Normally the stock market speaks gibberish -- at least to me. But at an investment seminar here last week, the canyons of downtown Manhattan flashed a clear signal.
The message of the market is that the country can live with inflation at around 10 percent. Whether right or wrong, that view is highly relevant to the major choice confronting the Reagan administration.
Belief in the inevitability of more inflation seems practically unanimous. Henry Kaufman, the chief guru at Salomon Brothers, which organized the seminar, said in the main speech that "living with, and adapting to, the inflationary process has practically become an American pastime."
"There is a consensus feeling that the inflation problem will not be curbed for some time," says the Money Market Center of the Bankers Trust Co. The industry Forecast prepared by S. Jay Levy finds that "inflation will continue in the United States as elsewhere. Our Consumer Price Index is likely to rise by an annual average of 10 percent during the next five years."
Still, the dominant mood here is buoyant. Last Thursday the Dow-Jones industrial average closed at over 1,000 for the first time in almost four years. Though a rise in interest rates forced a retreat the next day, the pervasive expectation remains upbeat. It is assumed that the Dow will pass its record -- 1,051 set in January 1973 -- before the end of this year. There is talk of a rise to 1,200 before the end of the next year.
The great expectations, of course, do not run across the board. But common stocks in three areas have been surging recently -- and for obvious reasons.
Energy stocks of all kinds have forged ahead. The energy companies do well because they can pass on increased costs to their customers. With Ronald Reagan replacing Jimmy Carter in the White House, the deregulation process that makes that possible is even more certain than before.
Defense-related companies are also doing brilliantly. The explanation, of course, is that the defense buildup forced by circumstances on the Carter administration last year will be pushed with enthusiasm by the Reagan administration next year.
Finally, technology issues are booming. The theory is that when the government pushes defense, high technology companies automatically benefit.
The selective nature of the boom, in itself, says one important thing. Professional investors have insulated themselves against rising prices. Being into things like energy, defense and high technology is one protection. In addition, they have done the kind of legal footwork that minimizes tax exposure. So they can live with inflation -- even at the rate of 10 percent.
Still, how come people who listen to E. F. Hutton don't also pay at least some attention to the growls against inflation that come forth steadily from the most prestigious economic advisers in the Reagan camp? From the likes of Arthur Burns, and George Shultz, and Alan Greenspan, and William Simon? The answer is that the professionals discount the growls because they know how high the cost of an all-out effort against inflation would be.
Wall street believes that an all-out effort would mean tight budgets and very high interest rates. That would yield a new recession, with unemployment and slack capacity apt to continue for several years at best. Thus inflation, which they rate as only a minor headache, would be cured by decapitation. As one fine business economist put it, "The cure is worse than the disease."
The message the market is sending to Reagan, accordingly, goes something like this: Live with inflation since you can't do much about it anyway. Concentrate on what you can do -- rebuilding American strength around the world and in technology. Later, maybe, you can turn to inflation.
Social perversity obviously runs through that formula. Not only will the rich get richer, but the lower middle class, which is not insulated against inflation, will feel -- and be -- gypped. It will become still more disenchanted with government and express its resentment in the form of hostilities to social spending. Thus the poor, especially in the big northern cities, will also be done in.
Moreover, there is no guarantee that inflation can be held at 10 percent. Uncertain conditions in the Middle East and bad harvests combine to suggest that rises in oil and food costs may induce a new surge in prices next year.
Still, the message from the market ought not to be discounted in a summary fashion. It could signal the top priority in the unpleasant trade-off that confronts the Reagan administration -- the trade-off between foreign and domestic emphasis, between guns and butter.