Market briefing --- Matt (slow)
Money & Sports --- Mike (slow)
>> welcome back to the special edition. let’s talk more about the fed, the economy and interest rates. patricia, how much can the fed tighten? and stocks still be safe in your view?
>> i don’t think they can tighten a huge amount, nothing like 1994 though we must remember back in 1994, the bond market was a disaster but stocks went sideways. it’s strange. the more the fed tightens the more the fed is saying the economy is extremely strong but their primary issue is inflation and i think they are not looking at inflation as a serious problem. we’ve already noted that i guess bonds are saying 75% basis point increase is factored into the market . and that doesn’t seem unrealistic. however, if we’ve seen numbers last week that indicated that the economy may not be rip-roaring ahead and some factors that are influenced by interest rates may already be slowing down a bit.
>> 1% to 2% still safe for stocks?
>> absolutely.
>> look at the phenomenal g.d.p. growth rates. if they’re anywhere near forecast, let’s say we finish with a g.d.p. growth rate of 4% and fed funds rate of 2%, we’re in terrific shape. that doesn’t bring the stock market or bond market to a screeching halt. i think it signals that we’re moving in the right direction on interest rates and it signals that the economy is stabilizeing and carry itself.
>> but inflation hawks―maybe i’m the only inflation hawk here, but inflation hawks can argue if we get nominal g.d.p. 4.5%, 2% may not be enough.
>> not if you have no inflation. if it’s coming from productivity gains, that’s not inflationary.
>> it depends on the flation numbers you’re looking at. we’ve talked about deflation, gary. make the argument for inflation, how much exists right now?
>> i think very little, maybe 2%, 3%. we’ve been on a disinflationary trend and i think now deflationary trend for two decades. it started in 1981. it’s not a straight line. there have been ups and downs along the way. i think we have a cyclical inflationary cycle now within a deflationary trend. but the point is that it isn’t so much the inflation that you get. i think it’s an awful lot more to do with what interest rates do to the tremendous speculation out there, all the people borrowing in japan and the u.s. and any places cheap and investing in long treasuries and so on and not much of that has been unwound .
>>> but patricia says if the fed tightens they are saying they believe the economy is strong enough to withstand the blow, if companies believe that, they listen to the fed’s message, they can do things like hire more worker, pay current workers more money, can’t that mitigate the impact of an increase in variable rate debt?
>> what makes you think the fed knows what they’re talking about.
>> that’s another show.
>> come on. in 1994 they tightened as a preemptive move against inflation. there was no big problem and they killed the bond market .
>> i’m no fed historian but i have read enough to know that the fed has changed, going from preemptive strikes to reaction.
>> what makes you think they’ve changed as much as the economy has. you have much more speculation than you had back then and more sensitivity and the history of 1994. everybody says the fed is twitching and the markets move way ahead of the fed. back then, nothing happened until the fed raised rates a couple of times.
>> does the fed know about this speculation?
>> if you look at their march minutes, they said very clearly that there was a risk that low interest rates would foster speculation that would be very difficult to contain once they had to raise rates. it’s there in black and white. they realized it then and they know the speculation. they’re in a real tight spot right now.
>> i think they do and i think that’s why it’s taken this long for them to do anything. it’s no surprise that 1% fed funds rate, the lowest in 58 years, will not last forever. this was an emergency fed funts rate. we had an economy that needed stimulus and much needed it quickly with several scenarios.
>> it was a gift to the u.s. consumer, was it not?
>> exactly. and the u.s. consumer took advantage of it. the economy never went into deep recession and we’ve known for a long time the fed couldn’t keep rates there so my guess is -- and i’d have to disagree with you, gary―i don’t think the speculative position will be as tantamount or equal the alarm that we’re reading about. i think we’re talking about a fed funds rate going from a 58-year low to a 20-year low, 1% to 2%. i think the bond market can deal with that and i don’t think it will cause a huge unwinding of a carry trade.
>> in 2001 when the market was bottoming out people said no one would invest in stocks for a decade and last year stocks rose. people have a short memory and apparently thick pocketbook because people are buying assets.
>> one way of looking at that, though, is that the speculation never got washed out. you never got to the puke point, the point where people want to regurgitate the last stock.
>> in july of 2002, it was.%
>> you didn’t see the mass liquidation of mutual funds, that would be a clear sign that you’d reach that point.
>> you had a lot of cash built up and very high cash positions and certainly you had the baby in the bath water. when the market then bottomed in october, subsequently, stocks went much hoir.
>> we’ll talk about the baby, the bath water and the kitchen sink after this short break, picking up our discussion with patricia chadwick, art hogan and gary shilling.
