After drifting slowly downward for over three
months, a group average of ten major hotel/casino stocks
made a strong move upward on good volume on 8/13.
Looks like the overall group is coming back in favor.
Another strong reason to buy/hold ISLE.
When inflation did finally materialize, the Bank
of Japan pushed up interest rates, giving the false
impression, Yamaguchi said, that Japan had fallen into the
most fatal flaw of all: pushing up rates to puncture
the stock market bubble and not simply to fight
inflation. "We have never targeted asset prices," Yamaguchi
Many outsiders disagree, arguing that
Japanese officials left the clear impression at the time
that they intended through higher interest rates to
ease down the stock market because they feared the
consequences of the market bubble.
Whatever the case,
Bernanke and Gertler furnished a happier ending for
America. Stick to inflation targeting, they say, and if
there is a stock market bubble, let it burst. Acting
much more quickly than the Japanese did, the Fed will
reverse course, lowering interest rates and encouraging
lending, thus minimizing the damage. The main potential
damage is from falling prices (deflation) and from the
unwillingness of frightened lenders to keep lending.
"If you think that over-reaction is a source of
panic, confidence is restored if the private sector sees
that the Fed will react," Gertler said, arguing that
Greenspan's quick actions after the stock market crash in
1987 and the Russian default last year demonstrated
his crisis skills.
"If people have confidence
that the Fed will stabilize the economy," Gertler
said, "that in itself will be a stabilizing force."
Equally important, American banks are far healthier than
Japan's in 1990, without the mountain of bad debt,
chiefly in real estate, that Japan's market crash
revealed. That in itself will diminish the damage from a
sharp decline in stocks, Gertler and Bernanke argued.
And Yamaguchi agreed.
Still, a nagging worry
remained. Is there more indebtedness and danger of default
than the conference presenters acknowledged, perhaps
among homeowners, hedge funds or other investors in the
Andrew Crockett, general manager
of the Bank for International Settlements, raised
that possibility. "Unpredictable things can happen,"
he said. "If there is a bubble and it breaks, people
can turn out to have debts you did not realize were
So well known is his face that several of the
tourists who shared the hotel with the conference
delegates got as big a kick out of sighting Greenspan in
the lobby as they did sighting moose from the hotel's
huge back veranda.
"There is an increasing
need to integrate into our macro models more complete
descriptions of the responses of households and businesses to
risk," Greenspan said in a speech on Friday, referring
to the risks people take in buying stocks and real
estate when prices are rising.
Stock prices in
particular have become an increasingly significant subject
of discussion at the Fed's periodic, closed-door
policy meetings, where interest rates are set. "As time
goes on," said Edward W. Kelley Jr., a Fed governor,
"different parts of the economy have a greater impact than
others. It was oil in the 70's, the very high dollar in
the 80's, and there is little question that in
today's world, the stock market is a very important
component of the overall economy."
What role should
the stock market play in shaping central bank
policies? According to Bernanke and Gertler, the Fed quite
correctly sets a flexible inflation target, an average to
be achieved that now appears to be roughly 2
percent. Indeed, that is close to the actual annual rise
in the Consumer Price Index these days. When
inflation drifts above this level, or seems to be in the
process of doing so, the Fed, in line with flexible
inflation fighting, generally pushes up rates to try to
slow the economy. And when economic conditions change
in ways that suggest the inflation rate will fall
below the target, rates are usually pushed down to
stimulate borrowing and spending.
Always the output
of goods and services is kept in mind: if the demand
exceeds the potential supply, then rates go up, and if
the opposite occurs, they go down.
prices themselves, in this approach, should never be a
target of interest rate policy. And in the Fed's
deliberations, Bernanke and Gertler concluded, inflation has
been the target, a point Greenspan also made in his
speech here. Stock prices have been dealt with only as
one component of inflation -- along with rising
wages, shifting oil prices and the changing value of the
Rising stock prices can feed
through to inflation by making people feel wealthier, and
companies, too. They spend or invest the new wealth or
borrow against it and spend the borrowings. Demand rises
and, if it exceeds the capability of the economy to
deliver more goods and services, eventually the inflation
rate should rise, too.
But are stock prices
too high? They have risen, on average, 25 percent a
year for five years, an unprecedented run. Or has the
United States entered a new era of greater efficiency
and profitability that justifies the higher prices?
Put another way, is the spending that emanates from
rising stock prices excessive and inflationary? A number
of the people here said so off the record, outside
the conference room. Greenspan and his colleagues,
however, insist that they do not know. And in that
Hamlet-like failure to decide may lie the makings of a
painful mistake: namely the Fed's failure to raise
interest rates sufficiently to counteract the inflationary
pressures coming from overvalued stocks, but not yet
evident in the inflation numbers.
Japan fell into
this mistake, Yamaguchi said. "The C.P.I. stayed close
to zero for three years through 1988, while real
growth accelerated to 5 percent per year from less than
4 percent in the early 1980's," he said. The
impression grew that interest rates, in the absence of
visible inflation, would stay low. And with Japanese
interest rates low, the vision of healthy economic growth
stretching endlessly into the future -- a vision popular in
America today -- kept stock and real estate prices
"The lag between rapid growth and the
eventual rise in inflation happened to be longer,"
Stock Market Alone Won't Force the Fed's
By LOUIS UCHITELLE
ACKSON HOLE, Wyo. -- Like the
narrator in a Greek drama, Yutaka Yamaguchi, deputy
governor of Japan's central bank, took the lectern here
and sadly described how the booming Japanese economy
in the late 1980's came to tragedy. His description
of Japan at its peak sounded eerily parallel to
America in today's still evolving boom.
question haunts us to this day," Yamaguchi said. Would
different policies have prevented the terrible crash of
Japan's stock market and real estate prices and the
decadelong recession that has followed? "With hindsight," he
said, "such excellent performance was unsustainable."
Alan Greenspan, the chairman of the Federal Reserve,
listened from the front row of long, narrow tables in the
hotel conference room. Gene Sperling, President
Clinton's chief assistant for economic policy, sat in the
next row, just behind Greenspan. And most of the Fed's
top policy makers -- the men and women with their
hands on the crucial levers of the economy that control
short-term interest rates -- were scattered through the
crowded hall, with its invitation-only audience of
prominent economists and high-level foreign officials.
The Federal Reserve's annual two-day gathering at
Jackson Lake Lodge, across a vast green meadow and
sparkling lake from the breathtaking Tetons range, has
evolved from an informal get-together organized by the
Federal Reserve Bank of Kansas City as a late August
escape for central bankers into a high-powered forum for
debating the issues that shape economies around the world.
The big topic this year was the ever-rising American
stock market. And almost as if they were staging a
play, the Fed officials chose to act out, through
research papers and speeches, how they were coping with
its hard-to-control impact.
the heavy. Reviewing all that the Bank of Japan had
done and failed to do, he left open the possibility
that the Fed might also make mistakes, falling victim
to roughly the same forces that brought down Japan
"If there is a bubble in the
American stock market," he said in an interview, "the
outcome is difficult to predict when it collapses."
But if Yamaguchi's narration was foreboding, many of
the Americans here said the last act of their own
drama would end differently. The Japanese lesson has
been well learned, they say. Further, the financial
system in the United States, after its own wrenching
changes early this decade, does not suffer from the debt
problems that were Japan's real undoing after its stock
market bubble burst. American real estate is nowhere
near as inflated as Japanese property in the late 80's
when, on the eve of the collapse, the land under
Tokyo's Imperial Palace was supposedly worth more than
all of California.
And if Wall Street
crashes? Well, the Fed stands ready to minimize the
damage, particularly with Greenspan still at the helm.
After all, in the October 1987 market debacle, his
skills in this department were aptly demonstrated.
"In all the discussion about crashes, we forget that
the Greenspan Fed will react," said Mark Gertler, a
New York University economist and the co-author, with
Ben Bernanke of Princeton, of a new research paper
that outlines how a central bank should proceed,
particularly in the presence of very high stock prices. The
Fed commissioned the study after learning that the
research by Gertler and Bernanke reflected the thinking of
Fed policy makers.
Greenspan carried his own
suitcase when he came to these annual conferences in his
early days as Fed chairman. Now, he moves about with an
entourage of Secret Service agents. He has become a
bigger-than-life figure in American public life, getting
considerable credit for the nation's prosperity in recent
years but likely to be the target of considerable blame
if things go wrong.
Reminiscences Of A Stock Operator -
Nowhere does history indulge in repetitions so often or
so uniformly as in Wall Street. When you read
contemporary accounts of booms or panics, the only thing that
strikes you most forcibly is how little either stock
speculation or stock speculators differ from yesterday. The
game does not change, and neither does human nature.
-Reminiscences Of A Stock Operator, published in 1923
Jesse Livermore under the pseudonym, Edwin
Some money from some redemptions is going into
other investments, including individual stocks, as
investors take advantage of low commissions available
through on-line trading. In fact, the longstanding trend
of investors selling shares of individual stocks
slowed in the first quarter after having risen sharply
for many years, according to data from the Federal
Matsanoff, for example, the commercial
real estate broker from Columbus, has transferred some
money from funds to individual stocks in hopes of
getting better returns. The fund he sold last month was
performing well. "But my individual stocks were performing
better," he said. "So when I decided which one I should
pick in order to write a check for the truck, I
thought my mutual fund was the way to go."
quick to say that he is not part of the on-line
revolution, preferring the advice of his investment adviser,
Donald L. Sazdanoff, of Sovereign Asset Management in
Lexington, Ohio. "I see people getting killed" through
Internet trading, he said. "I'd rather get the right
advice from a professional than try to make a decision
based on limited time for research."
consumer debt levels and personal bankruptcies remain
high, many consumers have paid down debt recently or
chosen to pay for new purchases with cash rather than
credit -- a trend also attributed in part to the strong
stock market. In a report this month, Moody's Investors
Service said that in the second quarter consumers paid
off the highest percentage of their credit card debt
in a decade and that credit card delinquency rates
fell in June to their lowest monthly level since April
But even as the rising stock market has
helped propel the economy and strengthen the financial
condition of the typical American household, "it's a
two-edged sword," said David M. Jones, chief economist of
Aubrey G. Lanston & Company, a New York bond dealer.
"If the stock market gets out of control, then
there's a danger that spending will be excessive," Jones
said. "And that will put undue pressure on the labor
market and kick off cost-and-price pressures, forcing
the Fed to tighten more than it might,"
could be a rude awakening," he added, "for the stock
market, and consumers' balance sheets."
The growing importance of investment gains means
that central bankers "no longer have the luxury to
look primarily to the flow of goods and services, as
conventionally estimated, when evaluating the macroeconomic
environment," Greenspan said. In other words, central bankers
must increasingly wrestle with the value of consumers'
stock portfolios, homes and personal debts when setting
Though economists agree that
investment gains play a large role in consumer spending,
they still differ on how significant the effect. A
study last month by two officials at the Federal
Reserve Bank of New York, for example, concluded that
stock market fluctuations affect current spending but
"changes in wealth in this quarter do not portend
significant changes in consumption one or more quarters
The decision by consumers to keep
spending based on their increased asset values is a
fragile one. The high rate of mutual-fund withdrawals
suggests that consumers have been selling investments at a
quick pace to maintain and upgrade their standard of
living. Whether those sales continue, especially if the
market swoons, could have big implications for the
A. Michael Lipper, chairman of the fund
research company Lipper Inc. in Summit, N.J., attributes
some of the selling to the aging population. "A fair
amount is due to people achieving their retirement" and
resetting their financial goals, he said. "People are
But he also says that many others
think the market may be overvalued. "They are reducing
their equity commitment," Lipper said.
rate of fund redemptions unnerves John J. Brennan,
chief executive of the Vanguard Group, who says he
cannot figure why redemption rates would be higher now
than during the market's nearly 20 percent selloff a
year ago. "That's the mysterious issue now," he said.
"People who hung in last year are paring back and taking
some risk off the table."
optimism about the stock market has dropped sharply,
according to a Paine Webber Inc. poll of small investors.
Optimism is close to the lowest level in three years, with
55 percent of the people surveyed optimistic and 18
percent pessimistic, according to the poll, which was
conducted early this month by the Gallup Organization. The
sample included 1,004 people with at least $10,000 each
in assets to invest. When asked what they thought
the market would do in the next three months, 28
percent predicted it would rise and 23 percent said it
To be sure, a lot more money is
still flowing into stock mutual funds than out, buoyed
by stable streams of contributions to 401 (k),
individual retirement accounts and other such plans, which
workers continue to feed each month to get tax breaks.
After a rocky period following the market's drop a year
ago, net fund sales are strong, if somewhat below the
pace of the last two years. By this measure --
investor purchases minus redemptions -- investors poured
$61.3 billion into stock funds in the second quarter
and an additional $12.3 billion last month, according
to the Investment Company Institute.
popularity of mutual fund "supermarkets" like that offered
by Charles Schwab & Company has grown, some
redemptions have gone into other mutual funds, though
economists say they doubt this accounts for much of the rise
in recent months. "Supermarkets have been around
awhile" and can account for only a small part of the
sudden increase in stock fund redemptions, said John
Rea, the chief economist of the Investment Company
Institute. Moreover, investor switching within the same fund
families has stayed at about the same pace, as a
percentage of total fund assets, for a half-dozen years, by
the trade group's tally.
August 31, 1999 MARKET PLACE
Day Traders Is Investigated by Government
RICHARD A. OPPEL Jr.
ately, a lot of investors have
found that one of the best things about mutual funds is
Don Matsanoff, 37, a commercial
real estate broker in Columbus, Ohio, cashed out of a
Dreyfus mutual fund in July and spent $24,000 of the
proceeds on a sport utility vehicle. After enjoying strong
returns for much of the 90's, he said, it was time to buy
some things he had put off while he let his profits
Most of his money remains in the market,
he said, but he would rather take a profit on some
of it "and use it for something, than have it sit
there and watch it go up and down."
Columbus real estate broker, Wayne Harer, 47, recently
sold about $150,000 in fund shares to pay for home
remodeling. He could have obtained a home-equity or other
loan, but with three children and college expenses
looming, "I wanted to start whittling down that debt," he
"I just said, 'I'll take this amount off
the table,' " Harer said.
Amid the market's
record highs and volatile moves, many investors have
decided to sell some of their funds and use the profit to
remodel the bathroom, buy a new washing machine, take
that expensive vacation or splurge in some way.
In fact, investors are cashing out stock mutual fund
shares at the highest rate in almost a dozen years.
Though more money is still flowing into funds than is
being taken out, the pace at which people have been
selling fund shares has been growing faster than the rate
This selling helps to explain
the surge in consumer spending on big-ticket items.
Higher interest rates usually muzzle spending, but not
this year. Home sales have soared, car sales are on
pace to set a record, and retail sales have been very
strong. By the method that the Federal Government
measures things, consumers are spending more than they
Investors typically sell 13 to 17 percent
of their stock mutual fund shares in any given year.
But that rate has grown substantially, and in July
investors redeemed shares from fund companies at an annual
rate of 21.8 percent, according to figures released
yesterday by the Investment Company Institute, a trade
group based in Washington. That is the highest level
since December 1987, when investors were still pulling
money out in the aftermath of the October crash.
Of course, the fund redemptions are not all being
spent on consumer goods. Some proceeds are being
reinvested into other funds, or perhaps into Internet stocks
or other market darlings. But economists and
fund-company executives say those cannot account for the
strong pace of redemptions lately.
economists say that the giant profits earned in stock
portfolios this decade have led individuals to spend far
more than they otherwise would, thus helping keep the
economy -- and corporate profits -- perking along. They
break the "wealth effect" down like this: For every
$100 increase in net worth, a consumer will spend at
least an additional $3 or $4 a year.
recent increases in stock prices, that has translated
into big spending gains. Total personal financial
assets were $27.6 trillion as of March, nearly double
the level at the end of 1992, according to the
Federal Reserve. And that does not count gains in home
prices. Borrowings against increased home values
"influence consumer outlays beyond the effects of gains from
financial assets," Alan Greenspan, the chairman of the
Federal Reserve, said in a speech Friday, adding that
run-ups in the prices of homes are at least partly
related to increases in stock prices.
The group sold more than 250,000 shares on August
2, 1999. And our estimates, based on a friendly
source at Legg Mason, are considerably more at that
time. The total could exceed a