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Strategies & Market Trends : Bob Brinker: Market Savant & Radio Host -- Ignore unavailable to you. Want to Upgrade?

To: Alan Whirlwind who wrote (5629)	6/25/1998 7:09:00 PM
From: MrGreenJeans	Read Replies (1) \| Respond to of 42834

Paul Samuelson and the Federal Reserve Thursday June 25, 12:10 pm Eastern Time INTERVIEW--US stocks worry Fed--Nobelist Samuelson By Isabelle Clary CHATHAM, Mass., June 25 (Reuters) -- Fear of a sharp decline in U.S. stock prices plus lingering Asian weakness are keeping the Federal Reserve from raising interest rates, said Paul Samuelson, a Nobel-Prize winner in economics. ''There are two inhibitions at the Fed: Asia and Wall Street's quasi-bubble. They are afraid they are going to send the stock market down 30 percent if they tighten,'' Samuelson told Reuters in an interview. The Dow Jones industrials soared anew on Thursday, vaulting the 9000 level for the first time in two weeks. Samuelson, professor emeritus at Massachusetts Institute of Technology (MIT) and an adviser to Boston Fed President Cathy Minehan, spoke to Reuters at the Federal Reserve Bank of Boston's conference on business cycles. He had delivered the opening comments on Wednesday. Samuelson added he has advised the Fed to tighten credit since U.S. growth began accelerating in 1996. The Fed has raised the federal funds rate just once over the past 2-1/2 years, which have been marked by robust growth, low unemployment and surprisingly modest inflation. The Federal Open Market Committee (FOMC) meets next on June 30-July 1, with many market players expecting concern over economic instability in Asia to keep the funds rate at 5.50 percent, its level since March 1997. Samuelson said some Fed officials believe relative newcomers to the stock market, who have not witnessed a major correction, could flee en masse if one were to unfold, exacerbating the pain of an equity swoon. But for now, those novice investors are showing little fear of a pullback and driving stocks toward historic highs. QUASI-BUBBLE IN TREASURIES, TOO ''Part of keeping the quasi-bubble going is that people are now convinced bond prices will go up forever, that the 5.50- percent (30-year Treasury) bond yield will go. This is creating a sense of false confidence that needs a little bit of puncturing,'' said Samuelson. The benchmark 30-year T-bond yield stood just below 5.70 percent at midday Thursday. First-quarter 1998 U.S. Gross Domestic Product (GDP) growth was revised upward on Thursday to a 5.4-percent pace on a record inventory build-up and a narrower trade gap. GDP growth averaged about 3.75 percent over the past nine quarters. ''Most experts think that 2.50 to 2.75 percent is a more sustainable (GDP growth) level. But the Fed is thinking 'I don't have to act' because Asian markets will act for us, restricting the threat of accelerating inflation,'' said Samuelson who noted the U.S. economy already displayed signs of inflationary pressures ''on Wall Street and in rises in nominal and real wages.'' PREEMPTIVE FED POLICY The Nobelist criticized ''steady-as-you-go'' monetary policy, saying the Fed should fire ''a warning shot across the bow'' against inflation. It could always reverse course if the economy were to react too negatively to a tightening, he said. Samuelson attributed the current modest rate of inflation to a docile American workforce that has long settled for small wage increases. But he saw signs this may have run its course, citing the strike at General Motors. ''The good (U.S. economic) condition is fragile,'' Samuelson said. ''We should seek good employment opportunities for the American people, not over the next 18 months, but over the next 10 years. We are in danger of losing the valuable flexibility in the labor force.'' Samuelson said the Fed at times deliberately causes recessions, similar to the purposeful triggering of avalanches on snow-heavy mountains to avoid larger, more dangerous deluges. Samuelson also noted that inflation was dormant and the U.S. economy seemingly healthy before the stock market crash of 1929 and the ensuing Great Depression. However, he warned against comparing today's situation too closely to 1929, because the U.S. banking system is now much healthier than it was then.

To: Alan Whirlwind who wrote (5629)	6/26/1998 8:59:00 AM
From: Chuck Schmeling	Read Replies (1) \| Respond to of 42834

Did anyone notice that valuations crossed over into uncharted territory again this week? Valuations hit a high on June 24 of 22.66 at the close (if you use Bob's $50/sh operating earnings). The last high was on Apr 22 at 22.61. Yesterday we dropped back to 22.59 (S&P at 1129.28) I know Bob was calling for a target of 23 to 23.5 times current operating earnings of $50 or 1150 to 1175 for the S&P 500. With these levels, I'm starting to feel a little like Humpty Dumpty, not Goldilocks. Chuck