Author bullish on stock market till 2020
By Deborah Adamson
Advertiser Staff Writer
Stocks are poised to climb for the next two decades as productivity gains continue to boost corporate profits and hold down inflation and interest rates, a Wall Street money manager has predicted.
"We have begun the next multi-year bull market," said Graham Tanaka, president of Tanaka Capital Management, who recently promoted his book in Honolulu. He grew up in Los Angeles but his grandparents were from Wailuku.
TANAKA
In 1990, the New York-based money manager predicted a big crash in the Japanese real estate and stock markets in an interview with The Advertiser. Tanaka also had said that stocks would double in the 1990s and real estate would see deflation.
These forecasts generally came true. Now, he's predicting a return to a robust stock market that will last until 2020.
Tanaka sees the S&P 500 bringing in annual total returns of 11.3 percent on average this decade, before inflation. From 2010 to 2019, he sees annual returns of 9.5 percent.
In his book, "Digital Deflation," Tanaka posits that the government is undercounting the effect of technology on productivity — or the efficiency of the workforce. For instance, fewer people are needed to produce better cars that don't require as many tune-ups as before. Yet the government hasn't figured out how to adequately count these improvements.
The result is that productivity could be 2 percent higher than reported, Tanaka said. As proof that the government is underestimating growth in productivity, he cited the recent upward revisions in productivity for the past two years by the U.S. Department of Labor.
Higher productivity means prices could be held down or fall — deflation. Industries whose product prices are falling help offset the inflationary pressures from other parts of the economy — such as the steel industry. That's why the economy could roar in the 1990s and yet inflation stayed low, Tanaka said. Low inflation means low interest rates, which are good for stocks.
Also giving stocks a kick: Recent tax cuts for capital gains and dividends.
"Fiscal policy has been appropriately stimulative," he said.
But Tanaka has a caveat: Wrong monetary policy could derail his projections. If the Federal Reserve doesn't see that it still has room to cut interest rates to further stimulate the economy, at worst it could plunge the United States into a deflationary cycle like Japan. The good news is that the Fed seems to be correcting itself, Tanaka said.
Harlan Cadinha, chairman of Cadinha & Co. in Honolulu, who manages assets of $700 million, agrees with Tanaka's basic premise that productivity gains will help drive the bull market for stocks.
But his outlook is more moderate, tempered by concerns about fiscal policy, which is set by the government.
Cadinha does not approve of White House attempts to back a weaker dollar to create more U.S. jobs. A weaker dollar makes U.S. goods cheaper abroad, boosting revenues of American firms. But he said it could also lead to higher inflation and interest rates.
"Any manipulative scheme is ill-advised," said Cadinha, a free-market advocate.
He's also concerned that attacks against President Bush could increasingly threaten Bush's re-election hopes. Without Bush, he said, there would be less prospect of making the tax cuts permanent.
"If you roll back the tax cuts, it could poke a hole in the market," Cadinha said.
Cadinha's caution balances his generally upbeat view on stocks. While Cadinha has cut back substantially on fixed-income holdings such as Treasurys, he said he's not ready to leave the bond market completely.
Reach Deborah Adamson at dadamson@honoluluadvertiser.com or 525-8088.
