Tabell’s Market Letter – July 20, 1984

\ TABELL'S MARKET LETTER . 909 STATE ROAD, PRINCETON, NEW JERSEY 08540 …,. ' MEMBER NEW YORK STOCK EXCHANGE, INC MEMBER NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC (609) 9249660 July 20, 1984 In case we needed to be reminded, the preemptmg of this week's television prime time by the .–such'Democratic NatioriaJ. ConventiOri'hfgl1lightea'1ne-filcf .thata-pFeSiaenHal.Cllinpaign nas begun a – '' period should be a good one for the stock market, which, on average, has advanced 6.24 between mid- July and election day in the last 14 election years. The market, as it so often does, however, is refus- ing to behave according to form and is once more testing its June low. A clue as to the reason for this may have been offered, inadvertently, by Governor Mario Cuomo in the course of his assigned partisan task of flailing the opposition in the Democratic keynote speech. Governor Cuomo said, Ask the Republican investment bankers on Wall Street what they think the chances of this recovery being permanent are …. they'll say that they are appalled and frightened by the President's deficit …Ask those Republican investment bankers what they expect the rate of interest to be a year from now … you'll learn from them what they predict for the inflation rate a year from now be- cause of the deficit. Governor Cuomo might also have asked, although perhaps inappropriately at a Democratic convention, why the stock market has been going down since last January. What the Governor was suggesting, it seems to us, is that the financial community and the Re- publican party (the two terms are not totally synonymous) find themselves somewhat uncomfortable with current trends m the economy, especially the largest deficit in U. S. history. It could also be asked whether the Governor — and Walter Mondale in his acceptance speech — found themselves uncomfort- able with rhetoric which, at least in part, could have been written for Alf Landon in 1936. This role reversal on the subject of the deficit seems to be a source of embarrassment for both sides. In our view, what is at issue here is the success or failure of supply-side economics. The as- sessment is complicated by the fact that there is, first of all, some question as to whether supply-side economics has even been tried, secondly, some doubt as to whether, to the extent that it has been tried, it is responsible for those positive economic trends that have emerged, and, thirdly, some question as to whether it may have produced an ephemeral success presaging disaster further down the road. This last, of course, is the posture the Democrats are likely to adopt in running against it. .. The RepubIIgans.,.-irt Dalla!Lal!!onthfI'omQwwm. of cO.\lI'Se…..giy.e….lliLan.el1tir.elyJliffeI'enLview. We'-will certainly hear at that convention that' the unemployment rate has been reduced from IOn to under 8, that real gross national product has shown one of Its sharpest expansions in history, and that the mflation rate has been reduced from 15 a year before President Reagon took office to the 4-5 range tOday. We will probably hear less about the deficit than we heard this week. The centerpiece of the Reagan program of four years ago was, of course, the tax cut, enacted in the face of a deficit that, even then, was mounting precipitously. This may have been the only real supply-side move of the administration, and it relied on the real, rather than theoretical, validity of the Laffer Curve, which tells us that, at a certain point, tax reduction will stimulate economic activity and produce increased tax revenues. The tax cut was coupled, it is not certain whether by accident or by design, with a period of fairly severe monetary stringency. The Democrats have already claimed that the results are a disaster, and the Republicans will undoubtedly trumpet its success. The truth is that the results are mixed, and the jury is still out — hence the uncertainty of financial markets. It is hard to fault the performance of the GNP, inflation, and unemployment figures mentioned above. It is, however, possible to attribute them to a pure-1930's Keynsian model rather than new sup- ply-side discoveries, and convincing data can be produced in support of this thesis. The recovery has, on the record, been supported by the sort of resurgent consumer demand which Lord Keynes told us 50 years ago such a deficit would produce, and has featured little increased savings despite record-high interest rates. It is also arguable that the reduction in inflation was bought with the most severe reces- sion since the 30's. Meanwhile the defbit continues. Or does it Governor Cuomo in his speech mentioned a deficit of 300 billion. There has never been such a deficit. It is a projection. Almost all news reports refer to projections, despite the fact that the hist- orical record of accuracy for such projections is a joke. The current deficit on a six-month annualized basis, is around 180 billion. For one glorious month, it was down to an annualized 60 billion. It is the supply-side contention that increased tax revenues from an expanding economy will reduce, not in- crease this figure. This contention has been neither proven or disproven by events. It is t furthermore, the conventional wisdom that continued economic expansion, especially at recent totally-surprising rates, must produce renewed inflation. Possibly, but it has not yet happened. Meanwhile, financial markets continue to express uncertainty. Interest rates are rising, stock prices are going nowhere, and savings stubbornly refuse to increase. Renewed inflation and lor a sharply escalating actual deficit would suggest that the market's fears are real. On the other hand, should the expansion continue. inflation remain low and J above all, actual deficits decline, the market could come to believe, rightly or wrongly in Reaganomics. The results thereof could be spectacular. AWT rs ANTHONY W. TABELL DELAFIELD, HARVEY, TABELL INC. Dow-Jones Industrials (12 00 p. m.) 1102.36 S & P Composite (12 00 p.m.) 150.51 Cumulative Index (7/19/84) 1820 97 No statement or expression of opinion or any other matter herein contained IS or Is 10 be deamed to be, dlrec1ly or Indirectly, an oHer or the sohcltallon 01 an oller to buyor sell any secunty referred to or menltoned The matter Is presented merely for the convemence of the subSCriber While we bellcve the sources 01 our mformatlon to be reliable, we In no way represent or guarantee the accuracy thereot nor 01 the statements made herem Any action to be laken by the subscriber should be based on hiS own Investigation and Information Delafield, Harvey, Tabett Inc, as a corporation and its oftlcers or employMs, may now have, or may latcr tal-e, positions or trades Ir\ respect to any secuntles mentioned In this or any tutme Issue and stith POSition may be dllterent from anyvlCws nowor hetealler e)'pressed In thiS or any other Issue Delafield Harvey Tabelt Inc, which is registered With the SEC as an Investment adVisor, may give adVice 10 lIs Investment adVISOry and other customers Independently of an.y statements made In thiS or In any other Issue Funher mformaUonon any seCUrltv mentioned herem IS avattable on request