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Gold/Mining/Energy : Gold Price Monitor -- Ignore unavailable to you. Want to Upgrade?

To: long-gone who wrote (15496)	8/8/1998 12:37:00 AM
From: paul ross	Read Replies (2) \| Respond to of 116770

>>>The Federal Reserve is not putting enough liquidity in, not only to service the American economy...but the global economy<<<< CNBC discussion with Mark Haines and Larry Kudlow,economist with American Skandia on 8/06/98. MH...Larry, a little while ago...you said you believe interest rates are too high. Historically real interest rates, that's subtracting the inflation rate from market interest rates, are high. The question I have been asking is if rates are so high how come the economy is doing so well? LK...Well, I think that real rate component is more a function of the strong economy. It tells us that the productivity of capital and labor, the rate of return on investment in this country, is terrific,indeed spectacular. That's one of the reasons I'm an optimist on this whole story. But all of that said, we have seen a big drop in long term interest rates from 7% in the spring of 97 to let's call it 550 today; the long bond is about 560, 10 year is about 545. We've seen a big drop in precious metals and overall commodities, we've seen a big rise in the U$D, and we've seen a yield curve...that is largely flat or inverted. These to me are market signals that the volume of liquidity created by the Federal Reserve in relation to the demand for those dollars is tight. The volume is too low. MH...The FED is not creating enough money... LK...The FED is not putting enough liquidity in, not only to service the American economy, where money demand is high, but the global economy where the U$D is in demand in 2/3 to 3/4 of the world. So my point is the fed funds rate, which is the key rate on the policy signal, looks too high to me. And really, with a zero inflation rate, or at worst, I think the GDP deflators were 1% , 2nd Q over 2nd Q, or 0.9%, we don't need a 5 1/2% fed funds rate. We can accommodate high capital returns with a 4% or a 4 1/2% fed funds rate. MH...So you think they're way off target? LK...That's the message coming out of the commodity markets. Yes I do, and frankly I'm not at all concerned about rising real wages for the work force because: #1, they've earned it through productivity enhancement; but #2, it is the drop of inflation that has made wages and salaries more valuable. Historically the experience in this country, outside of the 70's which was high inflation and the depressionary 30's, was that most of the time we have had positive real wages. So I think people gripe too much about that. My point is this, real wages don't forecast inflation, stock prices don't forecast inflation, and unemployment doesn't forecast inflation. What forecasts inflation is sensitive commodity prices and the exchange rate of the U$D. The signals from my point of view are unmistakable. There's plenty of room for an easier FED policy because the whole world market wants dollars. And you know what, I think, contrary to a lot of pessimists, the next move in FED policy is going to lower the fed funds rate. I think the long term bonds are going towards 5% and the p/e multiple for the stock market at a 5% long term rate and a zero to one per cent inflation rate is at least 30 times earnings to as much as 35 times earnings. That's why I believe investors should buy on this dip....