Wall Street Week with Louis Rukeyser; 0801; The Troubles Are Coming!

A. From the American Center for Public Broadcasting. Wall Street we produced Friday July 7th. Your hopes for Wall Street Week is real is real guys. Our panelists are Dan Dorfman James Price and Julius Westheimer.

Tonight's special guest is John Textor. Consultant in domestic and international money. Good evening I'm Louis Rukeyser is Wall Street Week. Welcome back. Well folks now it's official. Even the Carter administration no longer accepts the Carter administration's economic forecasts. It's a shame really because they were marvelously sunny forecasts even when they first were made in the gloomy depths of winter. Inflation which most people thought was going to get worse this year was actually going to get better down to about 6.1 percent economic growth on the other hand was going to boom along that one husky pace of close to 5 percent. And by the end of the year one supposed we'd be happily on route to economic nerve Vana our problems and deficit soon to be behind us. Did anyone in the White House care that hardly any serious economists took those

forecasts seriously that Pollyanna care. But now alas ugly reality has begun to include along the Potomac. The growth rate for this year is now projected at a less lively 4.1 percent and consumer prices it's now acknowledged will be rising in more than a point faster than projected at seven point two percent. A prediction that itself requires a much better performance in the second half of the year than in the first nor is that the end of the turnabout. It's what we might term the sensible consensus last winter was that 1978 would be another good but not great year in which it would be increasingly apparent that the overriding problem was inflation. But the administration until recently was still focusing its attention on the need it perceived for ever more so called stimulus more even than the U.S. Congress rarely known for its skinflint tendencies it was willing to provide. But now

all is changed. Not only has the president discovered inflation but the deficit this year and next are to be smaller than first demanded the large part of the explanation for that lies in the government's continuing inability to spend its appropriations as fast as there is desired. The administration's new turnabout will not alas restore us to that other happy economic hunting ground promised by candidate Carter. A balanced federal budget by 1980 that promise which has long provoked more tutors than applause on Capitol Hill. Was another of this week's official casualties. Nor was that all. Remember the administration's assurances that raising the minimum wage requirement would be a terrifically useful thing to do. Even though many teenagers couldn't find work even at the old level. Well now it seems President Carter's top two week anomic appointees treasury secretary Michael Blumenthal and Federal Reserve chairman William Miller are

saying publicly that in their humble opinion we better not let next year's increase take effect. Isn't that fun. This may be the first US administration in history that doesn't need any outside critics of its economic policies. It's busy enough repudiating them itself. But if you think that's bad where do you hear from my guest tonight John extra Not only is no Pollyanna. He sometimes makes Cassandra sound like Shirley Temple. But first let's look at an area that's at least as mixed up as Washington and see what actually did happen this past week on Wall Street. And as the Dow Jones Industrial Average indicates the market dipped this week to its lowest levels since the second week of the spring rally. Though a mild bounce back in the last part of the holiday shortened week cut the net loss to about six and a half points at eight hundred twelve point four six. And the results weren't much more exciting than the broader composite indexes of the New York and American stock exchanges and the over-the-counter market fizzy lovers will want to know that the

Elves who compile our technical market index are still negative but one notch less so than a week ago. Clearly the most dramatic financial development since the U.S. abandoned the gold standard. The good economic news today was that the US unemployment rate fell to its lowest level in nearly four years five point seven percent. And for anyone who still hasn't got the message that inflation is the big problem the index of wholesale prices took its second straight seven tenths of a point. Monthly jump. And one final announcement our viewers out there in Hawaii. The way up to now I've had the undoubtedly provocative experience of watching Wall Street Week exactly one week late. Well now thanks to the new PBS satellite be seen us at the same time as viewers in the other 49 states. So watch out. Pineapple stocks and aloha. Jim Price of all the panelists who made predictions in January. Your

stock selections have fared the very best. They were up an average of twenty nine point one percent. Congratulations. But that's the end of resting on your laurels. Thank you. What can you do for us tonight. Well I think commenting on that one of the interesting things about it is that the growth stocks capital gains were up more than that and the income stocks are up just mildly. I think we may see more of same over the next year or two I think the growth stock group is underperformed the market long enough and while I would recommend a couple of income securities outlook for basically gross and if I may go through a list I'd like to I would suggest given your record you certainly may. Marshall Field and I had a for income I think for capital gains I would look for. Abit lad in the poor corporation doing the nuclear datapoint and E.R. see if I were a speculator I might take a look at Mohawk data

sciences or address a graph. Jim as you know I never endorsed any of these recommendations but I wonder whether you wanted to guarantee a twenty nine point one percent return on these the rest of the year. No way no way that makes you not Mr. Joyce WESTHEIMER I know you were delighted to hear from one of the things Jim just said which was you thought it was time for the growth stocks. Some people think you've been saying that since McKinley was president I wonder if that's still your view. It's still my view and I even have a few extras to add to my list tonight if I can. You do whatever you like doing this you're actually they were up yours were up about 9 percent I think on average for this year. I did nine times as well as the Dow. I'm very happy about that. Before I give them a funny thing happened tonight on the way to the forum this forum I stopped home and got my portfolio from January 1st to June 30th. It was up five or six percent was a heavy heavy burden. It was up nothing to write home about but the income was up substantially and I think if people would buy stocks even though they accept a little lower yield at the

beginning as they do in pro stocks and would ride the income wave up because you buy groceries not by selling a share or two of General Motors or Kansas City parent like you buy it out of income what a gross talk that National Student marketing and Polaroid look alike or the wrong way. Come on that's one of the growth stocks that I've got a few that I think would be good for the next six months I think Atlanta Critchfield dresser industries an oil service company and digital equipment. And I still like IBM I still like Masco which raised its dividend today and I still believe in the philosophy of growth stocks and I think they will continue to do well. The best of your selections in January was Kodak You didn't mention that tonight is that no longer on your approved list. Well that's such a snafu ordinarily that I wouldn't even have to mention a snap judgment is it. And I don't have to tell anybody I wanted to watch your selection but that's what I've done along the way. Then too often in some ways you have the best record of all the stock pickers in January because you didn't make it but you did express some negativism about the market and I wonder if you are now equally negative or reassessed.

Well I don't want to frighten you. That become increasingly more pessimistic I think the market is really reading Oh my heavens. This is what I think the markets are waiting for a pretty substantial decline where we could perhaps see the Dow Jones Industrials fall below 700. Or you touched on the outside of the program the inflation and the rising interest rates. A possible recession next year. A man who was has shown that he can that we do so for economically. There is no we shouldn't Which man is that I think your point is that. And also look at the leadership of the stock specular gambling gambling stocks the same kind of securities and this is what you did years ago. I mean this is supposed to be the leadership of the market. I just noticed and you've got Donald Duck on your usually where Mickey Mouse I want to put any significance to that you know let it go. I said I thought maybe the market was going to complex. I want a Mickey Mouse operation but I see you don't feel that way. In any event gentlemen it's time now to help our viewers have some summer fun by answering a few of their questions.

Jim Price John Embry is a professor of geology at Brown University and he would like some advice from someone who doesn't have rocks in his head. Professor Embry describes himself as a middle income person with a rather common problem of trying to keep ahead of inflation. He had savings banks and mutual funds have helped very little. I have $5000 to invest that I can risk without changing my lifestyle if it will last. I'm considering getting into a managed commodity trading account. Do you recommend such a venture. Are these people honest. Boy. Though I think most good commodity people would indicate that you should not get involved in this area because it is a high risk area unless you have a couple hundred thousand dollars in liquid assets. If the professor just miss you noticed he didn't make the cut. If the professor didn't make the cut I think that he should look at a managed account because I think that whereas this is no assurance he's going to make money it is high risk and the gains received would be short term capital gains.

I think he would be better off if he had good management than trying to do it himself. Already. But in general you think it's like the gambling stocks. Well I gamble in this area. There's some analogy I think. OK DUIs Westheimer two questions about increasing the return on cash is a little more conservative. First Gary Think of Los Alamos New Mexico is selling his house expects to have the equity available for a short period probably less than a month before use it as a downpayment on a new house. He wonders whether there's a safe place he could put it that would earn him more than he would get in a savings account. And second K.A. Hassen of Terre Haute Indiana is curious about so-called bankers acceptances What are they here. How do I go about investing in them. Are they safe. All in 30 seconds. The first question can already wasted three seconds or so. Twenty seven. What if the man who just sold his house and wants to put some money to work for a relatively short period of time could use something called money market funds. There's one in New York called the

reserve front and T Rowe Price which is known nationally has another. They invest in short term instruments. Government paper or other paper commercial paper and they pay a prevailing rate that's a little bit more than Treasury bills I think the current rate is about 7 percent. They're fairly short and I think they're very very safe as far as bankers acceptances are concerned those are customarily called letters of credit. They're not terribly popular they're not too well known. They're bought from banks. They're safe because they're short but they're not insured or guaranteed by anybody or anything that relies really on the safety of the bank. Already down too often my view is keep asking us about the advantages and disadvantages of letting their brokers hold their stocks for them. For example Jeff Weiner of St. Louis says Does the individual buyer of common stock incur any unforeseen pitfalls when the brokerage house holds his stock certificates in the brokerage firms vault. What's your view on that one. Well I think you can I think an investor can leave his securities with a brokerage firm. There's an agency sort of like the FDIC which insures a brokerage account up to

$100000 40000 of which is in cash and most brokerage firms supplement this with another two or three hundred thousand dollars. So I think it's all right but it makes sense to get the financials of the brokerage firm. Already. You may lose money on the stock but it's not like you to lose the stock. If you'd like to lock up your broker and study your certificates are you just like to have a little security in the first place to send your investment queries along to us here at Wall Street Week or weans Mills Maryland 2 1 1 1 7. That's Wall Street Week Owings Mills Maryland. 2 1 1 1 7. Now before we meet tonight's special guest let's revive the half century old slogan of Al Smith. Let us look at the record in this case the record of a number of different possible investments you might have made over the last 10 years. For example you might have decided at the start of 1968 that the best thing to do with your money was hang onto it by keeping it in cash. That would have been the worst choice of all for the chilling truth about cold cash is that by the end of 1967

it had lost 83 percent of its value. Stocks wouldn't have made that much of your loss. On average they didn't keep up with inflation but as measured by the Standard Poor's 500 stock index with dividends reinvested it had been ahead by about half that amount 41 percent which at least put the market ahead of the mattress as an investment. A much better inflation hedge on average turned out to be the family home. Over the decade the median sales price of old homes in the U.S. soared from twenty thousand dollars to forty two thousand dollars a gain of 110 percent which not only outstripped inflation but makes you feel downright rich. Right up to the time you go looking for another home. Forms of tender that once were legal worked out somewhat better. An index of 29 gold rare coins compiled by Solomon Brothers was up by 185 percent over the 10 years the twenty are said to be the cons an investor would choose. Which means your Uncle Seymour is hodgepodge may not have done as well.

But you have done even better with your typical run of the living room old master. You do have quite a few old masters over at your house don't you. So the big part BURNETT The New York auction house says such high quality art has tripled in price in the last decade. A 200 percent increase. But burnt sienna wasn't the best color you could have had on your investment palette. That honor belongs to goal which was still fixed at $35 an ounce when 1068 began but sold for one hundred sixty five dollars an ounce at the end of 1977 a glittering rise of three hundred seventy one percent. Americans of course couldn't legally buy it until the start of 1975 when its price was higher than it is now. But it is the last decade of relative performance a clue to the next. For the views of one man who was high on gold long before 1968. Let's go over now and meet tonight's special guest John extra. Welcome we're just delighted to have you here. I'm pleased to be here Lou please and honor.

John X2 is a highly annoying fellow. You keep telling people what they don't want to hear. Although the very model of an establishment economist for much of his career Harvard faculty Federal Reserve official Citibank senior vice president Council on Foreign Relations member he has been warning for nearly two decades that prevailing policies would decimate the dollar and elevate the price of gold. Now at 68 he is a private consultant and one of the most good humored prophets of doom I know. John how close are we now in your judgment to the economic apocalypse. The word economic A pox apocalypse is your word and I never talk like that I don't think the world is going to come to an end. What. We got. It all goes. But I do think that the economy is going to turn down.

Well you have used phrases rather more severe than the economy turning down your suggestion that we may have the worst depression in our history. Yes I have said that we probably would have a worse depression than the nineteen twenty and thirty three depression. But even then it isn't an apocalypse you know I lived through it. You didn't. So I know what it was like I caught the end of it. Your version of whatever is forthcoming. Calls not for runaway inflation which we've been talking about up to now tonight. But for deflation. That's right the price of everything from all oil to food in the supermarket coming down actually down not just rising so a bit coming down. What are we going to see some evidence of that's really happening. I can't say when but I think it may happen within the next year or two. But I wouldn't be sure that it would happen as soon as that with with a 50 or 60 billion dollar government deficit with the Federal Reserve Board pouring out

money at a rate of close to 13 percent in the last three months. How are we going to have beef lation. Well first of all. The marketplace is destroying purchasing power faster than it is being created by the budget deficit. If you just take something you're very interested in the stock market. The stock market is down roughly about 20 percent. Since the end of 1976 and that is the destruction the purchasing power. That is going on when you add to that the destruction of purchasing power because of the fall of bonds. The bond market bond market is even bigger. How do you invest to protect yourself against what you foresee. Well. You know I am a gold bug. And I have been investing personally in gold coins and gold mining shares since 1962. So I was very interested in the chart that you showed a few minutes ago.

Do you think the next 10 years will be a repeat of the last and that goal will lead the way in relative investment. No nothing ever repeats itself. But I do think that that gold has a long way to go. John you have carefully said you didn't see Apocalypse that you were going to have some some bad news we could live through it but you're not a conventional doom and gloom runny have for example one of your beliefs is that the US dollar is going to outperform foreign currency. That's certainly eccentric these days why do you believe that. Well to tell explain that I have to explain that we are in a liquidity squeeze. Our inflation has not been caused by the Federal Reserve alone. In other words the Federal Reserve prints notes which we carry in our pockets. But not in as many as they printed that's not enough to cause inflation and inflation has been caused by the expansion

particularly of all the financial institutions like. The banks and the thrift institutions. And the problem there is that they have. Expanded by borrowing too much short term and lending long term. And it is a cardinal rule of finance not to do that. So we are being caught. In that trap. And it is that trap. That is going to cause deflation because short term interest rates are now in the process of arising above the law. Would you expect that within the next year the dollar would outperform the Swiss franc the German mark the Japanese yen. Yes within the coming year I would expect that. John you describe yourself as a gold bug our panelist and I may not be gold bugs but they have been known to bug the desk from time to time let's give them a chance starting with Tim Price. John I think buying gold is difficult for the average investor if in fact

this were two years from now and he began to agree with you. How might he invest some of his money to hedge against this in in a liquid security homestay. Well. I have been telling people who would listen to me to go into gold entirely in other words I think gold is going to win out over paper money. I regard gold as the best kind of money. And in gold. I prefer to diversify. So I would buy gold coins and the best gold coin today is the Kruger run. Then I would buy gold mining shares. And there I diversified between the South African shares and the North American shares. So I think there is a risk in South Africa but Ive been there nine times and I do not think it is too great a risk. But just in case. I buy.

Homestake and and some of the Canadian ones. John I imagine there are a lot of families looking in who have compiled a portfolio of stocks bonds and cash over the years some are middle aged some are elderly. Do you recommend that they really liquidate some of those and go into gold or should they basically stay where they are. Well I don't think that there is a overall rule. That fits everybody. I have given I gave my answer to Jim Prince. To him the basis of my own personal experience. Which is somewhat different because I have not needed the income I have had a good income. These people. I would take that into a code. OK but I would certainly recommend that everybody should have some gold. Its very chilling to listen to you when I talk about Google winning out. I think of massive unemployment and massive poverty. I think of riots I think of

famine. I think of crumbling real estate prices. Is that the scenario you suggested. Yes I him I'm free. It is this liquidity squeeze. Means rising interest rates and when short term interest rates go above the law. That makes it impossible for the savings and loans to expand and other thrift institutions. So that hurts the real estate market. The stock market I think is going to go down this is a fourth squeeze we've had in the 60s in the 70s and the and the last one which was 1974 the dollar went to five seventy seven. So I think that this squeeze is going to be more severe than the last one. So I would expect the Dow to go below that. And. That certainly means unemployment and. Many political and social difficulties. John you have painted a dark scenario. Is there any way

we can avoid it. No I do not think there is any way we can avoid it. I regard the market place as the master of all of us. That means all of us sitting around here but also the master of President Carter and Federal Reserve chairman mills. And there is nothing they can do to avoid what is happening in other words what they have done what government and the Federal Reserve have done in the past. Is now. Working itself out in other words we are now reaping the whirlwind of what has happened over a period of a great many years especially the last 20 years. But John if you are right. If the very serious events you have described do occur. Are you really going to be safe holding your gold. All there is no. There is no assurance of safety in this world it is an uncertain world. Gold can be

stolen. President Roosevelt nationalized it and took it away from all of us. But I think I dont think thats going to happen again. I would just say its the best hedge I know. John you once told me that when you left Citibank the head man of Citibank won't risk them gave you a going away present. Would you tell all of us about it. Yes I'd be happy to. He gave me. Money clip. That is. As a twenty dollar gold piece. I mean a ten dollar gold piece and I happen to have a ten dollar gold bill in it right no. When I received this. Well first of all when I was a young man I could take a $10 bill in any bank in the United States and get a ten dollar gold piece. When I received this the gold was about 40 dollars an ounce or maybe a little bit more. And of course

today it's Tell me what you told won't read well over 100 in 80. And I told him that I was I he could not have chosen a more suitable present because the clip would constantly rise in value while the paper that I put into it would fall. Thanks John xterm for a genial forecast of doom actually upon let's hope you'll be with us next week we'll try then to make vacation time last forever to find ways to cash in on other people's leisure whether that's gambling or other kinds of fun and games. Mike Astley is good or is Wall Street's top on the list of fun industries so come join us. We'll have some fun. Meanwhile this has been Wall Street Week omelet for the Kaiser. Good night. If you would like to obtain a written transcript of tonight's program send $1 to

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