Money: Treacherous Profitability


Wouldn't it be nice if we could all make our investment decisions without regard for what happens in Washington? To an extent, of course, we can. Once having decided on a general investment posture, selecting specific investment vehicles tends to be less politically sensitive.

If, for instance, you think that now is the time to be in the stock market, instead of in money market instruments or commodities or real estate, then choosing which companies' shares to buy can be done with relative disregard for broad federal economic policies. Naturally, even individual companies can be sharply affected in different ways by government regulations of various industries, but that is a different matter.

It's the initial investment strategy decision that's tough, though. And at the moment it's becoming increasingly tricky, because the fiscal irresponsibility of Congress makes the medium- and long-term economic outlook very uncertain.

You may be inclined to think that the stock market boom will go on indefinitely. From last August through early May, the Dow Jones Industrial Average rose nearly 60 percent. Then, after reaching a record high of 1232.59 on May 6, the Dow suffered a 60-point fall, only to recover by mid-June, surpassing the previous record. And each week seems to bring fresh evidence of strong economic recovery. But, while it is too early to pronounce the stock market boom over, the increased volatility of the market should give one pause.

Most market observers seem to think that stock prices could rise by another 10 or 20 percent during the course of the recovery. But many of those same people forecast that the recovery will be short-lived, that it will be interrupted sometime in 1984. Few believe that we can continue to have a bull market of the speed and dimensions we've seen since the summer of 1982. At best, further uptrends are apt to be marked by continued interruptions, which make the market more treacherous than before, though not necessarily unprofitable.

The doings on Capitol Hill have given Wall Street ample cause for doubt and should spur all investors to reevaluate their investment stance for the longer term. The Dow's volatility has coincided with signals from a stubborn Congress that it has no intention of controlling its voracious spending appetite or of doing anything—other than raising taxes—to narrow its ever-widening budget deficits.

The fiscal 1984 budget resolution in the works as this was written will likely call for at least $75 billion more taxes over three years, protect entitlement programs, increase military spending by a real 4–6 percent, and call for a deficit of at least $175 billion. Given that the fiscal 1983 deficit had already hit $130 billion with five months to go in the year, that is likely a very conservative projection. Even the Republican-controlled Senate refuses to deliver a sane budget. One can only hope that President Reagan wields his veto power fast and furiously come appropriations time.

The market can be forgiven for interpreting this mindlessness as meaning either that heavy federal borrowing will drive up interest rates, drive out private credit seekers, and stifle the recovery or that it will force the Federal Reserve into accommodating monetary expansion. And in fact, the money supply jumped by $11.4 billion in a two-week period in early May, after earlier showing signs of tapering off. Seen as a reaction to this, the Dow's precipitous drop in May is not all that surprising.

It is becoming increasingly difficult to maintain that the rapid monetary expansion of the last three quarters reflects solely definitional changes in monetary statistics and the creation of new banking instruments. The monetary base, a fairly neutral measure of the basic money supply, consisting of currency in circulation plus reserves at member banks, grew nearly 13 percent from January through May. And adjusted reserves, which subtracts currency held by the nonbank public, were growing even faster.

History suggests, and current behavior seems to confirm, that the nation, via the government, will choose inflation over the pain of resisting it. No matter who's in charge, the Federal Reserve cannot long maintain monetary restraint in the face of prolonged and heavy Treasury borrowing and simultaneous pressures to sustain a growing private economy.

That's why the consensus that we are living in a "disinflationary" period will prove to be wrong. Our society, or the aggregation of special-interest groups that makes it up, is unwilling to reduce its demand for government programs and at the same time is unwilling to pay more in taxes to finance its demands.

By the beginning of 1985, at the latest, look for the beginning of another surge in the price of "hard assets." As it is, those old reliables gold and silver have shown surprising strength in the face of greatly reduced inflation and high real interest rates. It's too early, alas, for the nation to return to the gold standard; but for individual investors, the time is coming.

Steven Beckner is a financial reporter and columnist for the Washington Times.