You're right about Ed Hyman, and he's well paid for his views! Do you realize Lou's giving his guests a much longer time segment these days? Which is great, until you try to transcribe it!! See below:
Ed Hyman, ISI Group Chairman, on Louis Rukeyser’s Wall Street Week, 7/5/02
Lou: Ed, welcome.../etc. etc.../
Lou: It’s a frustrating thing to be a Wall Street economist - unless you happen to be Ed Hyman! For a daunting and astonishing 22 years running, the Texan has been voted #1 in the annual "Institutional Investor" poll. After a distinguished career with C.J.Lawrence, Ed launched his own firm, ISI, in 1991. Ed, you called the recession when others didn’t see it, and you called the recovery when others didn’t see it. So what are you calling tonight?
EH: Looks to me like the same arguments for the recovery, which are the drop in rates last year and a pretty good inventory swing. Those things should be operative for the rest of the year as well as for the 1st half. So I think after the 2nd quarter being slower, the economy right now is starting to reaccelerate some.
Lou: Let’s put some numbers on it. What do you see for overall GDP growth, what do you see for consumer inflation, what do you see for unemployment?
EH: On the growth rate we’ve been using 4% as the underlying for the recovery. First quarter was 6%, 2nd quarter looks like 2%, so it’s averaging 4%, and I think it will be 4% in the 2nd half.
For the unemployment rate, the wonderful advance we are having in productivity is keeping employment weak and unemployment going up. So I think you can have growth of 4%, even 5%, and still have unemployment going up because productivity is so high: output per worker.
And the most interesting part of the outlook I find, Lou, is the inflation picture. Inflation which is currently about 1% will go down to 0 by early part of next year.
Lou: Are you speaking of the consumer price index?
EH: The consumer price index was 1.2% at the latest reading.
Lou: Why the disconnect between a relatively good economic forecast and a relatively sick stock market?
EH: That’s the $64,000 question.
Lou: I’ll give you a buck.
EH: I would attribute it to a post-bubble environment. The terrorism is another factor and maybe dollar weakness is a factor. But I would put most of it in a post-bubble environment. But to highlight it, it’s never happened before, that you get an economic upswing -- and this goes back to 1912 -- and the stock market would go down.
Lou: I remember it well. The hesitation in many areas, such as technology, as to when capital spending truly will resume: what’s your view?
EH: Capital spending was going down about 15%. It’s now flat. And I think it will be up very slightly, maybe 2%, in the second half of the year. And it won’t really recover until next year.
Lou: For a while when the market was misbehaving, you said the market might be right, and maybe you should look again at the scenario for a double-dip recession. You seem to have moved away from that possibility.
EH: I kept - the stock market and the economy are very close in a recession and a recovery, I think I mentioned going back to 1912. And so I thought that the stock market was giving me a commentation(?) on the shape of the recovery. And then about a month ago, as I kept watching the market go down, and seeing the economy still advancing, and considering the case for the economy growing, which I think is still a solid one, I decided there had been a disconnect, which as you know has happened twice in the post war period, once in ’62 and once in 1987.
Lou: Given your extremely benign inflation forecast, what do you see for interest rates, long and short?
EH: The Fed’s on hold for the year, is our view on the short rates, so no change there; and I think the bond yield, which is currently about 4.75, will come down to about 4¼, really dropping with the inflation rate.
Lou: The dollar was such a colossus for so long, that its recent weakness may have been exaggerated in the headlines. What do you see ahead for it and how important is it for your forecast?
EH: It’s not a critical factor. I assume the dollar’s going down. It’s down 10, I think it’s going down another 10-20%
Lou: This is against the yen and the euro?
EH: In general, as a basket. And actually Lou, that’s a tough one. It’s easier to see the dollar go down than to figure out what’s going to go up. It’s hard to see the euro or the yen strengthening much. But my guess is that after such a big move the dollar’s in a weakening pattern. In the past - and there’re four examples of this in the past 20 years, that has not been bad for financial markets in the mother country in which the currency was going down.
Lou: Because it helps to sell exports, which are then cheaper.
EH: Also, there’s the lag effects, from the dollar going up so much. So the dollar rise, in the 80’s, when it came down in ‘85 and ‘86, that was a great year for stocks and bonds.
Lou: What do you expect for corporate profits?
EH: We have them going up something like 20%. There’s always the question there about what measure of profits. But we have a nice increase, and from what I can tell profits have already started to go up.
Lou: So, you think the market’s just plain wrong at this point?
EH: I think it’s a valuation issue. Where you’ve built up the valuations in the bubble and now we’re getting all that worked out, ah, or washed out. And even the accounting issues are probably "bubblesque" in terms of their building up and now that’s part of the letting the air out.
Lou: Let me turn you over to our panel, which never had any hot air in it, starting with Mike Holland.
Mike Holland: Thank you Lou. Edwin, Lou referred to the disconnect between the stock market, the economy and your very benign views of what’s going on in the real world. Um, people who are bearish and continue to be bearish would say, gee the stock market even though it’s down a lot, even though the economy’s getting better, the stock market is still expensive when you look at it on a price to earnings basis. Given your zero per cent inflation outlook, where do you see the price/earnings multiple of the market perfectly positioned a year from now?
EH: The uh, well I think one of the lessons of the last few months is that it’s hard to know where that multiple’s going. And to a certain extent you’re seeing the sort of irrational markets of 2000 now getting irrational on the downside. And it’s hard to know where that could take us. The easiest thing that could make the multiple more comfortable at this level would be if the long rates were to drop, which they have been very grudgingly doing.
Gretchen Lash: Ed, in a zero per cent inflation environment what kind of level of S&P or corporate earnings would you see after the rebound this fall, so looking into 2003 or beyond, in a very low interest rate environment?
EH: Something like $60. You know, currently they’re $45, maybe at $50 or $55 in the in the last couple of quarters, having really come down significantly. The question we should keep in mind, that earnings two years ago were $57, so to get back to $60 is not exactly an incredible feat. The thing that should be remembered on the inflation part is that while inflation is low already, 1%, and I think going lower, unit labor costs are already way down, almost a record amount, because productivity has been so good. So I think profits have already started to move up, in part because labor costs are running below inflation.
Harvey Eisen: Ed you made one of the great calls that I’ve ever seen in the business when you talked about the perfect storm a couple of years ago, at the top. Is there a perfect storm scenario at the bottom?
EH: I don’t think so. We, uh, -- Harvey we’ve switched to the perfect recovery. And, uh, in a perfect recovery the growth is adequate, say 4%, but not too fast, and frankly not too little. Inflation slows, in a perfect recovery, and this is not perfect for the unemployed, but for the financial markets to have unemployment creeping up, is a favorable development because it keeps wages under pressure and keeps the Fed uh, to walk away from tightening.
Lou: Ed, the only one of my questions you haven’t answered, and answered exquisitely, was about long term rates. What’s going to happen to the Treasury bonds?
EH: I think they’ll come down to 4 ¼. They’re currently 4 ¾, and I think as inflation comes down - which will be a surprise if it does - that’ll get long rates to come down also.
Lou: With less than a minute left, you’ve alluded to the accounting bubble. How serious is that as a factor?
EH: At this point Lou, it’s such a front page story that I don’t get the feeling it’s driving the market. Now if there are new revelations, it certainly can. But it seems to me that we’re pretty late in the epic.
Lou: So we’re going to have a perfect economic recovery and the stock market one of these days will wake up and come along. Is that it?
EH: Yes it is.
Lou: Can you put a number on it? How long we have to wait before the market gets a little more euphoric?
EH: Well, you know, every dawn is a hope, but I would hope that the turn we saw in the past few days would be the beginning of it.
Lou: There we do have to stop... |
