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Strategies & Market Trends : Market Gems:Stocks w/Strong Earnings and High Tech. Rank -- Ignore unavailable to you. Want to Upgrade?

To: Jenna who wrote (75018)	12/10/1999 7:47:00 PM
From: kendall harmon	Respond to of 120523

ARCC earnings on Monday, one to watch imo.

To: Jenna who wrote (75018)	12/10/1999 8:07:00 PM
From: Kavika	Read Replies (1) \| Respond to of 120523

Jenna: I need to ask the big question, but feel free to dance away in any direction..... Where, how, do you locate such issues as ESPS? How many computers, running how many programs, sifting how many candidates......? Your latest fan....

To: Jenna who wrote (75018)	12/12/1999 4:51:00 PM
From: kendall harmon	Respond to of 120523

Ratajczak on inflation: <<My explanation about rising interest rates into 2000 seemed simple enough. Core inflation should begin accelerating as wage pressures build and the dollar falls under the weight of high trade deficits and improving investment opportunities elsewhere. The increase in wage- and dollar-generated inflation should be offset by smaller increases in energy prices, leading to about the same 2.7 percent inflation in 2000 as in 1999. However, because underlying inflation will be higher, so should interest rates. Then I suggested that long-term government bond yields could rise to 6.7 percent before falling early in 2001. While I was about to take my bow, I was asked why the "real" rate of interest should remain at 4 percent. This is a perfectly legitimate question. If interest rates are 6.7 percent and the inflation rate is 2.7 percent, then the interest rate remaining is 4 percent. (The amount available to investors must be adjusted to reflect tax payments, but such adjustments are rarely made.) What makes the question interesting is the historical anomaly that long-term interest rates on bonds that are virtually guaranteed to be repaid at maturity have averaged about 2.5 percent above prevailing inflation until recent years. In the 1970s, real interest rates began turning negative. Most economists explain this result by the failure of investors to adjust their expectations of inflation by the amount of the inflation actually realized. In the 1980s, real interest rates were exceptionally high, reaching 8 percent in 1985. Investors may have felt that double-digit inflation would return, although it never did. Thus, they demanded higher returns to compensate for the inflationary surge that was "just around the corner." Rising government deficits However, another explanation for the high "real" interest rates in the 1980s is the shortfall of savings that occurred in that decade. Large tax reductions that were financed by borrowing (because spending was not cut commensurately), led to sharply rising government deficits. Not surprisingly, government deficits as a percentage of gross domestic product reached their high point in 1985, precisely when "real" interest rates also reached a peak. Many economists assumed that if government deficits could be eliminated, interest rates could fall sharply, and they did. In 1993, when inflation was still nearly 4 percent, long-term government bond rates fell below 6 percent. In the fall of 1998, government interest rates fell below 5 percent as deficits for all governments virtually vanished. Clearly, government borrowing matters in determining what inflation-adjusted interest rates will be. However, private savings and the demand for capital also matter. In the past two years, household savings have been falling faster than government savings have been rising. As consumer spending grows faster than consumer earnings, household savings fall even further. At the same time, spending on capital goods is very beneficial. In order to exploit the new technology, new capital goods must be purchased. Fortunately, the prices of these goods are falling but not enough to offset the enormous increase in units demanded. We certainly do not want capital spending to grow more slowly, when such spending leads to high returns. Therefore, to hold interest rates down, government savings must grow faster than household savings decline. Unfortunately, politicians do not want government savings to grow at all. They do not get elected because fewer government bonds are competing with mortgage and corporate debt. Members of Congress have not been able to claim that houses are more affordable because their inaction allowed government debt to fall. Instead, politicians want to launch new programs or lower taxes, thus pushing down government savings. Indeed, tax cuts probably will accelerate the decline in household savings just as reduced revenue will be lowering government savings. If the politicians are able to deliver on what they are beginning to promise, the "real" rate of interest will not stay at 4 percent. It will rise. The speed at which we are modernizing our economy will slow. If only we can have political gridlock for a few more years. Director of the Economic Forecasting Center at Georgia State University. e-mail: ratajczak@gsu.edu>> accessatlanta.com