Wall Street Week with Louis Rukeyser; 2607; The Markets and Bob Dole

Iraq war. Why. For more than a quarter century America's most popular program about the economy people and their money Wall Street Week With the Israel Kaiser is made possible by the Corporation for Public Broadcasting. And by the annual financial support from viewers like you buy for eventual securities with more than fifty six hundred financial advisers nationwide pretentious securities can help you invest your money wisely 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 because solid investment performance and sound financial planning go hand in hand. Produce Friday Aug. 16. Our panelists are Alison beans John Desa and Louis Holland. Tonight's special guest is Edward S. Hyman chairman ISI Group Incorporated. You name it on the roof. Guys it is Wall Street Week. Welcome back. Well this was the week when Americans had the opportunity to watch the longest television infomercial in history. The did not actually offer them a chance to flatten their lives by real estate with nothing down or get a three month trial offer on a treadmill. For four tightly scripted days. The

Republicans had their chance to explain why they felt it was time to get America off of welfare and on the dole. And it was a great show. Even if they didn't provide an 800 number in the finest of American political traditions the new presidential nominee managed to offer something for everybody leaving San Diego with a Pat Buchanan platform and Steve Forbes running mate and an Oprah wife. It was all as warm and fuzzy as a koala chewing eucalyptus at the San Diego Zoo. Although there was a certain amount of residual confusion on two minor points. First whether the GOP really feels all that strongly about the dreaded a word or whether this was in fact an impromptu session of a suburban chapter of Planned Parenthood and second whether the cheerful Bob Dole so extensively portrayed amid the prairie's simplicity of Russell Kansas had ever actually left that small

town and spent 35 years as a dealmaking legislative compromiser in Washington D.C. the videos gave the impression that that must have been some other Bob Dole. But we live in hope. Or at least the other guy did before he lit out at his first opportunity for Oxford and Yale. Meanwhile of course there was also the so-called Reform Party this year and this was the week when Ross Perot made it stunningly clear to anyone still in doubt that galled own it it's his party and he paid for it. And anyone who doesn't like it can take it on the lamb. As for Dole's economic program the most interesting fact about it has not been widely noticed in the altogether conventional reporting of reactions from the White House which is about as likely to endorse a Republican tax cut proposal as I am to leap unaided to Mars and from skeptical ordinary citizens who by now regard any promise of a genuinely balanced budget as about as

trustworthy as an offer to let them purchase the Brooklyn Bridge cheap. You know what you find when you read the small print of Bill's proposal is that there was a lot less there than meets the eye of fervent supporters and critics alike. Not only would the much vaunted 15 percent across the board rate reduction not in truth make the overall tax code any flatter but it would be scheduled to phase in so slowly that even if enacted that we duction for 1997 would be little more than 3 percent and the net effect even in the year 2000 would not repeal the much denounce Bill Clinton increases in top marginal rates let alone the earlier increases under George Bush. And while Wall Street would surely smile on a halving of the capital gains rate if it occurs the bond market was notably undismayed by all the talk of tax cuts which usually set it wild. There are two possible explanations for that is the proposed cuts in reality are so

mild that even deficit hawks can't get truly exercised over them. Or the traders figure that those chances are still so slim that they will treat his economic plan the way he said he is treating his party's platform. And that is not even bother to read it. But the great game of politics issue really heating up and with the Democrats about to put in their two billion cents worth in 10 days everyone's finances are up for grabs. And so we tonight will talk with a guy whose analyses of these matters really do make investors sit up and take notice. Wall Street's number one economist for the past 16 years. But first let's see how they were voting with their cash in the week just passed. And as the Dow Jones Industrial Average indicates Republicans may have cheered and Democrats may have booed but investors just yawn at the now familiar cross-currents in a slowing but still forward moving economy kept the Dow in a narrow range. And it ended with a gain of just eight points and fifty

six eighty nine point four five. The broader indexes were mixed with weakness in the technology sector highlighted by a disappointing report from Hewlett-Packard hitting hardest at the Nasdaq or ells are unchanged with a net reading of plus two on the outlook for the Dow's next three months. And since it is now exactly three months since we instituted our tough new ground rules we're going to start showing you each week who was right three months ago. For who voted neutral then Laszlo Brini Gail Dudack Bernadette Murphy and Maudie's why get the first halos since the Dow tonight is within two points of where it was three months ago and we'll be giving you a similar report card on the elves every week. The bond market move naturally around the six and three quarter percent mark as the core rate of consumer price increases turned in its best. In other words lowest year over year performance in 30 years and as a variety of retail housing

and factory reports left little doubt that the overall growth rate is slowing. Meanwhile if you're really looking for a role model in 1996 you might consider a genetically engineered strain of mice that can eat whatever they want and never get fat. It's not yet known whether the treatment would work on humans or for that matter on rats. Most of whom are understandably otherwise occupied in an election year. Allison deans if the future of America is hanging in the balance why does Wall Street seem so unconcerned. Well I think that Morsi right now is a lot more concerned with the economy and feels it no matter who wins the political process that there's not going to be a whole lot dramatically different today on the tax front than there will be after the election. What's your outlook for stocks in the next few months. I think we're going to continue this sideways trend. There's enough uncertainty as to the direction of the market right now that every single new economic indicator to come out will drive the market one direction in the next day it will go the other

direction. So if you're an elf you be neutral enough. I've been to her. What's what's what looks good what looks bad. Well I continue to steer away from technology unless you go after the large capitalization in very solid high quality names but I'd be on the more conservative because the lows are just going to get Intel Microsoft Oracle names like that I gravitate still towards utilities I like utilities both a telephone and the electric utilities so I stay in the conservative area still like the banks. So that's that's my bias. Both you know you feel like I'm doing pretty well lately. Yeah I think they'll continue to be done. What do you make of it. Well a little more optimistic than Alison is right now. I look at second quarter corporate profits and they're coming in on balance better than expected and I look ahead I don't see an interest rate hike coming anytime soon certainly not next week but I also think that interest rates by the end of the year are both long and short are likely to be lower so that should give stocks in my judgment a little bit of a lift but I do agree with Alison that you got to be very careful and pick your stocks very carefully next week because when the Federal Reserve Open Market Committee meets be there less formal

chance for a while to raise rates you say they won't do it. I think the way they left the election I think after the election they're more likely to cut rates than raise them though because I think already that all inflation is heading a bit lower and I think that economic growth is a little bit slower than people had imagined it might be at this time. You saw the whole well see and we think the outlook for the buck. Well I still think the dollar is going to continue its upward motion here propelled mainly by a weak German market a weak Swiss franc and more than moribund strength of the dollar I don't really expect the dollar itself to show strength until sometime next year. Good for drillers or bad for industrialists. Right. Well Helen what do you think. Well I think we're going to move out of the range I think we have really a moderate economic activity. I think the surprise probably will be that Bonds will be somewhat better than people think. So I think we're going to move out of the range sometime in the next month or so. Moving up would you believe upward out of the range because if guns get better that sometimes implies a softness in the economy that isn't always good for corporate earnings because they could be good enough.

I think it will be good enough I think corporate earnings will remain relatively good and I think that that a positive bond environment will move the stock market higher. The whole stock market and you have some favorite areas. Well I think that the smaller stocks have not bounced back from the correction like the larger stocks the larger stocks have moved about 70 to 80 percent off of their bottoms recent bottoms the smaller stocks are about half. So I think the opportunities are there now core Puritan Bennett it's a company that like see you see international as another company that are smaller companies that have been well recently and I think they'll do just great. OK. No guarantees from the management. Many many. But I do want to know that our program will be a little short tonight with the extra minutes going to your local public television station. I hope you'll respond generously when they ask the questions. And as always we want to hear from you with your comments and questions. Hit Wall Street Week Owings Mills Maryland 2 1 1 1 7. Or you can fax us of 4 1 0 5 8 1 0 9 8 0. And now because there's so much to talk about in this election year economy let's go right over and meet tonight's special guest Edward S. Haim.

Every welcome I think you know the way. Thanks. Nice to see you. Pleasure to see you as always. As viewers of this program are well aware Ed Hyman is a most unusual economist. First he has the eccentric habit of conveying his views in plain and understandable English. Second he is actually out there in the arena managing close to a billion dollars in bond funds for ISI the New York firm be established in 1991 after 19 years with C.J. Lawrence. No wonder he is tonight making his eighth appearance as my guest on this program or that he has now been voted Wall Street's number one economist for an astonishing 16 years straight. And how do you assess the economic program just announced by Bob Dole. Well it's the details are pretty lacking. But the thing I would focus on is that if he's to put in place. Well obviously he's going to

be president and if he's president I think they'll be able to deliver on controlling spending and you know you'll recall he wouldn't be elected without a Republican Congress be elected. Exactly the problem that regen had was that he was not able to control spending with a Democratic Congress. So I think given the points you raise which are good points on the way it's phased in with the ability control spending. I think it's a good a good program. From the other point of view is it possible that it will be less stimulating to new growth than we were led to believe us with sense of being phased in so slowly. Possibly but I think the economy if anything is on the verge of growing too fast. So I'm not. I would like for it to not be particularly stimulative. So being phased in is good but the critical thing which has not been addressed so far is the extent to which the be willing to hold back the rate of increase in entitlements in particular

will a Republican Congress be more willing than a Democratic Congress to attack the entitlement programs. I think they will for sure. The the issue that they have to do is to simply slow the rate of increase which is currently about 7 percent and they need to slow it down to about 5 percent which is the rate of increase of the economy. Currently it's going about 5 percent. Senator Dole's speech was notably unambiguous on the question of defense he indicated they want to spend more on defense. Will that be a problem for the budget. It is. They have they have they've really done an aggressive job of cutting back on the spending programs except for the rate of increase in entitlements. So if they're going to be successful coming up in the next three or four years like they have been in the past three or four years of controlling spending they're going to have to address entitlements. And I don't think they're going to do it before the election. In terms of

putting out the specific programs you're a numbers guy what are the odds that this budget will be in balance in 20 0 2. They're good. Right now the budget is roughly one hundred billion dollars in deficit is one hundred fifteen is the bean counters estimate but about 100 billion dollars in deficit. And I think there's you know better than 50 percent chance that they'll get there by the year to 2002. But the only way they'll do it is if they continue to hold back on the rate of increase in spending which they've done for the past five years. But every year they keep doing it it's tougher. And if you have a Republican Congress I think they'll be able to stay the course. And you told me a couple minutes ago that you think the problem with the economy is it may be too strong at this point. Does that mean that if you were in the Federal Reserve board you would vote to increase rates next week. I give it a long thought but in the end I'd say I'm going to wait and see some more evidence because right now the economy has clearly slowed in the past couple of months and I'd like to see if it continues to slow in the next

couple of months. Without me having to raise interest rates. And if it does that then they're off the hook and they'll be the chance that they could ease interest rates by the end of the year. So I think they'll think hard about it. But wait John Kenneth Galbraith once said economists predict not because they know but because they are asked I will now ask you what's the over the next 12 months. What's our likely growth rate what is the likely consumer inflation rate. What's the likely unemployment rate. I think by the end of this year growth will be down to 1 percent and it's currently about 4 percent in the last quarter. I would guess around 2 in this quarter and in the first part of 97 around 1 percent. So quite a slowdown but not a recession. The inflation rate the CPI is currently 3 and I think it will edge down a little bit to two and a half. I believe inflation in the real world is less than that by at least a full point so inflation is currently

2 I think it might stay about that. And I would guess that the unemployment rate will tick up a little bit to 25 and a half and six is currently 5.3 percent. The only thing that confuses me in your forecast which I'm sure will be exactly correct is that if we're going down to a 1 percent growth rate this winter why do we have to raise rates. I don't think we're going to raise rates. I think the Fed is going to think about it but they won't. And my guess is that by the end of the year they will cut the the Fed funds rate and instead of raising it what does that suggest for interest rates long and short. The long rate currently is six and three quarters. It's come down from about 7 in the quarter. And I would guess that by the end of the year it will be down to six and a quarter. So about another 50 basis points drop on the long rates and 25 basis point cut in Fed funds. Well your overall forecasting record is spectacularly good. You were too optimistic two years ago about rates that come down faster than they did. Could that be true again this year. The key issue is whether or not we get a synchronized upturn where all the

economies are growing. In 1994 that was exactly what what happened. And at the beginning of this year it looked like we were on the verge of that again. And right now it looks to me like it's it's receding that synchronized upturns been pushed out for some time in the second half of 97. If Bonds look good to stocks look good. I think so. The earnings outlook I think is going to be under pressure in part because the economy be more sluggish and in part because the strength in the dollar which we've seen already will start to impact the foreign earnings. But I think that if rates come down the stock market will edge up. I forecast that the panelists have some questions for you starting with thousands. And there's a lot of concern that consumers have too much debt on their balance sheets right now and then that could really slow down the economy. What's your view. I think they have too much debt. The debt is centered in the low income sectors. And it's already become a big problem for that

area. It's not killing consumer spending by any means because the stock market is up so much. So the upper income sector is doing well but bankruptcies are up a lot. The write offs by the card companies are up a lot and so I think you're already seeing the beginning of a problem that will unfold in the next six months in a year. And one of the great wonders of 1996 has been the amount of money going into neutral funds particularly equity mutual funds. I'm wondering of course where did it come from but more importantly can this continue. I think that part of the increase in equity mutual funds was a deposit shift from other sources. So the money is not new money. It's money that was going into other places in particular. People used to own more stocks directly and now they're doing more of mutual funds and people used to have pension funds taken care of by their companies which didn't show up in mutual funds. And now more of them are doing their own retirement savings in mutual

funds. So and in those areas it could continue for a while. The other thing that's happened is that there's been no money going into bond funds. And so the money that people have been investing has been heavily weighted toward the equity side. Once you get the flows of money going that fast it usually doesn't continue. So I would guess that it's going to back off as you go forward. At the Republican convention the other night there was a lot of discussion about the flat tax. What do you think about the concept of flat or flatter tax. Well I think it's a great idea but I don't think it's going to happen. I think the tax you know once the election is their goal is a long shot. But assuming he was elected. He's intrinsically a very conservative character. And I think that the rigidities in the system for a flat tax which I would love to see. But I think they're a long shot also.

And somebody told me that Bob Dole asked you when you were next going to be on this program was that accurate. That's accurate. Are you close to him and are you likely to be part of his team if he wins. No and No. Give us then your appraisal as to how your economic forecast would change if Bill Clinton is reelected or if Bob Dole is elected. I think if if Dole is elected it's a major positive for the financial markets at least in the short term because you'll have a Republican Congress assuming that's the right assumption. And Dole and the White House and I think a lot of programs they'll pass immediately will be viewed by Wall Street as being positive for the outlook particularly on spending cuts the bond market has been the disciplinarian of tax cuts pending tax cuts also preventing spending increases. Are they going to stand still for a bold tax cut program if it's presented as being gradualist and most importantly presented as being accompanied by genuine spending restraint.

I think they'll tolerate it. They'll also be in the context of what the current economic environment is at that point. And if the environment is sluggish they'll probably give it a thumbs up. If the environment in early 97 is a strong economy I don't think the tax cut issue will be important will be the economy right then. Last question How important is the president to the financial markets. I think he's pretty important in terms of setting the tone for the economy. But I think that right now the financial markets might be more focused on whether Congress remains Democratic. Our. Story shifted Democratic remains Republican. Thanks Ed Hyman for your usual insightful overview. Thanks to our panelists. Hope you'll be back again next week when we'll talk about three of the most seductive and controversial activities in modern America. Smoking drinking and eating I guess Larry Adelman is an expert on the industries that produce all those commodities. And it should be an exciting and

informative evening. Just as long as you don't inhale. Meanwhile there's a bit more Fleet Week on the with us tonight Wall Street Week With Louis Rukeyser. There is a production of Maryland Public Television made possible by the Corporation for Public Broadcasting and by the annual financial support from viewers like you buy provincial securities with more than fifty six hundred financial advisers nationwide Prudential Securities can help you invest your money wisely by A.G. Edwards providing a full range of personalized financial retirement and estate planning. A.G. Edwards trusted advice exceptional service and buy often hybrid funds because of solid investment performance and sound financial planning. Go hand in hand for him. Or her to drench group of this program. Send $5 to transcripts wall

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