Wall Street Week with Louis Rukeyser; 0927; Happy New Year. Part 1

We all do go. The. The. The. This program is made possible by a grant from the Martin Marietta corporation and by this and other public television stations. The Wall Street Week.

Produce Friday January for your host for Wall Street Week is Louis Rukeyser. Our panelists are Howard Stern and Martin's why tonight's special guest is Milton Friedman senior research fellow Hoover Institution. Good evening I'm Louis Rukeyser This is Wall Street Week. Welcome back. Well I've heard of people who didn't have the holiday spirit. But this week was ridiculous. Scarcely had we finished cheerfully Wishing everybody a Happy New Year when the roof caved in. The Russians swarmed all over Afghanistan. The ayatollah wouldn't even talk to a harmless old Kurt Waldheim. The stock market opened 1980 with a big raspberry go turned into platinum. And platinum turned into diamonds. I can hardly wait for next week. The most spectacular financial development of the week had to be the incredible volatility of the

gold market right when even some of the die hard gold bugs have begun to give up on the metal either telling us that the big movers were behind us or actually taking their clients out of gold. It really took off an ounce of gold was worth about two hundred dollars five years ago. And finally got back to that level in 1978. But the last six months have been a page from the wildest dreams of what we might call the glitterati $300 an August $4 in October $500 just last week. And then believe it or not $600 this week the last London fixing yesterday was six hundred thirty four dollars an ounce in Hong Kong it soared to 660. And while today's London price came down $46 a more than an ounce of gold was worth a decade ago. That was still up a whopping 76 dollars for the week. Why it was as if the miller's daughter from Upul still skin had suddenly come to life spinning gold into capital gains.

What was behind the rocketing of the gold price. Well at bottom it was hard to avoid the conclusion that we were seen a worldwide vote of no confidence in what seem to many the new American foreign policy of walk softly and carry a peanut. Gold is traditionally the beneficiary of fear and chaos and whatever the deficiencies of our policy is in other respects we appeared at least temporarily adept at supplying those. The international markets of course reacted before President Carter scheduled his foreign policy address tonight during which he presumably planned to announce something more substantial than a renewed threat to unleash Ramsey Clark. Meanwhile though the merchants of hysteria were a mistake a bully having their week. We however will be hearing tonight from one of the world's Comus voices if never one of its least controversial. Nobel Prize winner Milton Friedman will be giving us his unique insights into the outlook for America at this time of golden doubt. But first let's check out the resident

hysterics on Wall Street for the week just passed. And as the Dow Jones Industrial Average indicates the stock market got off to a most unfair start plunging 14 points on the first trading day of the year. While gold and platinum vaulted and then fall in again before snapping back a little on Friday possibly in the belief that the world might survive for at least a few more days for the four day week then the Dow's loss was trimmed to 10 points and it closed at eight hundred twenty eight point eight for the same pattern of heavy trading a Friday rally but the net weekly loss pervaded the broader composite indexes of the New York and American stock exchanges and the over-the-counter market. And before we leave 1979 entirely let's record these year end readings for our major averages the Dow at eight hundred thirty eight point seven for the New York Stock Exchange composite at sixty one point ninety five. The Amex setting an all time record for the fifty third time in 17 on at two hundred forty seven point zero seven and the Nasdaq over-the-counter index at one

hundred fifty one point one for as for our elves whose technical market index this week recorded its fourth straight minus one reading. They left the holidays as they entered them mildly gloomy. It wasn't a bad description for much of the rest of the week's economic news either. The government's so-called leading economic indicators turned in their worst two months before months since just before our last recession U.S. auto production last month was at its lowest levels in 74 and even the nation's retailers many of whom were surprised when Santa did deliver a pretty good Christmas was said to be convince that the party is now over for them. Passing infatuation with gold has a love affair for airing this week. Unfortunately it passed more than double my money in gold in my market letter and told people to sell a few months ago and have watched it go up. Our money management company fortunately held onto the gold stock so we have huge profits there but I'm kind of nervous about it what would you tell someone I would look at that market and I would not buy gold now I think it's in a speculative

bubble and I'm sure that bubble is going to break but the problem with the bubble is it could go a few hundred dollars higher before it breaks but I think going to break much worse than people think. Eventually money a year ago you were our biggest There are 1979. You had the lowest prediction for the high for the year the lowest low the lowest close. Right. The lowest time I was the closest of or less that was 8. You predicted in fact it was a little bit below that but close to it. The rather high with the high was 17 points higher than that. You had 80 the high was a 97 you're low prediction that was six hundred twenty five was way off that was off nearly 200 points. We didn't get anywhere near that bad we had a dull year the market was in the 800 the whole time and the clothes you said 775 in fact it was a 38 74 as you have your stocks which you pick despite your general gloom. We're up twenty one point four percent so that was pretty respectable for a bear. What do you think for this year.

Well I hate predicting for a whole year because I could turn right bullish or outright bearish any time but I'll give you my highest 920 my lowest 760 and my closes 860. So you think this one's going to be boring too. At a club I happen to be cautiously bullish right now more bullish than I've been in quite a long time. But I'm not 100 percent convinced we're going into a bull market so I'm not trying to hit a home run with this particular people do with their money. Well right now I've advised traders to go as high as 70 percent stocks and conservative investors up to 40 percent. The rest in cash equivalents. You have a have a list first. Yeah I've got a few stocks like three smaller companies in the New York Exchange that heavy insider buying elk or hike. Which is. And universe Corporation stock with heavy insider buying is the whisky company IRA Walker which I like a lot. Another stock no insider buying but I like it. Technicolor. It's been very strong lately when you had a pretty good year. You were very close on the close you set of clothes when you said the

market would get up to 950 you didn't get that high you said it was down to seven thirty five even though that low but your stock picks were terrific. They were up thirty four point one percent on average which was the best of any of our panelists except for Bob Novak. So we want try again. OK I always feel better about picking stocks in the market Lou and they'll be heavily in the stocks I'd suggest Tom Brown Union Oil. Galaxy oil. Pennzoil magma power Kmart and Raytheon. I'm really investing in three Ps petroleum productivity and power mean defense. Well we hope the record won't be putrid How about the dire predictions down predictions I see a lower 760 high of 9 70 and a close of 960. So kind of a so-so year but ending on a higher note we're going to get the president we want that maybe I don't know let that go. What's your outlook for the year. I was afraid you were going to come to me. And this is what it was if you

get where you melody is an overpriced version gets tossed aside. OK. I think the high will be over a thousand and they will be about 10 to one point you said 10 20 last year. Yes you say we get out of 790 which was very good that was the closest of all the lows Incidentally you were only 7 points from the real low and you said we would close at 10 20 which was historically wrong. I would just point out that I think the reason we did not get as high as I thought we would was I think the recession that started last spring I thought would be permitted to continue right through the year and interest rates would come down. The expansionary monetary policy just did the reverse I think we're going to get it this year though. And so the high will be around 10 20. We have a box outside. But if. You want me to continue to have you in every way to be just about where we are about 8:15. And it will close at around 8:50. So you see in the year that goes up from here more or less. That's exciting and I know you're not a stock picker job if you have any thoughts gentlemen but I do I

think that there's one stock that's in the copper business that's going to look like it was pure gold over the next three to five years they have a new management team in there and frankly I happen to know the people pretty well I think they've turned the company around to its chemical cover I would recommend it very highly it's about $32 and it is likely to hit three digits. You're putting all your eggs into one copper plated basket. Well I would like to mention the banks but it wouldn't do for me to do that would you. You can imagine whatever you want. Well I think the major New York City banks Bank of America Continental Bank and shit. I think will do very well in the second half of next year as the recession is coming to a close. Very strong of ours. All right we will wait and see. In any event let's see if we can get our viewers off to a better year early start than the rest of the planet had. Money is why one of the most common complaints we get from small investors concerns what they regard as suspiciously poor executions of their trades. For example Jesse Wilhite of Bronxville New York says she has been trading with a discount brokerage house for several years but finds that invariably as she puts it she is buying at the highest price of the day or

selling at the lowest. She wonders whether the House might be reporting a phony price to her and pocketing the difference. What assurances does a trader have that his or her broker is reporting the transactions honestly and in your judgment how big a problem are poor executions for small accounts. And what if anything can be done about life. Most New York Stock Exchange member firms give surprisingly good executions but often the investor isn't very objective. Emotions can get you in or out at the wrong price of the day and your own traits can affect the price in the quarter which doesn't make it look good to you. The exchange has very stringent rules also against this type of wrongdoing. Hardly anyone would ever resort to it. If she suspects it I would call it the stock exchange and have them investigated. Chances are the broker is clean. Her two alternatives one would be to put in a limit order which point she'd be guaranteed that price if she could get the execution but at least she would know the price. Secondly if she's not happy with the brokers which is a lot of good brokers out there that would like her business. OK I'm not a broker.

I'm relieved to hear that the other half is good only worse all of Palm Bay Florida is focusing not on gold but on other metals that are not precious. At least not yet. He'd like to know how you feel about the prospects for further gains in COMPRA lead zinc and other non-ferrous mining stocks. I think that lead and zinc is kind of not only in color but their growth prospects. I think the copper is rather exciting. Copper could be subjected to production disruptions around the world but the price up it also has been monetized in the past. I might add that all three of these metals have had substantial price rises this year copper is up from about 70 cents at the beginning of the year to a dollar 20 today. My advice would be that someone buy a diversified natural resource non-ferrous metal producer like American metal climax known as Amex. Newmont Mining are saying show lead. I think these three companies that are in a variety of metals will do far better than gold suggestion of picking one copper company I think that's just too risky and not very gold plated.

I like your breasts a little economic history. Please can you. After a year of 13 percent inflation in the U.S. it's not surprising that many Americans are interested in the impact of one away inflation of the past on investments in general and on stocks in particular among those who'd like to recap on precisely what happened in the Germany of the 1920s or Paul Carlson of Kent Washington Frank Johnstone of River Falls Wisconsin and call Ruby of West Vancouver British Columbia. Well Fred many members of Cincinnati wonders what has happened to stocks more recently in hyper inflated countries like Argentina. Let me start in reverse and first say that about the United States. I don't think that because we've had a high rate of inflation this year people should start talking about hyperinflation. I believe we have a long way to go before we come to it and I think we'll go in the other direction with regard to hyperinflation you have to differentiate between two types I think one type is where the inflation rate is running at 5 to 10 percent a month and the other words perhaps several thousand percent per month. In the 5 to 10 percent month countries and one of them would be Israel today where it's only about 100 percent.

There's no reason why stocks should be affected negatively by the high rate of inflation. What did happen in Germany though. Well what happened in Germany and the other countries is there was a complete washout. And the reason was that the currency wasn't worth anything and people were worried about what the governments would do to try to bring the inflation rate down. It's that type of confiscation risk that people are taking that they're most worried about they try to convert it into highly liquid funds like cash and take their money and run. Now if you find that everything seems to be inflating what your own standard of living and what the problem is that they printed too much money but they didn't save enough for you invest 15 cents on the stamp quickly before the price goes up and send your money questions along to us here at Wall Street Week Owings Mills Maryland. 2 1 1 1 7. That's Wall Street Week always Mills Maryland 2 1 1 1 7 and now for a look at today's economy and tomorrow's in the company of one of the most distinguished Let's go now me tonight special guest Dr. Milton Friedman. Welcome welcome back it's always a very special pleasure to be here.

Not freedom as a living advertisement for his beliefs proven by dint of hard work and bright ideas that a boy from Brooklyn can grow up to win the Nobel Prize and influence the course of public policy and economic ideas in four decades of teaching and research Professor Friedman has perhaps done more than anyone else to advance two ideas one that the government is not as benign as it says it is. And to that the supply of money it creates will determine our economic future. Dr. Freeman is currently senior research fellow at the Hoover Institution at Stanford and professor of economics at the University of Chicago and starting next week he'll be spreading his gospel on these public TV stations with a 10 week series called free to choose. Many people believe that the Federal Reserve Board in recent months has finally adopted your way of thinking about how to control inflation. Do you agree. What is the outlook for inflation now. Those are two separate questions. The Federal Reserve Board its pronouncements are fine but I've heard these pronouncements before and I'm waiting to see whether they are

carried through. The Fed has said that it's going to do the right thing. I think there is a good chance that it will. And I certainly hope that they will. On the second question you have to distinguish between the short term outlook and the long term outlook so far as the next year is concerned I think inflation will be down. It's not going to be down to zero it's not going to be down to 5 percent but it will be down from its present 13 or 14 percent I think to something like 8 9 10 percent. From a longer term point of view. Everything depends on whether the Federal Reserve does stick to its long term policy if it sticks to the policy it announced on October 6. Then inflation will continue to go down. In 1981 82. If on the other hand it behaves as it has in past recession's then we'll be off to the races again in 1981 and inflation will be up in the 15 to 20 percent range by 1983. Well you know which of those two will happen. That waits to see what they do.

We've now had about three months since they made the announcement Are you encouraged by the early statistics. Yes so far they have been sticking pretty much into their announcement there was only one thing that has been somewhat discouraging. If they really mean what they said on October 6 A have no business messing around in the foreign exchange market and trying to support the dollar they cannot simultaneously control the quantity of money and also control. The price of the dollar in terms of foreign currencies and therefore I was very much disappointed to read that they have been. Speculating in foreign exchanges. Building with the growth of money market mutual funds and other new forms of money. There is some suspicion about which of the old indicators we should be following. What is your answer. I don't believe that that's anything like so important a question as it's made out to be. It doesn't matter which one you follow provided you allow for its past behavior. Personally I have found the least unreliable indicator to be what's called M2

currency plus all commercial bank deposits other than large sea days. But the plain fact is that all of the monetary aggregates tend to move more or less together and all of the talk about and one isn't any good M2 is better and three ought to be used has been mostly an attempt at it to shift the blame to confuse the issue. Because the Federal Reserve hasn't been controlling any of them properly. In your judgment what is the optimum growth rate for M2 in 1980. The optimum growth rate for M2 in 1980 is something like about 7 percent. That ought to be brought down by about 1 percentage point a year until it comes down to about 4 percent and then it ought to be held at 4 percent. That would roughly mean stable prices. Why would you come down gradually so as not to precipitate a major depression. No. Primarily because you've got to give people a chance to work their way out of the contract so you've entered into on the expectation of higher inflation. People have borrowed on mortgages people have

borrowed in business loans and the like and they have done so. In the expectation based on past experience and information was going to keep on going. If you come down gradually you allow people to work their way out of such contracts the same thing is true with labor contracts and with all other long term contracts. As you know you are criticized not only by the big government people but from the other side by the gold bugs because you do not accept the central role that they see for gold in the monetary system. What do you make of gold's behavior in Alaska. Well the same thing everybody else does it's an enormous tribute to Afghanistan to Iran and to the Middle East. The behavior of gold is not currently a result of monetary mismanagement there's been plenty of monetary mismanagement but that might have raised the price of gold to something like two hundred two hundred fifty dollars. The rest of it. It is in my opinion entirely an attempt by people in the Middle East to get part of their assets in a form which is not subject to government control. If you were

if you were a sheik in Saudi Arabia I think you would like to have a little gold out somewhere and in the fear that you might have a commodity like takeover in your country. You know Afghanistan has been the latest of these and I would think any Pakistani who has some assets is contemplating very very carefully whether he can get some of those in gold or silver or diamonds or some other form that doesn't have the name of his nation or any other nation attached to it. And then your 10 week series you're going to be putting your ideas forth in great detail and I'm not going to pretend in 10 minutes that we could do 10 weeks worth. But I'd like to take a good look. I want to take it from the other side you're a critic of government what government is good. Government a government the Thomas Jefferson defined a good government as one which protected individuals from others. And beyond that left him free to pursue their own interests. So I think a good government is one that would provide us with an adequate national defense which the present government

has certainly not been doing one which would provide security for person and property and beyond that would pretty much leave us to run our own affairs. I might say that in addition to the 10 week series My wife and I have written a book by the same name free to choose which expands more and more at length on the ideas that are presented in that series. I may say the series is entertaining the book is much duller. I'm sure that's not true. Let's. We're not here we control the panel supplies Let's start with money what you've often said that it's economically foolish for a country to buy its own currency to support it. What should the government do here to protect the dollar. If anything we should just let it. Go as is the only thing that can protect the dollar is to have a sensible internal monetary policy. If the U.S. were to follow a policy which lead to essentially no inflation the dollar would be strong. If we don't follow that policy there is nothing we can do that can protect it. And then the best thing to do is let the market set its value.

Milton let me talk a minute about the fiscal side of things. If you were the leader in Congress that you are in the Economic Community What three things would you advocate the U.S. Congress do to control inflation. What specific legislative acts could they take to put us on the right track number one. And I would put at the top of the list for Congress would be to adjust the corporate and personal income tax. So as to be adjusted against inflation to index the tax system. Because right now. One of the major reasons we have inflation big is because it's a way in which Congress can impose higher taxes on all of us without having to vote for it. You have a lot of talk right now about tax cuts. That's nonsense. Nobody is really talking about cutting a tax. All anybody is talking about is not having taxes go up as much as they otherwise would. The effect of inflation the effect of higher social security tax the effect of the mis labeled windfall profits tax are all going to be to raise taxes taxes will be higher in

1980 no matter what legislation Congress passes. And the first step. To stop that process in my opinion would be to index a tax system that by itself will not stop inflation but it will take away the incentive for Congress and the administration to produce inflation. Now the second most important thing would be to have Congress support and send to the public. A constitutional amendment designed to limit federal spending. I and other people associated in the national tax limitation committee have drafted such an amendment. It's been it's been introduced into both the Senate and the house. The second most important thing would be to vote that out and the third most important thing would be to turn down the so-called windfall profits tax back down on what they've already done and not put it into effect that windfall. Let me say a word about that because I think it's important. What happens to this country is fundamentally going to be determined more by foreign affairs than it will be by domestic affairs. We can mis manage our economy

badly and recover. But if we slip in the foreign policy area there's going to be no recovery. At the moment. The oil problem is a major problem we are very vulnerable in the Persian Gulf it's a major source of danger to our national security. There is nothing we could do. That would improve from a long run point of view. Our strategic position in the Persian Gulf so much as abolishing the Department of Energy ending or oil and gas price control and forgetting about the windfall profits tax because those measures would be strong measures to make us independent of Persian Gulf to make us less dependent on that very vulnerable supply of oil. So that would be my third measure of it and I'd like to ask you a question about liberals versus conservatives. Why is it true that liberals in this country seem to have the connotation of being compassionate whereas the so-called conservatives are believers in free enterprise. So if they come across as being cold hearted very objective very distant from the problems.

Because there's a fundamental difference between your attitude toward mankind and your attitude toward men. You will notice over and over again the people who are very much concerned about about the welfare of mankind have very little in interest in individual people. They are perfectly willing to waive them to one side. The typical liberal attitude in this country has been to be concerned about mankind. What you're calling conservatives I wouldn't call them conservatives I would call them true liberals are concerned about individuals about individual freedom. And therefore since they pay more attention to the possibility of you and the other fella expressing his own values. And doing what he can to promote his own interests they are regarded as not being concerned with the big issues with the big picture with mankind in general. You know so I we're almost out of time I just want to ask you for a quick answer to one question. Do you approach the 80s with hope or with discouragement. I have about 15 seconds to tell I approach the 80s with hope because I think the public

in this country runs a country and the public is waking up and recognizing the problems of big government. Thanks very much Milton Friedman thanks to our panelists. Hope you'll be back with us next week when my guests will be John Templeton who probably has the best long term success record in the world of mutual funds since 1954 Mr. Templeton has been investing internationally with a rate of return seldom matched on any continent so back up your financial baggage and join us. No shots are required. Meanwhile this has been Wall Street Week. I'm Louis Rukeyser. Good night. 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. That's $1 2 transcripts. Wall Street would Owings Mills Maryland 2

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