Wall Street Week with Louis Rukeyser; 0443; The U.S. Economy

The. Center for Public Broadcasting. Production funding provided by public television stations the Ford Foundation and the Corporation for Public Broadcasting. The Wall Street Week

reduced Friday May 23. Your host for Wall Street Week. Here's Louis Rukeyser. Our panelists are Frank happy Hello Howard Piccola and Carter Randall. Tonight's special guest is the Honorable William E. Simon secretary U.S. Department of the Treasury. Good evening I'm Louis Rukeyser This is Wall Street Week. Welcome back. Well tonight's going to be round two of our long range battle of the finance ministers. Last week we got a chance to see ourselves as others see this. In an interview with Britain's top money man chancellor of the Exchequer Denis Healey. In addition to assuring us manfully that Britain's current Labor government was not a socialist as all that Mr Healey indicated they would like to see a good deal more help from the U.S. and its international economic cooperation notably on energy. Tonight we're back home to hear the American government's

side of the story from Secretary of the Treasury William Simon. Mr. Simon will be meeting with Mr. Healey and other Western finance ministers in Europe next week. So if they're smart they will all be watching Wall Street Week tonight to hear immediately what he's going to be telling them next week. The seventh day of the Treasury comes to us after a week like so many this spring in which the menu of economic news has been a mixture of stale oatmeal today and the promise of strawberries and cream tomorrow about today that can be little argument cooperations reported their worst profit decline in 29 years. Revised Commerce Department figures for the first quarter so that both the economy's downturn and the pressures of inflation were worse than previously reported and international speculators began dumping in dollars and acquiring gold with a fervor not seen for quite some time. The stock market as is its want sniffed and got nervous. But just when it seemed that it

had finally found the excuse to begin its long awaited downward correction at its mightiest rally in years the market was confounded by more portents of better news ahead. Interest rates definitely seem to be heading down again New York's First National City Bank. The industry leader in this department moved its prime interest rate the one that charges the big corporations down to 7 percent the lowest in more than two years. And all four major U.S. auto makers announced that they would resume operations at all 58 of their North American plants next week for the first time since last November. It was enough to fuel endless midnight arguments and a full ration of confusion which was exactly the state of mind in which the stock market ended the week for as the Dow Jones Industrial Average indicates the market went into a two day downturn and then steadied ending the week with its biggest one day rise in three weeks when it was all over the Dow Industrials had a net loss for the week of not quite six points to close at eight

hundred thirty one point nine zero while the broader composite indexes of the New York and American stock exchanges and the over-the-counter market all showed small net gains when the week seesawed trading was at an end. This sensation of going nowhere fast has clearly overcome the elders who compile our Wall Street Week technical market index and they too are fighting desperately for the center ground. But since the market itself has lately been more neutralised than what ocean for mirin is heyday perhaps we can call this one of the better periods. So the elves but rising morale of elf hollow doesn't help put bread on the table at your house but you and I want to know is which way the market is likely to break next. So let's put that one to our panelists starting with the fellow who has been something of a skeptic through this 1975 rally. Pete Cullen Lou I think I've been pretty wrong Myra to your predictions in thinking the market was going to go lower because we've been in a rising market since last October.

I think at this juncture I'm looking for a higher market primarily because of the recovery in the economy. But the key question to me is inflation rates in 1976. I see monetary and fiscal policy probably being on the bias towards more inflation than the critical element is whether there will be enough slack in the economy between real GNP and potential GNP. Saying that you think you've been wrong this year you immediately take high Otto's in the credibility department. It's not an inhibition we often hear here or anywhere else in the world. You also have been relatively bullish on gold and you changed on that or do you still feel. No I have not changed all that and I don't think I'm wrong at my earlier prediction it was two hundred fifty dollars an ounce sometime in 1975 and is now 175 an ounce. It's been strong in the last week or so. The dollar's been weak and I think that could be a true prediction it is conceivable that we could have a

roaring bull market and a higher price for gold. Yes you could it depends. Gold is so much influenced the price of gold by international worries and relations between countries that it's possible to have a good strong market and an increasing price to go. On top you know you would raid some recently by saying that I think gold has had its teeth has just suggested that he if it is not you speak to that point a little bit. Yeah well when I said that gold has had it I think I was being a bit extreme but I what I meant was in simple English that gold is not a good investment this year. There are better investments in the stock market. There are a number of alternative investments that are better than gold the reason being that I just can't see a bull market an improvement in our economy a diminution of inflation and a run on gold. I just can't say it I think. Why do you think gold got stronger this week. Well I think it's a temporary situation which is really related more than anything else to the weakening of the dollar and the dollar does get weak from time to time but our economy is fundamentally

much stronger today than it was say six or eight months ago. We have put our economy through the wringer. Inflation is coming down. It's coming down as rapidly as it is in most of the Western countries and that's a plus. That's one of the things Great Britain hasn't done yet. Could of been let off easy because you haven't been made to assert yourself this year on the question of gold we've had a tentative yes because when Pete says $250 an ounce that's more modest and some people put it in and they continue to know what you have you. Don't really follow gold very much. I'm not really very interested in it to be very frank. I don't think I want to write a bestselling book on it. I don't think it's a viable investment either long or short term and I rather stick with what I know. Let me comment your first question to Pete was. What's the market going to do. I'll say momentum there is momentum on the upside. Now that doesn't mean we are going to have a correction we had a little bit this week and so on. But by the end of the year momentum will carry us much further than we are now.

What's much for you looking for a thousand. No I'll stick with the earlier prediction of 9 20 something over 900. It may get to a thousand because enthusiasm is building and as we see interest rates continue to fall and one's long term interest rates start to fall in sympathy with short term interest rates then we'll see momentum on the upside particularly for the yield stocks the utilities and the finance the financial services stocks and so on. Then eventually I'm going to time to turn from the glittering panorama to the niggly little brushstrokes and answer some specific questions about investing with my viewers. People who know you closely follow the real estate industry. Neil Collins of Madison Wisconsin has had a bad experience with the building materials stock. And he wonders what the prospects now are for an upturn in this group. What would you advise. I'm pretty optimistic about the whole building industry. The building industry has been in decline for the last three years we peaked at 2.4 million starts in

1972 were about a million starts now. The three factors that lead me to be encouraged about building are one there's a tremendous inflow of money to the Savings and Loans institutions too. Interest rates are coming down and including mortgage rates. And three that the government provide a special tax credit for the inventory of houses. I think the first group that will be positively affected will be the builders. Second the building supply companies then the distributors and lastly the real estate developers. I was positive on the group and certainly be in the quality companies they wire Howser type higher quality companies. Thanks Mrs. Fred Lowell of Albany California asses. How do you terminate a joint tenancy when you own a stock and she adds. I'm especially referring to death of one of the joint owners. What's the answer to that right. The answer depends upon what kind of joint tenancy we're talking about. If it's just a joint tenancy in common without the right of survivorship then it's presume that we're dealing with is each one of the individuals has a half interest in the

shares and let's say we're dealing with 100 shares of GM. A husband and wife both joint tenants the husband dies the wife gets half. If it's just a joint tenancy without the right of survivorship and she will immediately be able to get her half of the shares simply by sending setting off to the transfer agent and the other half goes in the estate. If a joint tenancy without the writer survivorship then the shares automatically revert a hundred percent to the survivor. So you've got to watch joint tenancy must be specific depending upon what you want to do. He caught a Randall C. Warren a Federica Delaware was curious about what he calls the relatively poor performance of warrants in the present market all the wines I follow right sell for about half of what they have sold for before and other bull markets when compared to the stock price. Maybe he suggests the want money is going into the options market. Do you agree and does this make wants a less attractive investment in the past.

I agree and disagree there are some morons that have done much better than the underlying stocks and Max lows warrants they've gone up much more than the stock. He's right though most wines have not gone up as much as the stock because the strike price is so far away from the current market and these warrants expire they become worthless. Option Trading has certainly been a benefactor in taking investors away from ours but I really think it's the relative price of the stock to the strike price of the war. OK. The only warrant that would help rescue your investments is a search warrant if you have any other questions about the world of stocks and bonds just send your queries along to us here at Wall Street Week. Always Mills Maryland 2 1 1 1 7. That's Wall Street Week Owings Mills Maryland 2 1 1 1 7 and now gentlemen without further ado let's go over and meet tonight's special guest the secretary of the Treasury William E. Simon. Well we're just delighted you can come join us. Thank you Lou

I'm delighted to be here. With writer Frank. When Bill Simon was an undergraduate at lathi at college he was a beer drinking poker player. Now he is a lean Apple Munchie and Secretary of the Treasury and his other habits have deteriorated too. Mr. Simon spent most of his career in Wall Street winding up as the millionaire chief of the Solomon Brothers government bond department before joining the government itself two and a half years ago as deputy secretary of the Treasury. A year later he became the nation's first energy czar and he is now despite a rash of skeptical predictions survive for more than a year as the nation's chief financial officer. Bill how much longer do you expect to hold this job. And I have. Said When I asked that blue that I would stay as long as the president would like me to stay and serve at his pleasure and he has asked me to remain in them assured him that I would as it should remain for any specific period of time.

No I don't think the president asks really anyone for a specific period of time because a president should always have his options open and be able to replace a cabinet member or a presidential appointee at any time that he pleases. Are you comfortable in the job and comfortable that after almost. Three years in the drudgery Department. Yes. OK let's turn then to some of your more pressing problems on this program last week. Your counterpart in Britain chancellor of the Exchequer Dennis Healey suggested to us that there had been a troubling lack of unity in the West on energy matters. You'll be seen Mr. Healey and others at European meetings next week. What will you be able to tell them what do you hope to accomplish. Well I think on the contrary we always tend to look especially during days when we have such severe problems as we do in the world in so many quarters of the negative side of the of the picture. And I think it's important to look sometimes at the positive side attempting to be a good news machine but let's look at what's been accomplished since the embargo. In February of 1974 Secretary

Kissinger and Secretary Shultz and myself were the clothes for a ministerial conference of consuming nations. Here in Washington. Groups that went to work on the specific problems at the close of that several days session. Achieved agreement in a relatively short period of time when one considers the complexities of the grid. The agreements most especially the import sharing agreement in case of another embargo that was a significant agreement where countries abroad been working on a formula for years prior to the embargo and were unable to do it and I think that that shows that people are willing to get together and make make agreements where it will help each other. And of course help themselves. The public is confused perhaps understandably but by what seems to many to be conflicting forecasts coming out of the administration about the future course of the world oil price. Could you clear that up point now. Wow.

I guess there could be and probably is some confusion. It's a matter of the way many Administration spokesman or are interpreted and whether indeed it's interpreted as short run or long run at present. The price consideration as far as oil is concerned is not an economic consideration it's a political one. The price of oil today bears no relationship to economic reality. There is no relationship to the production cost of oil that the cost of alternative sources of energy. It was a political decision on the part of a cartel to quadruple the price of oil arbitrarily because they controlled 67 percent of the world's proven reserves and now with the Humpty Dumpty logic that is being is that due to world inflation and that their imports are costing more than the oil they insist on a further price increase which is absolutely ludicrous on a trade weighted basis which is the normal comparison. The price of oil on any years comparison back to 1955 which is the most favorable year of Robeck by the way is as the far as the price of

oil is concerned on a trade weighted basis. Oil is 500 percent higher than their own imports are so it's consummate nonsense. Your message is very clear that we think it's nonsense ludicrous Humpty-Dumpty logic what do they think what are they going to able to do. Well the point is as I say I'm giving you the economic facts of the picture. The excuses are being used about not only the import trade but also the wholesale price or the Consumer Price Index was the reason given. Oil costs 35 percent more. Well I'm afraid that they're a little confused in their figures and when they're relating these figures they ought to be aware of what figures they're using they were using the IMF index points which indeed rose from 150 to 186 last year but those index points represent about twenty two and a half percent inflation. One third of that inflation is measured by the wholesale price index was caused by the price of oil

itself. So it is through their actions that cause the wholesale price index to go up by at least a third and I happen to think it's more than that as an additional skews for for an incremental increase in the price right now which as I say is is dead wrong. But let's not misunderstand what I'm saying. It's a political decision. If they wish to raise the price and do further damage to the world the economies of the world especially the poor the lesser developed countries are most seriously affected. They can get away with this blackmail for a little while longer. When do you think we are going to be able to bring down the well of all prices and we will. Well everything that I've just finished saying illustrates how critical it is for all of the countries in the world in general and the United States in particular to adopt a sound positive energy policy an energy policy that deals on two fronts one on the conservations with 6 percent of the world's population using 35 percent of the world's energy. We in the

United States are wastrels and there are many ways that we can save. Price so far has accomplished some conservation but not as much as we certainly could on the production side. That takes longer obviously. We have been just and by our good Lord with a super abundance of natural resources the government has placed so many impediments in the way of bringing on these resources back from the regulation of natural gas at the wellhead with the predictable results. The United States government in this instance legislated the national shortage. We have an infinite supply of coal that when we can mine it we can't burn it. It takes us 11 years to build a nuclear plant versus four and a half in Europe and Japan right. The regulatory process and then into the courts we've exported our refinery capacity I can just go through the entire litany. And if the government will act. And do the decisive things and it's no mystery then we can have a credible policy and we will have the ability for self-sufficiency. You know in the past year. 30 to

35 billion barrels of oil were found in non-OPEC non-US sources in several years and exploration is going on at record rates all over the world. So we do our job conserving. We do our job allowing the marketplace to work and that's the critical component of this and bringing on the additional supplies worldwide. And hope that is not going to have the 67 percent any longer their percentage is going to be diminished. Their internal demands for funds are are are growing at astronomical rates. There is just so far they can cut production they cut production by a third already. They can get away with a little more to maintain the price but it's only a matter of time. And that doesn't mean this year and that's where the confusion rests. Well given the given the political realities this year both in alpaca and in the United States what is now your forecast for the American economy in terms of interest rates unemployment inflation. Well the inflation rate has come down farther and faster than really anyone had

predicted. We look for an inflation rate at the end of this year and at 6 to 7 percent in the economy. And many now believe that the economy has brought them down already we still stick by our original forecast the economy will bottom out in the middle months of this year and we'll have positive real growth in the fourth quarter. The final quarter of 1975 the only difference of opinion rests in what the positive rate of real growth will be the difference range from somewhere 5 percent to 9 percent. I'm in the middle range somewhere in the 6 to 7 percent which would be a good fourth quarter carried right in through into 1976. But it's going to be very important at this point when we when we are experienced of experiencing the fourth quarter of the first quarter of next year as we are able to gauge with some precision the vigor of the upturn or lack of it what the monetary expansion reply will be because that's going to tell you where where the direction of interest rates will be because inflationary

expectations are still very deeply ingrained in the American people and that is one of the fears right now as we look at our budget deficit and the inflationary expectations they may wonder if we're not going too far. This is what I constantly warn about. I'd like to pursue all these points for the book my own cabinet with me tonight. I want to start with the secretary of mutual funds. Mr. Cahoon let me ask you a question about the financial situation New York City. They predict the city they're going to have a deficit of 600 million dollars. They came to you for some financial assistance. The banks seem reluctant to extend them certain types of credit. Do you think New York City is really on the verge of. I can't say bankruptcy but the fault in their financing and if they are what can they do about it since they don't have the right of the federal government to print money. I wish we didn't have the right to print money but that's another subject. Basically. There was nothing that the United States had the power to do. The government I don't have the ability legislatively to guarantee or to purchase state and local

debt in this country. I don't happen to think it's appropriate either. But even if I did I would not have the ability to do so. It would require legislation. But to a great many congressmen about this and I think really very few. An infinite minority that would have considered it favorably in my opinion it would have not succeeded at all. The second option we had was to advance Medicaid or. Revenue sharing payments which would have established a dangerous precedent and more importantly it was a minuscule amount of money upwards of 200 million dollars the third option is the Federal Reserve the traditional lender of last resort who has the ability to lend after the entity whether it be a city or a corporation has exhausted all other means. And this is an important point it also requires five of the seven governors to vote affirmatively. And needless to say would set a rather dangerous precedent but the point of this is that New York City has not exhausted. Everything. It

has been living living fiscally irresponsibly for many many years. Expenditure is running at a 15 percent annual rate. Revenues running at a 7 percent at an annual rate and those results are also predictable. They've been capitalizing operating expenses which increase interest cost by some 20 percent of their billion 700 million capital budget this year over 700 million is operating expenses a few years ago they floated a long term bond issue to pay the back pay of policemen and firemen. These are the type things that finally the investors say. Until you show me that you are going to put forth a credible balanced budget then New York City will regain the integrity to enter into our capital markets and that's what they have to do. The burning question I guess for this year is your mandate to really finance the deficit. And there's been a very serious question as to whether you can do this you know without disturbing the capital markets. Do you think you can do this. Frank I have not been concerned contrary to what some of quoted me in the newspaper and I've tried

to explain this on television because there is no problem with interpretation there. I don't see a problem this year deficit in our financing needs of some 75 billion dollars this year and they're going to be strains on occasion but they should be manageable. The danger comes in one thousand seventy six and again in 1977 the danger is many fold not only the crowding out that has gotten so much publicity which is a fact obviously crowding out occurs in the market all the time. First of all interest rates aren't going to be allowed to decline as much as they normally would no recession just look at what's happening today with our enormous demands again part expectation part real. Those who say that our warnings. And remember I do have responsibility as the chief financial officer of the United States do to prevent irresponsible behavior in this city. As unpopular as that may be again in Washington. Bill let me interrupt you. We were running short of time. Capital for American industry. How can we encourage the raising of equity capital as

opposed to debt. The best thing that we can do for our capital markets which I call the centerpiece of our. Free enterprise economy is to have sound economic policies a balanced fiscal and monetary policy. Where are encroaching upon the capital market in the preemptions of the savings that are needed for productive uses in this country we're transferring money from productive uses the private sector to nonproductive the federal government. The tax system is biased toward consumption and it's opposed to profitability. We've been in a profit depression. We remain in one. We have to do something about our tax system about the integration of corporate and personal income taxes and every other major industrial nation has done this and we have to do the same thing. Our productivity is the lowest in the world due to the fact that our investment. Capital investment as a share of GNP is the lowest of any industrial nation in the world. We have to turn this around and then we and then we have to stop in the hope that the effort you've just described will be successful for all our sakes. I went back to thank our distinguished secretary

of the Treasury William E. Simon who was certainly among the most outspoken public officials in anyone's government and our panelists. And I hope you'll be with us again next week when we build on the economic framework of the last two programs with a return to the nuts and bolts of practical investing my guest will be one of the shrewdest research executives in the business Mary Wren who eight years ago belatedly became the first woman vice president of Merrill Lynch. Meanwhile this has been Wall Street Week. I'm Louis Rukeyser. Good night. If you would like to obtain a written transcript of the night's program send one dollar or three always will 0 to 1. 1 1 7.

That's one daughter who will streak. Owings Mills Maryland 2 1 1 1 7 0 0. 0 residents of Maryland. Please include four cents sales tax. Wall Street Week is produced in the studios of the Maryland Center for Public Broadcasting.