Tabell’s Market Letter – November 13, 1987

Tabell’s Market Letter – November 13, 1987

Tabell's Market Letter - November 13, 1987
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VIEUEILIL'S IRlIEV ILIEVVIE 600 ALEXANDER ROAD, CN 5209, PRINCETON, NEW JERSEY 08543-5209 MEMBER NEW YORK STOCK EXCHANGE. INC MEMBER NATIONAL ASSOCIATION OF SECURITIES DEALERS. INC (609) 987-2300 November 13, 1987 Technical market action for the past week can. from a short-term point of view at least. be 1–'-' —regardedas constructive.—Kl-ilslowest'levels.- aroui1d1860 bnTuesaay.the'Dow haareach-ed the downside objective of a small top around the 2000-1950 area. It rebounded a number of times from that level and then moved up, postin'g a modest rally on Wednesday. and a somewhat more impressive 60-point rise in yesterday's trading. It remains unclear just where this short-term picture fits into a still vague intermediate and longer term outlook. While awaiting resolution of this dilemma. we would like to share with our readers a concern which has previously been articulated in this space. That concern is with the current budget deficit. However. unlike Just about everyone else in the world with the exception of a few lonely economists of varying stripes, we are not worried about the deficit's being too high. We fear that current efforts to reduce it may. in fact. be untimely. This suggestion. in today's climate, smacks of heresy. and we should, therefore. clarify our point of view. We are most emphatically not asserting that budget deficits are. in principle. a good thing. Nor are we asserting that recent deficits. which have been fluctuating around the 200 billion level since 1982, constitute a prudent way to manage the economy. We fully agree that U.S. Government debt, now over 2 trillion, should never have been allowed to reach its current level. We are simply asserting that, for 1988-89, it might be proper for the powers that be to spend less time on the deficit, rather than engage in what seems to be a competition to determine how closely politicians. especially those up for reelection in 1988, can equate deficit reduction with motherhood and apple pie. We have, actually, not done too badly so far by taking no overt action with regard to the deficit. It must be recalled that the deficit now the subject of bickering between the White House and Congress is a projected figure. When we look at real numbers, 'we find that the actual deficit has declined in each of the past four quarters and has. in the process, been reduced by an approximate 90-billion annual rate. We are not all that sure that continued benign neglect will not produce slJ11ilar success. Our readers know that we have. in this space, drawn parallels between market action in the late 1980's and that of the late 1920's. We were forced to drag out this comparison once again when this month's market colla,p-seescalatedintoonethat could.–.legitimately .becompared onlywiththe crash of October, 1929. However, we have always noted, in discussions of 1929, that we regard the stock-market collapse of that year as an event separate from the depression of 1930-1932. It can and has been argued that the stock market provided a trigger for that economic contraction, but, subsequent to the 1930 rally, we are convinced the market was mirroring the economy rather than the other way around. The task, then, is to avoid the mistakes of that era. However, when one reads a history of 1930-1932, the political tub-thumping sounds strangely familar. In his budget messages of 1930 and 1931, President Hoover voiced alarm regarding projected deficits At the same time, the 1932 Democratic platform was calling for a balanced budget. At the very bottom of the depression. in 1932. the Treasury Department recommended a sharp rise in the personal income tax. On the monetary, as opposed to the fiscal, front, the money supply in the early 1930's was allowed to drop some 30. an event Milton Friedman has characterized as being central to the depression. Part of the reason for this contraction, however. was the failure on the part of banks to lend the reserves that the Fed attempted to supply. Dr. Friedman has noted, as long ago as 1954, that the tools the Fed now has at its disposal are sufficient to make America depression-proof. He indicated last week that he still holds this view. If, however, the very fact of the stock-market drop causes a private spending contraction, and that contraction is accompanied by deficit reduction efforts. either increased taxes or reduced spending, we wonder whether the Fed will summon up the courage to take the drastic measures that might be required. We wonder. in other words. if monetary policy can succeed in the environment of a fiscal policy dIrectly opposed to it. The monetarist answer would be that it can. However. a great deal depends on this theoretical prediction being correct. This view is shared by disparate classes of economists. One such group consists of unreconstructed Keynesians, who believe in the primacy fiscal policy and the necessity of fiscal stimulus during a business slowdown. A diametrically-opposed group, supply-side economists, argues for the preservation of its flagship. 1988 tax reduction. Such reduction. if the Laffer curve is to be believed. could result in increased revenues rather than reduced ones. Support for this argument can be found in the deficit figures referred to above. It is not the intention of this letter to propose a particular economic point-of-view, but simply to note that there exists a reasonable case for aVOiding immediate. radical spending decreases and/or tax increases. This cautionary note, ultimately. seems to be falling unheeded on the ears of those members of Congress who will. unfortunately. decide the fiscal policies which will characterize 1988. Our concern is, at the moment, nothing more than that. It is most certainly not a prediction that 1988 fiscal action will bring about a depression or other prOblems of equal severity. It is simply something to keep in mind. given the current consensus projections of continued 1988 economic growth. ANTHONY W TABELL AWTebh DELAFIELD, HARVEY, TABELL Dow Jones Industrials (1200) 1942.80 S & P 500 (1200) 24793 Cumulative Index (11112187) 3089.80 No statement or expression of opinion or any other matler herem contained IS, or IS 10 be deemed to be, directly or Indirectly, an offer or the solicitatIon of an offer to buy or sell any secUrity referred to or menltoned The matter IS presented merely for the convenience 01 the subscriber While we beheve the sources 01 our Information to be reliable, we In no way represent or guarantee the accuracythereol nor 01 the statements made herem Any acilon to be laken by the subscriber should be based on his own Investigation and mformatlon Oelafleld Harvey, Tabelllnc, as a corporation and lis officers or employees may now have, or may later take, poSitions or trades In respect 10 any secuntles mentioned In thrs or any future Issue, and such position may be different Irom any views now or hereafter expressed In thiS or any other Issue Delafield, Harvey, Tabellinc , whICh IS registered with the SEC as an Investment advisor, may gIVe adVice to Its Investment adVISOry and other customers mdependently of any statements made In thiS or In any other Issue Fur1her mformabon on any security mentioned herein IS available on request

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