by Archie M. Richards, Jr., CFP^®
September 16, 2002

Here were questions I was asked recently on a Detroit radio show, and the answers I gave:

1. What's the outlook for stocks?

   Nobody knows, short term. But the prospects for the longer-term are terrific! Not counting write-offs for special problems, the operating profits of U.S. corporations are growing. U.S. monetary policy is decent. Revolutionary technological developments are coming soon. And voters throughout the world (except U.S. Senate Democrats, it seems) have become aware that big government does more harm than good - all positive trends.

   Every bear market is followed by big advances. During the next 15 months, I look for stock prices to increase by about 40 percent.

2. How about interest rates?

   For the next year or two, who knows? But beyond that, interest rates will fall below current levels. The technological developments will raise the productivity of the American worker to new heights. The flood of goods and services will outpace the money supply, and prices will go down. The price of money (interest rates) will fall as well.

   You should therefore choose a low-interest mortgage whose rate is adjusted every year. When interest rates fall, you can gain the benefit sooner.

3. Won't deflation be harmful?

   Most economists and investment professionals think so. They point out that when prices fall, borrowers have to struggle to repay debts with dollars whose value is greater than the value of the dollars they borrowed.

   But the economic predictions of most economists and investment professionals are usually wrong. This time, deflation won't be a problem. Here's why:

   Let's say you borrow an amount of money that would take you 100 hours of labor to earn. In the next decade, labor productivity will rise so much that it would require only 96 hours of labor to earn enough to repay the debt. Higher productivity will benefit workers. It will also make corporations more profitable. And the strong economy will increase government revenues, wiping out deficits.

4. How do we clean up accounting problems and prevent executives from being overpaid?

(These are problems, all right. Several days after the radio show, William J. McDonough, President of the New York Federal Reserve Bank, said that during the last 20 years, the pay of the average chief executive officer has risen from 42 times the pay of the average production worker to 400 times!)

Okay, back to the show. I commented that both the accounting and the pay problems would disappear if Congress enacted two measures.

First, it should make the payments of dividends deductible to corporations. This would result in the following:

• Dividend deductions would encourage corporations to pay higher dividends. Shareholders would have cash in hand - the best assurance that the earnings are real.

• Corporations would obtain capital more from the sale of new issues of stock and less from the sale of new issues of bonds. Corporate borrowing would diminish, making the economy safer.

• With more money being raised from the sale of new stock, investors would have more opportunities to evaluate corporate business plans.

• After paying more in dividends, corporations would have less cash hanging around to pay excessive perks to executives.

Here's the second measure Congress should adopt. It should repeal the laws and regulations enacted in 1968 that made it difficult for companies to engage in hostile takeovers.

When unfriendly takeovers occurred in the 1950s and early-1960s, the managers that lost their jobs complained to Congress. Congress therefore forced the purchasing companies to obtain the approval of the managers being bought out.

Executives who are losing their jobs want big bucks in exchange. Money is paid to the departing executives, who are already rich. The money is therefore not available to the shareholders of the company doing the buying.

Congress's 1968 mistake should be reversed. If it were, the companies that keep honest financial statements and pay their executives appropriately could more easily buy companies that hide their costs and pay excessive compensation. The executives being let go would not be rewarded for their incompetence and avarice. Instead, the shareholders of the company doing the buying would gain the benefit.