Fedwatch: Anticipating Greenspan Jude Wanniski and David Gitlitz July 20, 1998

Today’s gains in Treasuries -- the 30-year yield at 5.71% from Friday’s 5.75% close -- reflects optimism that Fed Chairman Alan Greenspan will begin shifting expectations toward the possibility of ease during his Humphrey-Hawkins testimony tomorrow before the Senate Banking Committee. Such a move is long overdue, but we would advise against expecting too much from Greenspan at this week’s hearings (he goes before House Banking on Wednesday). In fact, despite the scattered indications of a significant slowing in the pace of growth, we rate the chances that the Federal Open Market Committee even shifted from a tightening bias to a neutral policy directive at the July 1 meeting at no better than 50-50. This sudden eruption of optimism is almost entirely based on the release of two economic indicators: the balance of trade and business inventories. While these indicators can have significant short-term influence on statistically reported output and GDP, they can be highly misleading when viewed in isolation. The WSJournal reported the surge in the trade deficit as a sign of economic weakness, but the number only tells us the U.S. continues to be more attractive to capital than the rest of the world. Hardly an indication of slowing growth. The inventory decline seems a normal adjustment to the robust build-up earlier this year. Before long, inventory investment will probably be augmenting rather than diminishing reported growth. We expect Greenspan to split hairs enough in his war against a non-existent inflation to signal a trading range for bonds in the 5.6% to 5.75% trading range, down from 5.7% to 5.85%.  

David Gitlitz

JAPAN: In recent meetings with Japanese officials, Polyconomics tendered the following advice, which they said they’d not gotten from any other source and had relayed to Tokyo: Most of the wealth of the people of Japan is in their real property. Even Japanese industrial and financial equities are weighted with the capitalized value of the property owned by the companies. If everyone in Japan were today forced to sell their property to someone else, the capital gains tax would force them to pay trillions of dollars worth of capital gains tax to the government. In other words, the present capgains tax is an enormous THREAT to the people of Japan. They cannot sell property because of the tax, and the nation's wealth is thus frozen in place. It only can be liquefied by ending the tax or cutting it in half, with no holding period to get the lowest rate. If a new prime minister would announce that the government would end the capgains tax on real property for individuals and corporations, he will need to do nothing else to assure his popularity. The stock market would boom and the banking crisis would be over. Revenues would flow into the Treasury from all other sources, as people would be able to tap their wealth. With gold at ¥41,000, the monetary deflation is still squeezing yen debtors, who would feel more relief if gold were at ¥44,600, our guess at the optimal price. There must, though, be some fix to the capgains tax on land, or the economy will remain stagnant, as it has been since 1989. Because the current tax ranges as high as 57%, it produces almost no revenue, and would thus be the easiest for the new government to cut.  

Jude Wanniski