Wall Street Week with Louis Rukeyser; 3038; The Bush Economic Policy

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By the Kathman find. A small company. Aggressive growth fund. And by contributions to your PBS station from viewers like you. You produce the Friday March 23rd. Our panelists are Frank can't follow Tom Gallagher and Kim Goodwin. Tonight's special guest is Lawrence Lindsey assistant to the president for economic policy. Good evening. I'm Louis Rukeyser. This is Wall Street Week. Welcome back. Well folks the big question in the world of money tonight is a perfectly simple one. Have stocks hit bottom. This is unfortunately a recording. After their massive upsurge ended early last year stock several times appeared to have pulled out of their dive only two weeks of merge as the economy has stalled

worsened. The Federal Reserve stubbornly refused to swiftly repair its errors and the country went into a new period of self doubt and the Banana Republic recounts that follow the November election. Nasdaq fell 2000 points from March to May. Got more than half of it back by mid-July and saw some of its biggest players moving up to all time highs around Labor Day before they started plummeting again. Since then investors have seen more false bottoms and you'll find that a convention of magicians. So it's understandable what shell shocked investors who had suffered through another round of unfulfilled hopes. After the Fed finally swung into action lowering rates in January. Are beginning to wonder if there's ever going to be an end to this year of bad news. The answer. I assure you is yes. When though is a somewhat more difficult question. When the Fed disappointed investors by trimming short term interest rates by only half a percentage point.

This week the Dow Jones Industrial Average plumply plummeted 900 points in two days there by dramatising that while everybody has been focusing on the consumer confidence index. Maybe the one that's really in trouble is the investor confidence in Greenspan index. But when the Dow then turned around yesterday afternoon that's technically avoiding entering into a bear market if that's any consolation. And the bloody tech stocks actually rose for the week. Hope Stewart knew that the worst had been seen. Nonsense. Well the bears. You have no idea how low earnings and stock prices are going to go this year. What's the real answer for that. I am indebted to Barbara Collins a viewer in Northbrook Illinois who passed on the comment of TIAA see our E-F chairman John Biggs in response to requests to predict results and stock prices for the months ahead.

I'm reminded of the wonderful ambiguity of Abraham Lincoln's statement in his 1865 second inaugural address regarding the progress of the Civil War. With high hopes for the future no prediction in regard to it is ventured. Now if only ourselves have been smart enough to listen to honest Abe. The doubters say the valuations are still too high and that panic among investors is still too low. They're a cheerful aren't they. In truth neither side knows for sure. And there have been several notable market recoveries in recent years that did not start with every classic indicator of investor pessimism neatly in place. When the end of the latest scary sell off has well and truly arrived. We will know for certain only in retrospect. Meanwhile I commend to you the words of that eminent financial expert Herman Melville who wrote in Moby Dick. On the starboard side of every woe there is a sure delight and higher the top of that the light than the bottom of the woe is deep. A whale of

a good thought. And it's nice to know that our own words are helping some creatures. Betty Lucroy a viewer in Evanston Illinois emails me as follows. While you were discussing the sad state of the tax our black Lab started to moan. My husband assured her that we were not heavily invested in the tax and she wouldn't be deprived of her treats. She immediately stopped moaning. It's nice to know that at least our dog can be reassured by your program. So for the sake of Betty's dog and all you other nervous creatures out there I hope we will soon be able to echo with assurance the words of William Shakespeare. Bless the bottom bless the we tonight will speak with a man who is very anxious to see an economic upturn and maintains that his boss has the policies that could help. The chief economic adviser to President Bush. But first let's see the latest wildly diverse episodes of that modern maritime drama groping for a bottom.

On the heaviest trading in the history of investing. The Dow Jones Industrial Average swung wildly not just from day to day but within each day as there no place to hide mentality. SAVIDGE many of the stocks that have been regarded as refuges in the tech storm even with the end of the week come back. The Dow lost more than 300 points to close just above ninety five hundred. But the rest of the market is notably better with NASDAQ ending a ferocious seven week losing streak after falling to levels not seen since November 1998. Two of our elves shifted in different directions. After 63 weeks in neutral which was most often the accurate call on the Dow. Bob Stovall turned bullish saying new Fed and fiscal policies would soon be recognized as slow but effective but technician Ralph Acampora moved from neutral to bearish saying that the Dow had broken what he called major support

at 96 54 which it held for two years and that in his words a good number of components are echoing this technical deterioration Ralph continues as the only bear and the elves Nasdaq predictions a position he has held for five weeks. But none of the elves gets a halo tonight with Bonds oil and the dollar or little changed. The biggest news on the business front this week was Boeing's announcement that it will move its corporate headquarters out of Seattle and eastward. A historic decision that shocked Puget Sound hers was roughly equivalent to moving the Eiffel Tower from Paris to Newark but at least somebody is coming out and having a good time. Amid all this nail chewing a female gorilla went on a field trip from her Pittsburgh Zoo to a local hamburger joint her keepers caught the primate. Soon after her big meal which he presumably had cooked her way of proving that in times like these everybody's entitled to go ape.

OK Frank Kapila tell us have stocks hit bottom. No one knows but I would guess. Nasdaq is close to a bottom. I think the Dow probably isn't. If you look at what happened today Lou short covering accounting for a lot of the movement upward. But interestingly enough the other part of it was bargain hunters and they're mainly buying semiconductor stocks and that's a good sign for the technology stocks. Explain short coupling short covering is when you sell something that you don't own and you sell it short buy sell to buy barring the stock selling it and hoping to buy it back at a lower price and that margin is the short profit. Why are you more confident about not NASDAQ hitting bottom than the Dow. Well first of all it's come down an awful lot. We've had a lot of bloodletting in that particular index. Secondly every time NASDAQ has moved up and out of a market like this it's been led by the semiconductors and semiconductors get the orders first. So now that this is not a trend we just started. But hopefully next week we'll see more of it.

But the Dow might have a little more to go. But this is the best risk reward I've seen in two years. I mean you know do I take Guess what you just said that you're buying a stock. Yes I am. National Semi and my old favorite Intel. But let's focus on national semi because everyone's tired of Intel's. OK. As always frank. Yes you could be right. Thanks. Kim Dulin What do you make of it. I think that one of the problems that I see is that there seems to be a disconnect between investor sentiment and the actual data. I mean we got the 50 point basis point rate cut from the Fed because they said that the new economic data simply weren't that bad. Yet investors are concerned and the market went down. And I think that some of the down revisions that we're seeing in S&P earnings are just coming too late. I think that where we've gone from too optimistic to too bearish. So the same market that over trades not on corporate earnings but on the expectation of corporate earnings now over trades not on the economic news but on the expectation of

the economy. I think the expectation basically I think that analyst revise these S&P operating earnings downward and they've come down 50 percent in two months. Well numbers were actually trending down and I think that they're closer to a bottom and I think that the analysts are actually late and that investors are reacting negatively. We have been kidding about calling him the actual bottom in stocks can we call the bottom in bad earnings estimates. I think that we're going to have another quarter where are you going to have some downward adjustments. But again even there we're closer to a bottom than we are to a top. So if we can just suffer through the next quarter we'll be fine. What are you doing while you're suffering. Well we're looking for the best performers within specific industries because we're no longer in an environment where you can just buy an industry and expect that to go up. And for example in retail we're looking at Target stores they actually had a positive surprise quarter and they're doing well because it's a discount rate it benefits in this environment. When we think that earnings will accelerate like a retailer It doesn't sound like you're expecting a big recession.

No absolutely not. Tom Gallagher from your viewpoint in Washington. Are we overreacting to what Washington is doing. Well I think actually Washington has their chance to come to the rescue if you will over there over the next several weeks. You do have the Fed even though they're disappointed the markets with the size of the rate cut they did hint at an intermeeting cut if they're going to cut between meetings are probably going to do it over the next two or three weeks so that's a possibility. And then there's is speculation on the activity on Congress to try to accelerate the tax cut. They can a little bigger. I think that's the direction things are headed. I wouldn't get my hopes up too much there but so Washington is trying to help the market reacted negatively to the interest rate cut said it wanted three quarters of a point. That's pretty pretty good point and a half I guess since the start of the year. Will the market react positively to an income tax cut. I think that it would because it's especially if it's a little bigger than people expected a little quicker than than people expect because it's another way to help the Fed try to lift the

economy. It's a little sluggish responding to. Interest rate cut so a tax cut is a way to kind of reinforce what's what's going on so I think I think it would be a help we're seeing in the market as if it was monolithic. But while stocks want a better economy bonds sometimes don't want the inflation but they react negatively to it and come back. Oh. I don't think so I don't think inflation concerns are really all that prevalent. I think that's not what the bond markets reacted to. If anything the bond markets worried about the supply of Treasury securities that may be affected by a bigger than expected tax cut. So in your view we may have to rewrite the old joke and take seriously the government and I'm here to help you. Well I think I keep that in mind. I think the Fed has the potential to deliver but just the notion of speedy action by Congress should raise a warning flag. What's the meaning of this bold move. Well I don't think there's much particular impact from a from a Washington point of view. I just think it underscores the they don't want to get to those in Washington know the Bush administration there in Washington but I don't think I think it just underscores how

turbulent the changes the transitions in the economy are already. And if you are looking for information advice or just a little sympathy we're always here for you in Owings Mills Maryland. 2 1 1 1 7. Now let's go right over and meet tonight's special guest Lawrence Lindsey. All right welcome back. Lou it's great to be here. Good to see you and all your incarnations. Larry Lindsey had George W. Bush's ear on economics from the start of the last presidential campaign and now as director of the White House National Economic Council he is the president's chief economic adviser formerly a Harvard professor. An aide to President Reagan and Bush Sr. and for five years in the 1990s a governor of the Federal Reserve is tonight making his fourth appearance as my guest on this program. Larry. Suddenly everybody seems amenable to a retroactive tax cut. We're going to get one.

Oh I think we will. I think members of both parties in the Congress are joining with the president to get one through when you were last with us last year I said that by asking only for a reduction in the top rate to 33 percent there was a danger that that would be compromised away by the time of the final deal. I'm now hearing that all over Washington that forget about 33 percent we're not going to get that. What's your view. Well the one place you're not hearing that is from the president. The president spent six months with us working on his tax package. He proposed it back in December of 1999. He ran on it during the primaries when he was attacked from the right he ran on a During the general election when he was attacked from the left and he sent the exact same proposal up to the Hill. He believes it's the right thing to do for America and that's why sticking with it. And you think he's going to get it. I do. I think that of course you know the legislative process has been compared to making sausage. Sometimes it may be better not to watch but in fact I think the president's going

to get most of what he asked for. The other compromise that's been bruited widely is that the estate tax or if you will the death tax will not be completely eliminated. What's the outlook there. Well I think that the problem with any compromise and that is that the death tax has got its tentacles into the entire tax code. We have not just a death tax but as a result we have a gift tax a kitty tax a generation skipping tax. A lot of the insurance company taxation is because of the inheritance tax. The only way to kill this monster is to cut it off completely. And I think the Congress in the name of simplification is going to move that in that direction. Are you for a tax cut before tax cutting was cool. You remained a tax cutter when it became uncool again again you have the unusual situation now that some people in Congress want to cut more taxes than you've suggested such as the capital gains tax. Why are you holding back on that one.

Well when back in 1999 we work with the president to come up with a package. He asked us to solve the worst problems in the tax code given the money available. Certainly would be great if capital gains taxes were lower. But what we identified were worse problems we have a case where a single mom today making twenty five thousand supporting two kids she gets a raise she only keeps half of it. That's ridiculous. We've got to get rid of it. But it's expensive to do. Marriage penalty has got to go. Death Tax has got to go. We've got to cut down the top rate of income tax. These I think are probably more pressing priorities and capital gains reduction. You will not be surprised when I say that there's a lot of criticism that. Affluent people give too much to the benefits of these tax cuts. Some of this is reflexive Washington talk. How serious will it be in the final compromise. Well I think that we're going to get something very close to what the president proposed. Again what the numbers show what the Joint Committee on Taxation analysis showed was that the tax cut is

disproportionately targeted to middle income families. The share of taxes and the total tax take. Paid by the rich actually rises under Bush's program. A very well-to-do person might get a 10 percent tax cut a family making $50000 gets a 50 percent tax cut. I mentioned you had five years at the Fed. So now you're out and can speak freely. What did you think of the action this week. I'm a I'm a member of the central bankers Union and once a brother always a brother and I don't I don't comment on them. You have to operate out in the open. Your boss the president has to go to press conferences and be out in the open. Should the chairman of the Fed have to. Well you know in Congress for example the votes on the floor are taken in the open. But the real decisions are taken behind closed doors in private caucuses. I don't think that you know televising the FOMC meetings. First of all after the first show I don't think the ratings would be very good people would fall

asleep. But the better than some of those sitcoms it might be. But frankly I think the deliberative process at the Fed is a good one. And I think deliberative processes are best kept out of the public eye. I've been accused you and your boss of talking down the economy. Is this a fair judge. Well no I don't think so at all. As you pointed out the market started falling in January the Nasdaq started falling in March. Industrial production peaked in September. Real disposable income peaked in September and then we've been working to keep the president up to date with anecdotal evidence as well. We've had business people come in the president looking at the statistics and hearing what businessmen are reporting about their sales drew the conclusion the economy needs some help and that's why he has asked the Congress to work with him on accelerating the tax cut. You're for big tax cut to suggest that this is just a first step the counter

argument is that's how we got the big deficits in the 80s. Is this a fair argument. Oh I don't think so this tax cut amounts to about 1 percent of GDP. It's a third the size of the Reagan tax cut. It's half the size of John F. Kennedy's tax cut relative to the economy. Greenspan himself testified that this was a moderate sized tax cut. And I think that's a good way to describe it so puny Why don't you do more. Why. I wouldn't say it's puny. The key thing is is that we have we have to help the economy. But more important we have to do the structural reforms the president is proposing to have our capital markets work better. The death tax makes no sense. People spend a lot of money avoiding it. Marriage penalty makes no sense. These are well-thought out changes that will make the tax system fairer and the economy work better. And you think that most of them will prevail this year. And I think most of them will prevail this year. I have assembled my own Council of Economic Advisers tonight starting with Frank Havill. Thank you Lou. Larry what do you make of the dollar the economy has been going down. No bottom yet the

stock market is going down. Consumer confidence is weakening. And yet the dollar is growing stronger which is I guess a plus growing confidence in foreigners. What do you make of it. Well I think that people around the world have confidence in the long term health of the American economy. I think it's fully justified. We are. Moving aggressively to reform our tax system. We do not have a fiscal mess. We have a sound monetary policy. If you're coming down from the planet Mars the best place to put your money is in the United States and it remains that way. All right. Larry this one's more hypothetical but what do you think the impact would be on the markets if we did pay down the debt and there was no more market for treasuries. Well I thought that Hamilton had it right. He said the national debt could be a national blessing and the national debt having a liquid market there provides a good benchmark for the private sector. It probably underpins the role of the dollar in the world. It allows the Fed to conduct monetary policy easily.

I think we have to keep in mind the costs of paying down the debt. There is some people single minded focus on it but there's no free lunch in this world and eliminating the national debt. Well it may sound attractive has its costs as well. The president by the way in his program is paying down as much debt as we can retire in the next 10 years. We're moving in that direction. But whether we should pay it all off I think is a more open question. Larry as you said earlier everyone's trying to figure out where the bottom of the stock market is. Japan offers a pretty sobering experience and how long a stock market can take to recover once the bubble has been popped. What kind of things can Washington do to see that we don't repeat Japan's experience. Well one is learn from it. The Japanese government at first was paralyzed by it. They looked at the surplus which was disappearing. They actually raised taxes rather than cutting them in the process. You know governments can can make things worse but that's if the government didn't

anticipate the problem. The president I think was well on top of it. We consider this a possibility. He said we needed an insurance policy. And he's proposed the insurance policy that maybe it's time to cash in. Well only a couple of minutes left. Some quick questions do you think we're in a recession now. I don't know. We're following the data very closely but the data you know operates with a lag and whether the country is in a recession. Certainly some areas of it are. You said last year on this program that the president if George Bush if elected would use whatever political capital was necessary to solve Social Security. What he can do about the president's going to be appointing a commission. We will be taking a Social Security reform legislation to the Congress later this year. If you don't get the 33 percent top tax rates and the total elimination of estate taxes this year will those proposals be back over the next year or two. I think they're proposals that have great merit. And I think the president believes in them. If you

don't get them now we'll try them later. Several years ago you yourself. Got out of the stock market saying you thought it was overvalued. You were somewhat premature. Would you advise people to get in. I think people should look at their own circumstances and their own tolerance for risk and listen to your panelists and listen to you. I'm not going to I'm not going to intrude on your judgment. Well I'm much more courteous to us than we are to you and governments that I'm overwhelmed with humility. Thank you Larry Lindsey for your usual eloquent and forthright statements to us. We look forward to seeing you again in your tenure and this and wherever you're going from here. Thanks to our panel. I hope you'll be back with us again next week when my guests will be a fund manager for all economic seasons. John Good who runs the Smith Barney fundamental value fund out of San Francisco and has made money for his shareholders every single year in the past decade. So let's see what he values now for the year ahead. Meanwhile this has been Wall Street Week Louis Rukeyser. Good night

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