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To: Tunica Albuginea who wrote (4418)	2/5/1999 12:08:00 PM
From: Joe E.	Read Replies (1) \| Respond to of 41369

Think how smart the Japanese thought themselves 10 years ago. Thats us now.

To: Tunica Albuginea who wrote (4418)	2/5/1999 12:42:00 PM
From: Vendit™	Respond to of 41369

A very good and concise post TA. BTW I didn't laugh at your tickle down comment. I take my news from the wires before the media has a chance to to spin it.

To: Tunica Albuginea who wrote (4418)	2/5/1999 2:51:00 PM
From: PDL	Read Replies (2) \| Respond to of 41369

TA: FWIW... Allow me to add a few comments to your hypothesis. First, let's not forget that we are still extremely highly taxed -- over 40% (fed, Soc. Sec., state, local, sales) of family income. So it's not as if we all have had this recent windfall (especially thanks to Bubba's retroactive 1993 tax increase on the top brackets plus all the messing around with AMT, etc.) from "lower" taxes. But the really big deal is what has happened to taxes on capital -- from the Steiger Amendment in 1979 to today where LT capital gains tax is down to 20%. This has been the most dramatic shift in tax policy over the past 20 years (from marginal rates up around 50% to now 20% and even some more favorable rates for venture investments [post 1993]). Couple this with the great Demographic Shift of Baby Boomers leaving their "prime spending years" and entering their "prime earning years" with huge incentives to "save" [read: invest] for kid's college and retirement --> unprecedented stock market boom. Also, at the same time, thanks to the more consistent monetary policies begun under the Reagan administration and the incentives to industry as a result of "trickle down" supply-side economics, American industry got competitive again vis-a-vis the rest of the world, particularly in high tech and services (remember when the Clintons were slamming the Republicans because we were turning into a "service economy" -- I'm sure they want to take credit for services like AOL and the internet today) and even in some very basic industries (Chrysler is probably the most efficient auto manufacturer in the world -- they certainly generate the most profit per car among the world's leading mass producers). As long as that 401K money keeps rolling in, and as long as Alan Greenspan and the Feds can continue to provide a stable monetary environment despite the ups and downs of South America and the Far East meltdown, and as long as Bubba feels compelled to co-opt GOP investment friendly policies, I think this market will continue to have great recuperative powers. Yes, there will be corrections -- a major one is long overdue. And yes, internet valuations have to be rationalized (i.e., compressed) at some point. But equities will remain the vehicle for building wealth for all Americans (think of what truly privatizing Social Security the right way would do for future generations of Americans). When the Baby Boom starts retiring in droves (2013 and on), then we'll see the market face some major challenges -- all that money coming out of the market. But even there, that money will be withdrawn over a long period of time, so that might even be absorbed. Keep smiling and keep investing for the long haul. And keep believing in the "shining city on a hill!" Just MHO.

To: Tunica Albuginea who wrote (4418)	2/5/1999 4:32:00 PM
From: jhg_in_kc	Read Replies (1) \| Respond to of 41369

LEAVE RATES ALONE. WE ARE IN A NEW ERA. The Bubble Won't Burst By Wayne D. Angell, formerly a Federal Reserve governor. He is chief economist at Bear Stearns. For 40 years, policy makers inhabited a dismal world which believed that faster economic growth was bad and a higher unemployment rate was good. These notions, which stem from the view that rapid economic growth causes inflation, spawned a mind-set in which every boom was seen as a bubble in the making--the current boom included. But the evidence that I see does not suggest a bubble; rather, it indicates that we have at last arrived in a new-era economy, one in which information technologies and sound money fuel long-term, noninflationary growth. It has taken too many years for the market to understand Milton Friedman's insistence that inflation is a monetary phenomenon. Simply put, Mr. Friedman said that inflation was a result of too much money chasing too few goods. It is only when a central bank pursues higher economic growth through currency depreciation that we end up with inflation. In contrast, when rapid economic growth emanates from confidence in the stability of money, less government regulation, and lower marginal tax rates on economic gains, then faster growth actually helps to reduce inflation because it results in more goods to be chased by the same amount of money. Stock market investors have now come to realize that our economy can grow at a 3% to 4% rate while inflation approaches zero, and thus that there should be no reason for the Federal Reserve to raise interest rates. Indeed, the economy appears vibrant enough to expand well into the future, notwithstanding recent setbacks in Asia, Russia and Brazil. But investors do face risks. First, there is the risk of being in the market if economic policy, and consequently economic performance, were to deteriorate. Second, bears may yet scare too many investors out of a very good market. So far, the bears have missed the 135% rise in the Dow Jones Industrial Average over the last four years; they may yet miss the next 135% rise. The bear-market case rests largely on the assumption that we are repeating the bubble-crash scenario of New York in 1929 and Tokyo in 1989. But market bubbles have more to do with the fickleness of economic policy than with that of investors. The Great Depression lasted as long as it did because of a deflationary monetary policy followed by protectionist tariffs and a New Deal that stifled normal market-based recovery patterns. The same holds true for Japan's economic woes today. The bull-market case, by contrast, rests firmly on the belief that sound money is here to stay and that it has helped create a new-era economy in which high-tech industries make earnings gains that justify ever-higher valuations. This new era had its origins in October 1979 when the Federal Reserve began moving toward a policy of sound money, but did not become a reality until as late as 1994, when marketing strategists no longer factored pricing power into their calculations, prompting inflation to fall to a near-zero rate. Besides abandoning pricing power, the new-era economy is undergirded by a managerial focus on enhancing shareholder value by cutting costs, an approach made possible by information-age technologies. As the power of these technologies makes itself felt, capital goods become much more flexible substitutes for labor. The increase in capital-goods productivity increases capital-goods investment and augments labor productivity. The economy can therefore grow much faster while cost cutting makes price stability the norm. But the new-era economy cannot really fly so long as monetary-policy makers cling to the notion of a speed limit on growth. If the Fed attempted to hold economic growth to some estimate of the employment rate, then new-technology capital-goods investments would be limited and inflation would rise. What is the evidence that we are now living in a new-era economy? Five characteristics--markedly at variance with previous patterns--stand out: A much faster sustainable growth rate than previously expected. It is now apparent that in 1998 we completed the third consecutive year of 4% growth, and there is good reason to believe that this rate will last through 2000. Faster economic growth has brought faster profit growth--profits have risen as a proportion of gross domestic product to 10% from a low point of 5.5% in the early 1980s--which adds immensely to shareholder value. A decline in inflation to near zero. Business attention to cost cutting means that price-level stability may require the Fed to be as alert to deflation as it is to inflation. Longer economic expansions, with the economy in recession a much smaller proportion of the time. For workers, this means a much better job market even while more companies feel free to downsize their work forces. Unemployment rates trending lower. New-technology capital enhances labor productivity, pulling wage rates higher, and at the same time provides substitution of capital for labor so that labor markets never become as tight as suggested by the unemployment rate. Tax receipts that rise faster than projections. This means widespread and sustained budget surpluses at the federal, state and local levels . Everyone should love this new-era economy. And as long as the Fed focuses its attention on the price level rather than on economic growth and unemployment rates, the new era will continue. The results are apt to be so awesome that the Fed should face little political pressure to change course. That does not mean a continued drop in interest rates; it means instead that higher or lower interest rates will be consistent with rapid growth and low inflation. Yet the new-era economy could easily come undone. Protectionist sentiment turned into legislation would certainly be the death knell of this bull market. Then there is the risk to the high-tech entrepreneurial economy posed by the Justice Department's case against Microsoft. However these developments play out, the price of gold will provide an early warning signal if there is an unacceptable risk of either deflation or inflation. In the meantime, reform that shifted the tax burden away from savings and toward consumer spending could improve the current rate of economic growth. Providing an unlimited and universal Roth IRA is one way to boost the returns to saving, enhance investment and productivity growth, and reduce the trade deficit. Freeing investment income from taxation would lower the cost of capital, increase labor productivity and provide for a significant rise in the wages of workers. For now, however, we may be too busy savoring the fruits of this new-era economy to do very much to bring on the next. Return to top of page \|