Wall Street Week with Louis Rukeyser; 1303; Hail to the Chief Economic Adviser

If. If. With. Wall Street Week With Louis Rukeyser. Brought to you by this and other public television stations and by

grants from the Hilton Hotels Corporation the spere corporation. And Prudential Bache securities. Produced Friday July 15. Our panelists are Carter Randall. Robert still Vaughn and Julius Westheimer. Tonight's special guest is Dr. Martin Feldstein chairman Council of Economic Advisers. Good evening I'm Louis Rukeyser This is Wall Street Week. Welcome back. Frailty the name is woman wrote William Shakespeare thereby proving not only that he was arguably sexist but that he indisputably had no knowledge of Wall Street. For the most fickle female of poetic imagination would seem a symbol of romantic constancy. Next to the recent behavior of the stock market.

Indeed to paraphrase that other male chauvinist Sigmund Freud What does Wall Street want. One thing it wanted we were told was Paul Volcker. It got him. President Reagan reappointed Voeckler chairman of the Federal Reserve Board. And this week Volcker assured Congress that like it or not he'd be the same old Pol. Another thing Wall Street was said to want was solid evidence of the economic recovery this week for anyone still among the doubters that came flooding in. Industrial production continued to surge. Consumers not only told pollsters that confidence was growing but displayed it by taking on more net new debt than in any previous month for two years. And the long suffering auto business was so good that sales in early July rose nearly 42 percent. Ford announced that it would pay its first dividend since 1981 and the government's most widely publicized welfare client Lee

Iacocca said Chrysler would soon pay off the remaining balance of its federally guaranteed loans. As if that weren't enough the market's Premier's stock. IBM surprised analysts with earnings that were even better than expected. So how did the in constant market react to all this news for which it had been said to be yearning. You got it. It turned its back. It turned up its nose. It turned some down turn my stomach. The Dow Jones Industrial Average went to its fourth straight losing week the first set sequence since this great bull market began last summer and every one of the major market indexes stands now at its lowest point since early June. While that still leaves prices pretty high by the standards of a year ago it causes one to wonder just why Wall Street has recently become so hard to please. One explanation surely can be found in the Old Market adage buy on the rumor sell on the news. In other words the current good news had sent prices up before it

arrived. But the second reason equally clearly is concern about inflation and interest rates. Wholesale prices for example while still down for the first half of 1983 were moving ahead more briskly in June and interest rates of climbed about a point in a month. What's more some of traders worst current fears were confirmed with a rash of bad money supply and bank loan figures after the market closed late today including a whopping five point eight billion dollar increase in the basic money supply. About the best that can be said for that is that the bond market having retreated in anticipation took the actual report in stride. One thing some people think the market wants is a better economic policy in Washington. We'll get the inside story on that one when I talk tonight with Ronald Reagan's chief economist Martin Feldstein. But first let's look at the fickle pickle on Wall Street. The Dow Jones Industrial Average which has now spent nearly three months circling around twelve hundred

dipped back below this week and has now lost 50 points in four weeks. Its last series of four straight weekly losses ended more than 13 months ago. For this week the Dow gave up about 15 points to close at eleven hundred ninety two point three one and the downward movement was consistent through all the broader composite market indexes as well in the thin straw of hope Department. The elves grew one notch less pessimistic though their technical market index is still mildly bearish and telling us to sell. Once again though there was no refuge in precious metals both gold and silver were off for the week. Despite such juicy bits of gloom as reports that Brazil was getting ready for a major default why even some of the pessimists lost money this week. Quite a battle is it now time to bail out and swim for shore. I think it's time to bail out. But I think we've got some some bad market news for the next few weeks. And then it's time to leap in very heavily because by

the end of this year we're going to have a very strong market in my dad's been down 7 in the last 10 weeks four in a row in the US we've got another 10 weeks of bad news. I think so we're going to have persistent fears about higher interest rates and the specter of inflation and the money supply figures are going to help to engender that. But the outlook for 1984 is going to be so good particularly as far as corporate earnings are concerned that then we will have a strong market this is the correction this is. We haven't had much of a correction yet. We'll have more. How much we're going to have got you know you know these things. I'd say another 70 80 points on the downside in the Dow Jones Industrial Average before we right the ship. Well Bob Stovall let me turn to you and repeat that message I slipped in. What does Wall Street want. What would show up at this point. I think Wall Street at least the gurus on Wall Street the analysts would like to be right and maybe the consensus is about to be correct about the correction. It's been a

lateral correction for the last several weeks as we've just pointed out. And it may persist in this market correcting one group after the other and maybe the Dow average will drift down another 50 points or so but I think that what Wall Street wants now is some sign that the Congress will give us some fiscal discipline and move toward trying to balance that budget. And I think if that happens we wouldn't have to worry so much about tightening up money and we could concentrate on earnings which are pretty good now in the second quarter and should be much better in the third quarter. Do you see any evidence whatsoever that Congress will meet that desire. Absolutely none. Joyce West you've been gloomy for so long we must be tearing up now the market's going to slip a little. No I'm not happy at all about this Louis but I fear that we have not seen the worst. I think we'll see much more of a correction than this because there's something on the horizon I don't think we've given much thought to August the 12th is getting close. And that is one year since the rally began at 777. And as we move through August

September October November profits will be long term which means they will be taxed at a much lower rate than they would have been short term. We've talked quite a bit about possible tax selling wanted to try and put a number of course. How have how far do you think this debt is going to go. I think it could go 150 to 200 points lower than it is now and I think people should protect themselves by scaling back to 60 percent of their total holdings in stocks. Why don't they bail out entirely if it's going to get out and if you do want to point because I could be wrong. Oh I can't believe that. I hope I won't let him. What do you where you put in a 60 percent anything like that. Cash cash equivalents just stay on the sidelines with the with the 40 percent I say 60 percent in stocks and I think there will be opportunities to pick up some bargains at much lower levels for any in any event over this time now to look for a summer rally in our viewer's finances at least a quarter randomly in Quirin of Williamsville New York would appreciate a fill in on the new form of tax deferred investments known as tax management funds. What are they how are they rated and do you consider them

safe investments for couples retired on fixed incomes. Well first of all Lou it's not necessarily new. And secondly tax management funds are not generic. There are many many different forms of tax exempt bond funds. There are investment trusts which are taxable as corporations and take advantage of 85 percent tax credit on dividends. There are some hedge funds that are called tax management funds. Whenever I hear the term tax management and avoidance of taxes I think in terms of. Possible low rate of earnings possible deferral of income and so on I would say for most people particularly older people income now making money is important not of voiding taxes. But for those in the high brackets who want to defer taxes tax management funds would be OK. Time we tax management it is Bob Stovall How would you respond to Rick Harrison of Toledo Oregon who writes as follows. How do the option exchanges determine the

stocks in which they will trade puts and calls. And why are there no options contracts offered on companies traded over the counter. It would appear that at least some of the big ones could have popularly traded options. That's a good question and one that's being discussed right now because of the on this program on this program and also in the industry on the option exchanges. The nature of options is such they're speculative and volatile that the exchanges that trade them have very stringent requirements I won't rattle them all off for you but a stock to be listed on an options exchange has to have more requirements than just to be listed on the American or even The New York Stock Exchange in some instances. So the restrictions are keen and high over the counter there are a few stocks that have very good deep trading markets. But there's no accepted way yet to protect the public against the possibility of side by side trading of on listed options as well as the listed stock. And until or unless some sort of a rule can be accepted and

agreed upon I don't see how that's going to happen right away. Would you guess we'd eventually work in Atlanta. I think somebody will take some time. Here's West on my dashing fellow like you should be just the one to help Mrs. Bean bone heard of Watertown Wisconsin with such an interest in the romantic paperback novels she writes. I was wondering if love can be found investing in these novel ideas and I assume she does not mean love in the tennis sense. Maybe we can get her some financial love you know. There are some stocks on the New York Stock Exchange that do feed into the romantic novels I bought a bunch of them this week and I thank her for inviting my attention to him. I think the best play on this is Gulf Western selling around twenty eight dollars a share. They have a subsidiary Simon and Schuster which is a fairly big part of golf and westerns leisure time activities and I think it's a good play on that. The second one is Times Mirror which has Signet publications They also publish romantic novels. And the third one is CBS. It's an expensive stock much more so than Gulf and Western. But it has a publishing subdivision to it. But I like Gulf and Western best for this idea.

It was investing by the book right. OK. Now some cool stranger is trying to foreclose the mortgage on your house. We'll try to change your pitiful story from tragedy to passion and triumph. So calm your heaving bosom take some smelling salts and send your most breathless and intimate financial questions here to us at Wall Street Week Owings Mills Maryland. 2 1 1 1 7. That's Wall Street Week Owings Mills Maryland. 2 1 1 1 7. And now let's go right over and meet tonight's special guest Dr. Martin Estelle Stein. Monday welcome we're so pleased you could come and be with you please. When Martin Feldstein talks Ronald Reagan listens and has been listening closely since last fall when Dr. Feldstein became chairman of the Council of Economic Advisers. Since 1969 he's been a professor of economics at Harvard where he intends to return before Election Day 1984. Dr. Feldstein is a former president of the prestigious National Bureau of Economic Research which last weekend determined that the latest

recession ended last November. Marty the first thing we heard from Ronald Reagan was he was going to balance the budget by 1983 or 1984. The next thing was that the route to economic success was through tax cuts not tax increases. Now comes Martin Feldstein to tell us a that we ought to move toward raising taxes in 1085 and B that even then we won't have a balanced budget. Now isn't it about time this administration got at least one economic act together. Well I think you have to look back Lou at why the budget deficits have gotten much larger than anyone anticipated back in 1981. At that time no one foresaw inflation coming down as quickly as it did and no one foresaw that the recession was going to be as serious as it was and both of those have led to less revenue growth over the past two years than we had in to subpoena. And at the same time the president proposed to Congress and expected to get more spending cuts than actually occurred in the combination of those two have given us the

large deficit that we now see. But taxes haven't been cut yet. They took a larger share of gross national product in 1982 than they did in 1980 taxes really have been cut. If you look at put aside the Social Security payroll contributions and look at the personal and business taxes they've come down they've come out I checked with the Treasury this week and they tell me that it would take at the federal level and federal state and local combined a larger chunk of GNP in 1982 than they did in 1980. If you look at the 1983 figures passed the trough of the recession we now are taking a smaller share of taxes and it's coming down. Now you want to raise money. Well I think that as we look ahead to future years we're going to need to have both lower spending rates and more revenue if we're to get this deficit under control and I think that's the number one priority. Well your views on how to raise taxes couldn't be more explicit. I don't think we've heard yet from this administration truly explicit plans genuinely to reduce federal spending.

Now we heard from Ronald Reagan in 1980 that we were going to reduce federal spending from what was then about 23 percent of gross national product down to 19 percent. We're up to 25 percent now are we ever going to get to 19 and if so how. I'd like to break that public spending down into its parts. As you know one of the things that the president is most concerned to do is to reverse the tremendous decline in defense spending that occurred over the 60s and 70s. In 1980 we were spending a little more than 5 percent of GNP on defense. We've been gradually bringing that up to a point where it's now about six and a half percent. We've also seen an explosion of interest on the public debt which is beyond control. But it's in the broad range of domestic spending other than Medicare and Social Security that there's some room for cutting back on things that never should have been passed in the first place. And there has been remarkable success. The administration and Congress have actually cut back the share of GNP. After seeing it

grow year after year after year it's been cut back and indeed if we were now at a more full employment level you would see that that share been brought down by about a fifth between 1980 and today. So I think that substantial progress is being made on cutting spending. Are you advocating now any further changes that would greatly reduce that spending. Sure. The administration's budget calls for further changes no big dramatic cuts but a whole series of improvements. Efficiency changes and ways of paring back over the years the share of GNP going on these programs. Why not the dramatic cuts why don't we rethink the whole program when most everybody thinks it's a failure. Well. I guess I can answer that in one word Congress. My sense is that the kinds of. Dramatic cuts that you may have in mind are not in the minds of those folks up there. Look at what I have in mind would you favor such cuts. I think there are a number of changes that can be

made yet there are other things which realistically cannot and indeed shouldn't be changed. I think we have to continue to slow the growth of spending but we can't look for miracle cures. Are you saying that the Reagan campaign promises in 1980 were in fact lend to economics. No not at all what I just said was that we have had very substantial cuts in taxes already. We have had very substantial reductions in spending on domestic programs already. To what extent were you personally sympathetic to those original promises. I was very sympathetic to them and I feel that we've really seen a dramatic step in the direction that this program was intended to move in terms of bringing down high tax rates bringing down marginal tax rates providing substantial incentives for savings. They just weren't there a couple of years ago when if ever are we going to balance that budget. I think it's going to be the end of this decade before we see that budget in balance and how much of that balance and you expect to come through revenue increases. Well

our budget the president's budget forecast over the next five years will be roughly half and half half of the closing of the gap would be done by slowing the rate of growth of spending in half of it would be done by additional revenues. Would you. But none of that let me be very clear because there's a lot of confusion about this none of the additional revenue would come about until 1985 and then only as part of a package that also includes spending cuts. Well even if Congress could be induced to pass that deferred tax increase on a contingency basis in 1985 which is a very big if it seems to me. Surely the markets would see that as a piece of paper that could be changed in 1995 would it not. I don't think so. My sense from talking to people in the financial community is that while the a promise that that might happen in 85 without legislation isn't worth very much if Congress followed the lead that we've laid down and actually enacted that we would see a very substantial market

response. You made history this year as a chief economic advisor in that your annual forecast appears to have occurred on the pessimistic side. Could it be that you are also underestimating the strength that economic recovery could come and bring in terms of new government revenue. Sure it's always possible that we're underestimating it and yet we've done an analysis of what would happen if the growth rate were 1 percent higher at 2 percent higher. And it's very unlikely that the growth alone could ever close this revenue gap. If Congress takes your argument might not they not do the one thing you don't want to do and repeal the indexing of income taxes. I don't think there's any chance that they'll do it. And frankly it wouldn't much matter because the president would veto it and he knows he has the support to sustain that veto so we will see indexing come into effect as it should. You know 85. I mean let me turn you over now to my own Council of Economic Advisers starting with Carter Randall. Marty. The dollar is strong relative to other currencies all this frighteningly strong

right very strong. This makes for foreign competition for domestic business and labor. It also inhibits our ability to export. What should we be doing about that. I would answer it one single thing we should be bringing down those budget deficits the large budget deficits are keeping real interest rates high. That's what's attracting funds to this country. That's what's keeping the dollar so strong. OK. In my travels around the country it seems to me that most investors and other citizens are concerned about two things right now. The banking system and the structure of the whole international debt problem and a quick deregulation as it applies to the financial industry banks and also to AT&T. Could you give a couple of quick weeks rejoinders a lot of things in that question Bob. I would say the banks are in good shape. I would say that the deregulation process is helping it's helping the financial industry and it's helping customers. I think the thing that's troubled a lot of people has been the international debt the debt from the Latin

American countries. Last August it was a shock when Mexico indicated that it wasn't going to be able to repay its debts on schedule. But over the almost year since then we've moved a long way toward resolving these problems and towards getting them on a more hopeful more constructive path. The news that we just heard from Brazil yesterday that they are going to take the tough steps that the International Monetary Fund has called for I think is very encouraging because it suggests that that's going to be on its way toward resolving those difficult problems. In my travels around the country I hear something else I hear that the recovery is proceeding nicely but largely confined to affluent people and businesses. People's taxes have been cut. There's a good business climate. I'm wondering if this isn't going to seep down to the other segment of society which isn't heard from much. When will unemployment come down. When will spending cut

stop for the people who really need it and are not articulate. Don't they have to be included in the harvest of this recovery. Sure they do and indeed they have been included already. If you look at what's happened to the unemployment rate is down nearly a full percentage point just since December it's down from ten point seven percent to nine point eight percent there 1.1 million more people on pay rolls today than there were in December. So that the recovery is moving forward. And also and I think this is one of the most important thing that's happened in the last 12 months. We're seeing wages now rising faster than prices. The typical person's take home pay is now buying more and for three years in a row that wasn't happening for three years in a row. Inflation was taking away more than people were bringing home in increased pace. I think we are really moving ahead as far as the spending programs go. Yes we're going to control spending and we're going to keep slowing the growth of spending but we're not going to take benefits away from the most needy

we're going to target it. We're going to take it away from perhaps some of the most vocal. We're going to target it on those with the lowest incomes and the greatest need. MARTIN What is your current forecast for the rest of 83 and 84 terms of economic growth inflation unemployment interest rates for the rest of this year we're expecting about six and a half percent and for next year about 4 and a half percent which is a very strong rate over the second of growth a real growth from the fourth quarter of this year to the fourth quarter of next year which is a strong rate for the second year of a recovery. We think that inflation will be about 4 and a half percent this year. Consumer prices would grow the GNP deflator they'll get consumer prices a little lower and about that same level again next year. Interest rates are the tough one. Interest rates are tough because you really can't make a forecast without saying what's going to happen to the budget deficits and all of our forecast is contingent on Congress and acting something like the president's budget this

summer and that will give us the lower interest rates that we're forecasting we're forecasting Treasury bill rates coming down from the almost nine and a quarter percent now to about 8 percent by the end of next year. But that's not going to happen unless we see the turnaround in the budget deficit. Unemployment rates will come down from the current nine point eight. If that recovery happens along the pace we're forecasting to a little more than 8 1/2 percent by the end of next year. We're nearly out of time in a sentence. What would you say to Paul Volcker now is advice for the future. Keep up the good work. Are you content with the good work of the last six months in terms of money supply growth. I think the first three months of the year really reflected the deregulation of the last three months. I think there are more problems and we have to work to bring those particularly M1 growth rates down. Thanks very much Martin Feldstein. Thanks to the panel let's hope you'll be back with us again next week when I'll be talking with one of the top money managers on the west coast who's Claude Rosenberg a San Francisco based investment expert with a long time reputation for talking sense about

stocks. We'll be asking him what looks sensible to him right now. Meanwhile this has been Wall Street Week. I'm Louis Rukeyser that I. Wall Street Week With Louis Rukeyser has been brought to you by this and other public television stations and by grants from the Hotels Corporation the Sperry corporation Prudential Bache security. For a printed transcript of this program. Sent $2 to transcripts Wall Street. We go into. 2 1 1 1 7. Bets. $2 to transcript. Wall Street we always Mills Maryland 2 1 1 1 7.

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