Bull-Bear debate on CNN Moneyline with Lou Dobbs - Friday.
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Tonight's "MONEYLINE Focus": Is inflation back? A surprising jump in consumer prices today shook Wall Street, already on edge thanks to a red-hot economy. Now all eyes turn to the Fed, which meets Tuesday to decide its next move. Two perspectives tonight, from Wall Street, and main street. First: the Street ,
I'm joined by Liam Dalton of Axiom Capital Management.
Welcome to MONEYLINE, Liam.
LIAM DALTON, PRESIDENT, AXIOM CAPITAL: Thanks, Jan.
HOPKINS: So the market, obviously, was spooked today. Is this an overreaction?
DALTON: I don't think so. I think that the market has reacted very logically and rationally to what is a major flaw in the fundamental picture right now. Stocks have benefited largely from an almost ideal backdrop of low interest rates and lack of inflation, and also strong earnings, which seems incongruous, but it's actually been occurring for some time now. One of those pegs has been removed now, and I think may be seeing the end of a 17-year-old run in disinflation; and at a price inflection point like that, I think stocks are going to react severely like they did today.
HOPKINS: So how worried are you? I mean, what kind of a pull back could we have?
DALTON: Well, we're raising cash to a maximum position. We think that, given the fact that it is one of the major pegs that has a flaw in it, which is interest rates, we think that trying to guess where the market will pull back to is a little bit dangerous. We think it's prudent to raise cash, particularly in growth areas of the markets, because growth stocks experience valuation expansion and higher stock prices as interest rates come down and as inflation stays low. If the tide is turning the other way, those stocks should actually suffer the worst setback, and that's really what we experienced today.
HOPKINS: So you're selling growth stocks, but you really aren't buying anything?
DALTON: We really aren't because, ironically, normally you have areas of the market that are undervalued, but just in the past few months, we've had an astounding rally in the cyclical stocks. We already know growth stocks are expensive, and even the small-cap stocks have had a pretty significant rally in the last few weeks. So we can't really find an area of the market that approaches undervaluation, so we're really just raising cash as cash.
HOPKINS: But isn't it possible this is just a one-month phenomenon and it will go away?
DALTON: It is possible, and, you know, as a result of that I'd like to temper, you know, my negativism by saying that, you know, if we do stabilize the interest rate picture, it is possible the market will stabilize. But I must say the stock market and investor psychology is a fickle thing, and at a time like this, with valuations at records and a surprise term in statistic CPI, particularly at the core rate, it's not a time to be hoping. It's a time to be taking good care of your portfolio and being careful with your levels of margin and/or exposure to the stock market.
HOPKINS: Thanks, Liam Dalton of Axiom Capital Management.
And for a different perspective, economist and former professor Jim Smith. He's now chief economist of the National Association of Realtors.
Welcome back to MONEYLINE.
JIM SMITH, NATIONAL ASSOCIATION OF REALTORS: Thank you. It's great to be here.
HOPKINS: So do you share this view? Do you think that we now have inflation and should be worried about our markets?
SMITH: Well, we had inflation last month. I think it's very temporary. All the core inflation was caused by increases in apparel and tobacco prices. If you don't like tobacco prices, stop smoking. That's pretty simple. And apparel prices are still 1-1/2 percent below where they were a year ago, and in the next three months you'll see them declining once again as we get sales.
The underlying trend for inflation is quite low. I certainly agree that we're not ever -- and we never were -- in a problem of approaching deflation, but the threat of inflation is probably two years away before we really need to worry about it. But the long bond at 5.93 percent is an absolutely screaming by and...
HOPKINS: So you would advise people to be buying bonds because you think that the yield is going down and the price is going up?
SMITH: Right. I don't see any way you can lose on a risk-free investment in Treasuries at 5.9 percent, with probably long-term inflation at worst around 1-1/2 percent. I mean, the story of the next 50 years is going to be much lower inflation and much higher productivity growth than over the last 50 years. And that's still not in either the bond or the equity markets, but, of course, you know, people differ, honest people of good opinion, and that's what makes markets. No known tree has ever grown to the sky and stocks aren't going to 20,000 on the Dow tomorrow, and the bond's not going back to three percent tomorrow. But over the next 20 years, both of those things will happen.
HOPKINS: So by the end of the year, next year, what will the bond be?
SMITH: By the end of this year, I think the long bond will be around five percent, 4.95 or so. Next year, not much higher, maybe 5-1/4, and probably not much higher in 2001, because I think inflation will by then begin to pick up towards 2-1/2 percent. The Fed will tighten by August of 2001. We should be looking for an inverted yield curve, and that will lead to the next recession, which, as you know, I think will happen May 16th, 2002 at 9:15 late in the morning. But until late 2001, don't worry, be happy.
HOPKINS: Next week, the Federal Reserve meeting Tuesday. Any change?
SMITH: They're -- they're looking for an excuse not to do anything, and they've got millions of them out there. Employment growth is high. You look, there's 32 states with unemployment below the national average, and none of them have inflation problems. As I say, these...
HOPKINS: Thanks very much, Jim Smith, chief economist of the National Association of Realtors. |
