Portfolio strategy update

Better times ahead

David Gottstein

It has often been said, because it is true. The recent second round of 50 basis point cuts in interest rates not only tells us that the Federal Reserve is poised to do its part to secure a soft landing, but that the speed and dimension of these last two cuts point to the degree with which they are convinced the economy is slipping, and they know they are somewhat behind the eight ball.

Even 10 days ago Chairman Greenspan gave the green light on tax cuts to help the economy, something he has been loathe to even suggest before this.

Is this posture political or purely economic?

We don’t know and we may never know. What we do know is there is a lot of history between the Bush family and Mr. Greenspan, and opportunities exist for improving relations.

The economy has definitely slowed. Earnings are pretty flat, and a flood of layoff announcements has been peppering the airwaves.

The question is, will the causes of the downturn be reversed and when? Do we know what they are?

Not for sure. A build-up of excesses of speculation and inventories, high oil prices, weak global economies, Fed tightening, are all factored in to some degree.

The conventional wisdom on the street now is that the second half of this year will portend the beginning of another round of growth. The inventory cycle will be corrected, Fed monetary policy will have kicked in, and the potential for tax cuts will add to the consumer side of things.

It is still too early to forecast a turnaround in either Europe or Asia and OPEC appears to have the discipline to keep oil prices above $25 per barrel.

There is no real fear of inflation, except there are still concerns that a slowdown in the American economy will spark a dissipation of foreign investing in the United States. This could cause a retreat in the dollar, spurring a round of inflation. If this happens, we could be in for a round of stagflation. Costs pushing inflation in a no growth economy. Stocks and bonds lose in that environment.

Our bet is that the Federal Reserve will keep on loosening until the job is done, and that better times are within six to nine months away.