis group International Economics was familiar ground for the Iowa born economists who had earlier been an official of the International Monetary Fund. To what extent is this economy finally gathering some steam. Well I don't think we're seeing an Excel aeration though but I would describe growth as sturdy and self-sustaining if it's self-sustaining. What's the government role. I think in the near term its role is relatively limited. There's been a lot of talk about Clint nomics and of course what the government's going to do will affect expectations but the plans are really not that important in the very near term. None of that none of the policy changes are all that big.

What's your forecast and how it will affect us in the course of let's say the four years of the Clinton first time over the longer term it's very important because we can see putting together the trends and demographics and trends in spending that if we don't make some changes later in the decade we're going to see strong growth in the deficit that we have to deal with. Does this plan deal with the deficit. The one we're getting from the White House now. We haven't seen all the plan. One of the very important elements is going to be the health care reform proposals. And of course the increase in cost of health care has been one of the most important causes in increasing the deficit in government spending in the past. Let's get back to what we do know and what we have now in terms of the economy this year what do you expect in terms of economic growth in terms of unemployment terms of inflation for work spectum to see growth remain someplace in a 3 to 4 percent range. Not great by my recovery standards. Not so bad either. In terms of inflation I know I'm not so worried that we're going to see any significant uptick

at today's PPR number for example is not necessarily a harboring or of some increase in consumer price inflation any time soon. I think we're going to see inflation around the 3 percent level with inflation around the 3 percent level with growth a little stronger than last year but not dramatically stronger. What does this do to interest rates long term interest rates fallen very sharply over the past few months as the market has absorbed the good news of Rudd's reasonably good inflation outlook. We've seen that the government's plans are not going to put a big boost into the economy soon. I think that we could see some further declines in long term rates. But I think the best way to characterize this is in a trading range long term yield somewhere between six and a half and 7 percent. So we're pretty close to the bottom and as of today a little closer to the top. Yes but I wouldn't want to describe that weave. The situation is having set a cyclical low for long term interest rates. There are still some big questions to be answered

that could result in further declines. Well even based on your own forecast of inflation is only 3 percent why should long term bonds now to 6 percent. They could but right now people are not certain that inflation will really stay down for a long time I suppose. Stock traders are nervously I mean short term rates what you forecast there. Well in the near term there's no reason for the Federal Reserve to change its policy in either direction. It will take some stronger growth in and higher inflation numbers to move the Fed. Given your forecasts that we're on a at least a measured roll at this point. What does this mean for stock investors. Well with total growth of the of the economy about put in about 6 percent or so it's hard to think that we're going to be back to sustained double digit rates of total return in the stock market. More like single digits will see 6 8 percent. On balance will the Clinton proposals accelerate or diminish economic growth.

I don't think they're going to have a dramatic impact in the very near term. The stimulus that's proposed for this year is relatively small. The tax increases probably will slow the economy somewhat in the years to come but again we've got to see what this health care reform proposal is going to mean for the deficit. We really haven't seen that. What we have seen is a brilliant panel So let's bring them in starting with Pico. John the number of states and in America have gotten their fiscal house in order by having legislation that requires them to have a balanced budget. And families that spend too much get there have fiscal house in order when a bank won't lend them anymore money. How important is it for the United States government to balance its budget. And would a balanced budget amendment be effective in doing that. Over the long term it's important that we that we eliminate the structural budget deficit. We can't go on running big deficits when times are good. Now whether a law that says that's illegal is the right way to go about it. I don't know. More important is the conviction of the citizens of this country

that we have got to put our fiscal house in order but more importantly that over the over the long term that low and stable inflation will produce the best economic results. They may not have a uptick in inflation of significant measure but drug prices have been singled out by the Clinton administration is intolerable as they are and the administration is holding the drug companies in his in effect. To impose wage price and price controls. I mean is this the Harbingers something and should we be concerned about this kind of policy initiative by the ministration other areas. Well first of all we should be concerned we haven't seen that the actual proposals in the health area let's let's see what they really are. We could see some problems for the economy in terms of overall efficiency. If new regulations produce a lot of new costs for businesses that wouldn't be good. But in the long run inflation is going to depend on monetary policy not on but a series of

individual prices do. And that eventually the Fed's going to face a challenge in which they're going to have to be willing to act to keep inflation expectations low. John because of the threat of higher taxes the public has bought a ton of municipal bonds in recent months yields have gone down. Would you be a buyer or seller or a holder of municipals now. But be a holder of municipal as now as I say I think we're we shouldn't jump on the basis of one day's results in the bond market. I think there's still the possibility of some further declines in the bond yields in the near term even though I think we see we are in a trading range. One one aspect that concerns me still is we've seen a certain amount of vagueness about what the administration's policies really are going to be we saw this week an apparent change in tax states new spending cut proposals the health care proposal still to come. There's a fair amount of uncertainty that will affect the municipal bond market that's for sure. John when economists say as you have said tonight that the recession is behind us that growth is proceeding at a reasonable

pace. There's a lot of popular resentment and disbelief focusing in in the political realm on the characterization of this is a jobless recovery. When are we going to start to see job generation. Well first of all I think the recent employment data for February which showed a sharp jump in a certain way was a payback for what we've seen over the past few months I've been a little suspicious about this about the jobs figures I think we've had some more job creation than is shown in the in the in the recent data. Nonetheless what has been different about this downturn is the amount of permanent layoffs that have been associated with the corporate restructuring that we've seen and that's been sustained even into the even into the recovery. This is going to be a problem we're starting in. Unemployment is not tremendously high as you showed earlier but it's not likely that we're going to see very rapid job growth in the next few years. We have less than a minute left I mentioned you had because of a background International Economics So tell us about our greenback. How's the dollar going to do in the next year.

Well against the European currency says it think it's going to continue to strengthen European economies are in very rugged shape. Germany's at an outright recession is going to stay that way through next year against the European currencies the dollar's going up against the yen. I think the end's going to continue to strengthen as it has in recent weeks with all those foreign economies in the dollar themselves. Is our own economic progress going to be limited by that very fact. Luckily a number of markets in the emerging countries that are good good customers for our exports are doing quite well. We've seen a shift in the composition of our exports. They should hold out. Thanks very much John Lidsky for a tour of the world in just a few minutes. Thanks very much to our panel. Hope you'll be back again next week. Then we're going to get a view from the top on what to expect next from the Clinton economic program. My guest will be secretary of the Treasury Lloyd Bentsen an old friend of this program and he'll be here in his current incarnation to give the administration's perspective on where this economy really is heading now and what should and should not be done about it. To be alive leave it in while this has been

Wall Street Week. I'm Louis Rukeyser. Good night. St. Louis Rukeyser has been made possible. Why the Corporation for Public Broadcasting. And by the annual financial support from viewers like you by the travelers providing American business with insurance invest in services and manage health care for travelers by FS and FS helping mutual fund and institutional investors achieve their financial goals. Since 1924 and by for eventual securities we believe the most important thing we earn is your trust for Eventually security has far 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.

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