Wall Street Week with Louis Rukeyser; 0911; Bulls, Bears and Lions

This program is made possible by a grant from the Martin Marietta corporation. And by this and other public television stations. I. Can. You. Wall Street Week produced Friday September 14. Your host for Wall Street Week is Louis Rukeyser. Our panelists are Frank Kapilow. Gail Dudack and Bill waters. Tonight special guest used money. Gordon director of research the Dreyfus

Corporation. Good evening. I'm Louis Rukeyser. This is Wall Street Week. Welcome back. Well it was a terrific week for the American economy. If only you knew how to look at it the way to look at it you see was upside down through a mirror. Everything that was supposed to be down was up. And everything that was supposed to be up was down. Other than that no complaints whatsoever things that the government would like to see down include reasonably conspicuously the price of gold which we not only keep selling and attempt to lower the price but which is like it or not a world wide indicator of lack of confidence in paper money is generally and U.S. leadership in particular. Gold which if the skeptics are right has been going through one of the longest running topping outs in history serves the head another 17 bucks in London this week to close at a new record high of three hundred forty five dollars eighty cents an ounce. Now not all of us care that much about the price of

gold but millions of Americans are yearning for lower interest rates. It was a good week for those Americans to stand on their heads too. First the U.S. federal government for the first time since Columbus set sail from Spain had to pay a double digit interest rate to borrow money from its citizens for six months. And two days after Treasury bills of this new chorus of how high the moon. The nation's banks began to lym their version taking the prime rate charged to the nation's biggest corporations to an unheard of 13 percent. Previously unheard of that is. Now you've heard it here. Other things heading rather distressingly upward including the nation's inflationary money supply. The federal debt ceiling. And the administration's predictions on unemployment which Treasury Secretary G. William Miller now says could get above 7 percent next year. Something went down of course. But regrettably the wrong things.

Industrial output for example which tumbled by 1.1 percent in August thereby telling even the most dubious that recession was indeed at hand and auto production which SAG last month by a Detroit daunting 15 percent. With nothing good to report. Nothing that went the way it should. Why of course there was no gloomy little sour puss. The stock market that perverse little devil went up in the face of all this bad news. One thing that may have been fearing investors was the thought that we were now overdue for good news. And in that vein secretary Miller said Friday that the recession was already at least half over and that its effects would be no more than moderate. Tonight we'll have exclusive forecasts on that subject from six top American economists. And we'll be talking with a special guest whose job it is to take these economic projections and turn them into dollars for investors. Well we should interview him right side up. But first let's stagger over to Wall Street and see what did happen there in the week has passed

and as the Dow Jones Industrial Average indicates a Friday rally brought the stock market another net weekly gain in a busy week that saw the second heaviest trading of the year. This week's five point advance brought the Dow to eight hundred seventy nine point one zero within nine points of its 1979 high. Also continuing to march forward with the broader composite indexes of the New York and American stock exchanges and the over-the-counter market with the latter two setting all time records. It was all enough to sour ourselves with long quiescent technical market index moved sharply into minus territory. Which could be the most encouraging development of the week. Other money news this week came from the Senate Ethics Committee which decided to denounce Georgia senator Herman Talmage for what it called financial misconduct a charge that some might think could be sustained against the entire United States Congress. Gail not give it more than Miras that is keeping this market levitating.

Yes it's more than Merry's. I think that while the market's done very well in the face of bad news people are forgetting that the market had been correcting for several years in preparation for this recession. So I think you know we talk about a market that does kind of spreading for several years. Well actually the Dow had a peak in 76 and it had really a year and a half of a negative trend and then it went sideways for a long time. So now that it's acting better when the news is bad everyone is saying how can this happen. Well it's already taken its medicine. Now the other argument would be that the stock market in terms of the Dow Jones Industrial Average keeps going up to about 78 80 and stopping what reason is there to believe it won't do the same this time. Well it may do the same this time but I think that eventually it will get through there. I think it will break through before the end of the year whether it's this time or next time. But underneath I think the underpinnings of the market are pretty strong. Frank Caprio let's examine your underpinnings are not bad. Low

13 percent prime rate. How much higher you think we're going to go there. Probably up to 14. I didn't think we'd go beyond 13 but we're here and we have some experts telling us we're going to go higher. Why do you think we got this high. Well I think Volcker is one of those are the two general Volcker the new chairman of the Fed is once again losing sight of the important factor and that's money supply and he's trying to do it with interest rates and this has been the problem with the fed all the time. They try to concentrate on keeping rates down but not concentrating on money supply and that forces rates up for folks who's been in the Federal Reserve system for years. He's a very experienced fellow Why doesn't he recognize what you see so well. I think he may begin to recognize it very shortly because the money supply is increased from time to time. Rates will go to 16 percent 17 percent. You know sooner or later he will get religion. He ought to talk to Milton Friedman. But Lou this thing about the stock market you know we ought to remember that stock market moves of major proportions start with a wall of worry and they climb that wall of worry. And 13

14 percent prime they're going to climb to 14 percent prime rate. I know but you know everyone is expecting the stock market to get knocked down to 7 97 80 and then conveniently will all buy stocks and the market never accommodates that kind of reasoning. The market has to go up on surprises. Otherwise economists would be rich and they're not. Well I think that's that's a disaster for the country that they're not. Bill waters What do you make this market. I think some economists might be rich Lou. The wall of worry I think we are. I think stocks are cheap. You know in 1974 five years ago when you couldn't give away stocks the the price earnings ratio on the Standard Poor's 500 was a little bit over seven times. And that's what it is today. What's it going to take to convince those people who have not believed as you have that stocks were cheap that they are. I don't know. I think that there's 30 billion dollars out there in the money market funds. The institutions are awash with money. I don't know what's going to trigger it. Maybe the

first down tick in the interest rates I think we're close to the top Frank. But when it gets triggered I think we're going to have some real excitement on the upside. Bill I'm worried about gold. What do you make of gold at $345. That's what scares this scares me to death though I still can't find my Krugerrand. My last move. Are you going to. Are you going to go. I don't think so. You think it's too risky up here. You think it's getting up in the stratosphere. Yes and you look at the silver markets and commodities they're jumping up and down up and down a bit in the futures of silver and I think that tells us that gold could run into the same problem. I think if it think late in the day if. All right in any event panelists It's time now for our weekly session of stock questions but hardly original answers. Gail Dudack understandably we keep getting questions about investments and possible solutions to our energy problems. How would you respond to carry holiday of Chapel Hill North Carolina who writes this as follows. I understand there's been tremendous development in the area of using hydrogen in place of petroleum fuels. Is there any way to invest in hydrogen research and development and will there be a boom in hydrogen.

I hope she doesn't mean that literally. And you to have a little help from my career. I'll try I'll try. I think with the boom in is there's something about hydrogen that's misunderstood it's not a source of energy it's really a future means of transporting and storing energy. You have to put as much energy into hydrogen to get energy out. So because that's not economically efficient I think where you know 20 years away from that the research is being done primarily by government agencies universities and very large corporations because it's very expensive research. Probably the most exciting year would be air an airplane fuel for the future because that could be efficient and there are several companies like Union Carbide and air packs some chemical that that make liquid hydrogen that might be a possibility of their investment there. But on balance not yet a gas of an investment.

It's a little risky Larry. I can feel it was our resident follower of the Kondraty of wave theory. You should be just the one to answer. Robert Nicholas of Tustin California and Fred Walker of Gulfport Mississippi both of whom would appreciate a little elucidation on what that theory tells us about our current predicament and our future prospects. And by the way Frank how seriously do you take such theories about the inevitability of business cycles. OK well Nikolai Kondratiev was a Russian economist who had studied the capitalistic economies over some period of time and he discerned that there is a pattern a recurring cycle of boom bust boom and these cycles from peak to bottom to peak again seemed to average about 50 years. The first wave that he identified began in 1790. The top of the Third Wave was 1929. If you add roughly 50 years to 1929 you're right here at the present time. And many followers of the wave believe that we are now headed into the 1930s

recession and depression deflation and so on. Others believe that we have not yet seen 1929 the best is yet to come. Well who's right. Unfortunately Nicholai died in Siberia in 1930. So we're not sure. We see more than 50 at the time. I think so Stallin sent them there. But the point remains that there are cycles there is a sunspot cycle. The Kondraty of wave the wave cycle they're useful but they're difficult to pinpoint though in terms of precise timing in the stock market and that's the important factor. So I say watch them observe them. They're helpful but don't bet money on them really. Bill waters put on your stethoscope and prescribe for John out of a whole lot of high point North Carolina who writes in the past decade the American hospital system has become one of the most criticized and regulated sectors of our economy. During that time however for profit or proprietary hospitals evolved from mostly physician owned individual institutions into well-financed and professionally managed corporate systems of hospitals. As we move

into the 1980s the pressures on hospitals appear to be increasing rather than abating. Given this persistently hostile environment what do you feel are the short and long term prospects for investment in corporate hospital chains. Well the pressures are already there. There's about 130000 excess hospital beds in the United States by the Wall Street Journal's estimate just last week in fact. But the corporate hospitals are more. I think the solution than the problem. The ones that should close the inefficient ones the public and the voluntary ones the public for inefficiency the voluntary ones for lack of capital. Corporate hospital chains now represent about 40 percent of the proprietary is and it's growing rather sharply. They have economies of scale professional management ability to specialize and the like. And the kicker is that socialized medicine of Europe is working and they are going away from that into that type of thing that corporate hospitals could get into. I like the long term and short term as to Ames hospital supply Corporation of America. Life. Mark. A.m.-I American metal medical international and national

medical enterprises are all goodbye's short term and long. And if you're wrong we'll hospitalizing. Out of your investments are looking sick. Take two aspirins and write us in the morning. The money hospitals addresses Wall Street Week Owings 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 take a look at some of the current wisdom conventional and on about the current state of the U.S. economy and its immediate future. We've gotten some exclusive comments from half a dozen of the nation's leading economists and to a man and woman they agree we're in a recession. Paul Samuelson of MIT says it started on April Fool's Day and will last through the middle of next year. The recession will bring some relief from inflation he says but inflation isn't like smallpox. Once we wipe out the last case of Ethiopia smallpox will be gone forever but once the recession is over Samuelsohn says we'll be back slugging it out with inflation all over again. I know Eckstein of data resources says the recession will

last for most of the next year longer than the forecast earlier because he says the Federal Reserve is now back to its old ways. And this has kept interest rates higher than they would have been. This in turn has finally taken the boom from business spending he says. Alan Greenspan of Townsend Greenspan and formerly the chief economist for Gerald Ford says the recession will continue into spring. And the good news is that the government's likely stimulative measures probably won't go too far. A heavy hand from Washington is far less likely than 10 years ago he says because the problem of inflation is far greater and better understood. Greenspan thinks inflation will fall to 8 and possibly even 7 percent. Walter Heller of the University of Minnesota and formerly of the Kennedy White House agrees with fellow Democrat Eckstein that the Federal Reserve Board won't help much in this recession. The Fed he says can't do much because monetary policy is hog tied. In defense of the dollar. Unemployment how it feels will hold around 8 percent next year and what he calls the only real way to go will be a tax cut

one aimed at stimulating investment as well as putting money in the hands of consumers. Laurence Klein of the University of Pennsylvania sees only a moderate recession ending fairly early in 1980 but says the bad news is not good news. And the government is well-advised to add stimulus the cost in unemployment and other problems isn't worth the relief to inflation and interest rates inclines judgment. And finally Alice Rivlin head of the Congressional Budget Office is telling her employers about the same thing. Mild recession high but moderate in interest rates. Unemployment around 7 percent. And the recovery in 1980. That will however be weak by historical standards. So it doesn't look like the best thing here is for the American economy but well short of a disaster. And don't forget that as Walter Heller cheerfully pointed out all of this is just educated guessing. How will the stock market react to this ongoing recession. For some thoughts from one of Wall Street's most educated

guesses. Let's go over now and meet tonight's special guest Monty Gordon. Welcome back. How are you. Always great to see you. Thank you. Finally Gordon is the mouth that roars for the Dreifuss lion. As director of research for the Dreyfus Corporation. He's the chief spokesman for one of Wall Street's biggest mass money managers and one of the financial community's most outspoken analysts. This is the third time we've invited him to speak on Wall Street Week before joining Dreifuss nearly nine years ago. Mr. Gordon did is analyzing that Sertorius and company and for 24 years before that a patient company. Might have been a skeptic about this market but it seems to be coming on strong again. What's your current appraisal. Well I kind of phrase it is that the market is in a sense separating itself from the economic scene and that has happened that occasions in the past. What is going on now is purely within the internal dynamics of the market itself. I think that the market in a very real sense is vulnerable much because of exactly the kind of expression that you were getting from our six economists

which is in effect that we have laid out a kind of comfortable scenario that this will be a nice well-contained recession that it will end on schedule that it will accomplish certain objectives as far as inflation is concerned. I think the vulnerability is that it will not quite may not quite work out to that scenario. So what you're saying is really the reverse of what Frank was saying that you're worried about unpleasant surprises. Yes I think that the market has kind of laid itself out because the best of all worlds at the present time is the miller statement to the effect that the recession is half over. Lou they haven't even decided there is a recession yet. I mean it's got to be worked out and decided as to when it began. We don't know yet. My guess is that it's probably less than maybe about less than a third maybe only about a quarter. And we may be deeper into it and for a longer period of time that we know that the primary purpose of that is to slow down inflation. That's really what we're shooting for. If this recession does not come on and successfully accomplish that objective then we will have for the two of them is Dr. Samuelson's and indicated Fleischer will be back what is a wise investor do at this time.

Well there are a lot of things that a wise investor can do. Actually what we've seen is curiously enough over the last three to five years equity prices have performed very well. Concerning as far as the inflation is concerned that's some of the studies that we've done have indicated that. So there are areas in the equity in the equity field that they're going to now if they're doing that. You've got to kind of lay yourself out in the sense of what is the direction of the economy. It's quite clear. Energy is a very severe and serious area and a lot of effort is going to be spent in that direction. It's also quite clear that our technology is going to continue to advance of the computers and telecommunications are going to be very serious. And in the event of looking at the kind of a thing of a recession developing of any significance you would have defensive areas such as food and other related kinds of sectors traditional historical areas of going. Why don't you name some issues in each hotel if you will going into. For example if you are going into the energy or you're talking times of floor and Drainville which are engineering companies you're going to plant synthetic fuel operations. If you're talking in terms of companies that have domestic resources and you would talk perhaps in terms of a Louisiana land exploration if you were talking of companies that overseas

resources of Philip. Philip. Philip petroleum would be an example of something like that. If you're talking in terms of coming up into Canada where there's a lot of work being done you could talk a superior oil and other companies that are involved in that particular area food on the defensive side you might talk in terms of craftier even the supermarket for example supermarkets generally does extremely well. There's never been a shortage of area to go into. The key thing for an investor is the strategy that is befitting the occasion not to simply say well I can't buy equity or I'm going to buy equity regardless. Why shouldn't an investor who accepts your analysis and who shares your jitteriness about the next few months leave his money in money market mutual funds earning double digit returns and wait and see what happens. We think that's a great idea too. Let's put it this way. That is certainly a place where an investor who has to think in terms of what we begin to call a s.c.s ratio which is cash to the common stock ratio we would think that some part of his funds most certainly should be in a cash money market fund in that type of fund for that

purpose. However at some point and then even within the context of that there should be some equity commitments which are looking out to the longer term past this kind of condition that I'm talking about now. You notice what I essentially defined or what I believe are areas that are going to be very powerful and very significant to the U.S. economy in the decade of the 80s. Let's put some numbers on it in terms of the Dow What do you expect this year well you. I've consistently felt the Dow essentially is in a trading range moving between about 780 and 900 on the on the high side. I still think that that is a viable range. I think however that in the circumstance that we're seeing here as far as the economy is concerned and the efforts that will be made to combat the recession that the stage is being set over the longer time for an even more improved equity performance I'm not one of these people necessarily thinks in terms of fourteen hundred or thirteen hundred or things like that on the Dow. But I think that circumstances over coming months although there will be some difficulties as far as the market is concerned. We'll set the stage for a better equity market before we get over the bumps around here.

Let's go over to our panel and hear from them starting with Gail Dudack money. You say that the market is looking taking the best possible lock let's say that there is negative surprises come about. What areas of the market do you see as being the most vulnerable in that case. Well if the equity support the surprises that we're talking about come on then apart from let's say the energy and those related areas certainly the almost apart from those sectors would be vulnerable. Many of those sectors have moved up in anticipation of events coming about that depend heavily on the economy moving in an orderly fashion. The simplest things Suppose Iran cuts off oil production again even though the oil production has not been restored anywhere near the previous rate we were in such a fragile balance that we could actually put the economy into a very severe pressure that would still leave the energy to synthetic fuel and that related area in a very attractive sector. But the rest of the others who have gone ahead on the premise that the economy would recover fairly smoothly they would be vulnerable to money.

Forget about timing the market. That market is cheap it's dear. The economy is going down or up. I've got a son who has $5500. So you're in the summer. One stock for the next 10 years. What one stock would you recommend for a long term horizon. Years out. That's what we'd love to you know give our 15 20 recommendations someone or we call one of the corners is what are you really can't do and why are they. If I had to say one stock. Right. OK on the basis of where you'd be comfortable and you'll still be around no matter what happens almost in the world. I'd have to say IBM. In order for people to they end up getting over into a consumer field by any business week in a well-publicized cover story not long ago said that equities are dead and stocks are no longer viable as an investment medium and inflation was the murder. What does my Gordon say. Well I would think that in the history of the world is usually the best time in which the market becomes attractive or you begin to get that way back in the 60s they said. Bonds is

dead and there was going to be a shortage of supply of equities 1969 took care of that particular problem. I would say the article is talking more of the past than it is of the future. And if I were to look at something like that I would say suddenly having looked back as I say in our work over the last three to five years we have seen that equities have done surprisingly well against an inflationary pressures. I don't really buy that argument. What's your expectation now on interest rates. Long and short term. My expectation on the rates is essentially that they will move with the inflation rate. I think that there is a possibility they will go anywhere from 50 to 100 points basis points higher. No that's a half to one percent to one percentage point. I don't think the long rates will perform in the same way. I think the long rates will tend to lag on that basis so that you'll continue to see a very sharply inverted yield curve much higher at the short end than you will at the long end. And when do you expect to see him start coming down. Well I think if they're going to start coming down then Mr. Volcker hasn't got

much time to move in the area that he's moving in. I think that he's got to come in fairly quickly and reduce inflationary expectations. I would think that if rates are going to start coming down or at least showing signs of black doing it will be sometime not later than the first quarter of 1980. Monday one of the news events this week that we haven't touched on was the emergence of Edward Kennedy as an all but clear candidate for the presidency of the United States is of any investment significance to that. Well the only investment significance to that is that you would if Mr. Kennedy becomes a candidate and assuming he would become elected I think that one you will not be dealing with quote a flaming liberal as we've known him in the past. I think you would be dealing with someone who is much more activist than I think there would be a sense almost the carry way back. I don't mean to date myself but back to Roosevelt were in a sense with whatever you did by Franklin or Theodore Franklin whatever you did at least you did something. And I think that is really where the appeal of Mr. Kennedy lies. We only have a little time left Monte. You have suggested that while you're edgy or at least

cautious about the next few months that you're a long term optimist. Why. Because I think that there is an inexorable pressure of events that goes on and I think the U.S. is now subjected to that in the sense that we must find solutions to the energy problem we must find solutions to inflation. We will stumble. We will make mistakes. But I think this is a very powerful resilient economy that has the cushion and the strength to resist those areas and come out on the other side. I think we're going to come out very strong and mean and much better shape than we were and how long do we have to wait before we can see some evidence of that. Well I think you may wait at least a couple of years before that becomes clear in the sense that you can clearly and distinctly perceive it. I think your sense of the direction of it. Well before that but the distinct perception of it will be a little longer. Well maybe but the next time you're back which I hope will be quite soon we'll be seeing some of those signs. Thanks again my dear Gordon. Thanks to our panelists for joining us tonight. I hope you'll be with us again next week. We'll be looking at the gyrations in the credit markets and the company of one of their least Disney observers George Johnston with interest rates soaring to

unprecedented heights millions of Americans are wondering just how high is going to be anyhow. Why don't you give us your prime interest as we try to find out. Meanwhile this has been Wall Street Week. I'm Louis Rukeyser tonight. I'm. Sorry. If you would like to obtain a written transcript of tonight's program. Send $1 to transcripts. Wall Street Week Owings Mills Maryland 2 1 1 1 7. 1 dollar 2 transcript Wall Street with Owings Mills Maryland 2 1 1 1 7 residents of Maryland. Please include the five cents sales tax. For Wall Street Week is produced by the Maryland Center for Public

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