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- | Hello again and welcome as professor Paul Samuelson | 0:02 |
of MIT discusses the current economic scene. | 0:04 | |
This biweekly series is produced | 0:08 | |
by Instructional Dynamics Incorporated of Chicago. | 0:09 | |
It was recorded on May 28th, 1970. | 0:12 | |
Professor Samuelson, I see that the stock market | 0:16 | |
is still making news. | 0:19 | |
- | Although in my last tape | 0:20 |
I addressed myself primarily to the stock market, | 0:23 | |
it really is not possible at this time | 0:27 | |
to talk about any other subject than the stock market. | 0:30 | |
So with your indulgence, I will continue | 0:33 | |
to analyze the situation there as I see it. | 0:38 | |
I happen to be talking on the day after | 0:43 | |
the largest single rise that has ever been recorded | 0:46 | |
in the Dow Jones Averages. | 0:50 | |
They rise on May 27th of 32.04. | 0:53 | |
It is a record, but it's a record by only a hair, | 0:58 | |
since over 32 points of game was also registered | 1:01 | |
on the weekend after the funeral of John F. Kennedy | 1:08 | |
back in 1963. | 1:13 | |
Still, it's newsworthy, | 1:17 | |
when you get a jump up by this amount. | 1:19 | |
The market you know goes up more often than it goes down. | 1:23 | |
That's for two reasons. | 1:30 | |
One, the stream of world history | 1:31 | |
as we have known it up to this date, | 1:35 | |
has on the whole been a trend of upward prices | 1:36 | |
in the stock market reflecting growth in the economy, | 1:40 | |
inflation and so forth. | 1:44 | |
So most of the time the market is going up. | 1:46 | |
There's a second reason. | 1:49 | |
And that is that when the market goes down, | 1:51 | |
it goes down much faster and harder in terms of rate | 1:53 | |
than when it goes up. | 1:58 | |
So a 30 point decline in the market downward | 2:00 | |
would be quite newsworthy and catastrophic | 2:04 | |
but would not be quite as rare in event | 2:07 | |
as an increase of 32 points. | 2:10 | |
Now the questions that has to be asked is | 2:13 | |
what is the significance of this rise? | 2:18 | |
I may say that as I'm now recording | 2:21 | |
the day after that record-breaking rise, | 2:25 | |
the market is also very active. | 2:29 | |
The stock market is also very active. | 2:32 | |
And although the market is not yet closed, | 2:34 | |
it's up another 20 points or so | 2:38 | |
showing some erraticness. | 2:41 | |
But considerable volume. | 2:42 | |
I should also add that the markets all over the world | 2:45 | |
have in the last 20 hours risen in sympathy | 2:50 | |
with the rise in Wall Street. | 2:57 | |
This was true in Japan, which is on different time | 2:58 | |
from North America. | 3:02 | |
This morning, early, when the markets in Zurich | 3:05 | |
and Germany and London opened up, | 3:09 | |
they were strong in sympathy with the New York rise. | 3:14 | |
This is only as it should be | 3:20 | |
because as foreign investors know too well, | 3:21 | |
those markets have been rather weak | 3:25 | |
in sympathy with the weakness in Wall Street. | 3:29 | |
Now it doesn't pay for us to spend a good deal of time | 3:35 | |
on the hour to hour and day to day durations | 3:42 | |
of the stock market. | 3:47 | |
In the first place, by the time you hear my voice | 3:51 | |
the data of what happened in this particular week | 3:54 | |
will be stale. | 4:02 | |
You've already will have read in your newspaper | 4:03 | |
several days beyond that. | 4:06 | |
This is not a hot flash service | 4:10 | |
by Pepsi Cola and sell Coca Cola | 4:13 | |
within the next five minutes. | 4:18 | |
What we want to do is to provide a longer range | 4:20 | |
background and analysis. | 4:26 | |
Now the first thing to say about the rise in the market | 4:28 | |
is that it follows upon two very weak days in Wall Street. | 4:31 | |
And as a matter of fact, | 4:40 | |
falls upon months and months of sagging stock prices. | 4:41 | |
I will not venture an opinion as to | 4:49 | |
whether the bottom has now been seen | 4:53 | |
or whether by the time you do hear my voice, | 4:56 | |
the market will again be below what it was | 5:00 | |
a couple of days ago. | 5:03 | |
What I do wish to discuss anew, | 5:06 | |
at the cost of repeating, | 5:11 | |
is whether the general level of the stock market | 5:14 | |
and its recent behavior is explicable in terms | 5:20 | |
of developments on the economic scene. | 5:26 | |
And what this perhaps boads for the future channels | 5:30 | |
within which average stock prices will fluctuate. | 5:35 | |
It is commonly said, you've heard me say it, | 5:41 | |
and David Rockefeller, | 5:46 | |
the chairman of the Chase Manhattan Bank, | 5:49 | |
testify in a similar vein before Congress | 5:54 | |
that the extreme jitteriness | 5:59 | |
and weakness of the stock market | 6:03 | |
does not seem to be explicable solely or perhaps primarily | 6:05 | |
in terms of weakness in the economy itself. | 6:14 | |
You know that it is a matter of some dispute | 6:21 | |
among economists as to just how strong and how weak | 6:24 | |
the economy itself is. | 6:30 | |
Listeners to the parallel series of tapes | 6:36 | |
recorded by me and recorded by Professor Milton Freedman | 6:41 | |
of the University of Chicago, | 6:45 | |
have discerned some small difference of opinion | 6:47 | |
on this score. | 6:51 | |
For example, I earlier said in this series that I thought | 6:53 | |
the midi recession was only a midi recession. | 6:58 | |
That I thought it was bottoming out | 7:02 | |
between the first and the second quarter. | 7:04 | |
And you take the parallel service have heard | 7:09 | |
Professor Freedman comment directly to that view | 7:13 | |
and he said that he thought that was a a premature judgment. | 7:19 | |
He thought that even a third quarter upturn, | 7:26 | |
middle of the year upturn, | 7:31 | |
was a base upon his reading of past experience | 7:33 | |
a bit premature and he would himself | 7:36 | |
give as his single best guess, | 7:40 | |
the view that the turn would be likely to come | 7:46 | |
between the third and the fourth quarter at the earliest. | 7:48 | |
I don't mean to try to paraphrase his pick of view. | 7:52 | |
I simply want to indicate that there is residual uncertainty | 7:56 | |
about the strength and weakness | 8:01 | |
in the economic system itself. | 8:03 | |
However, the really graphic decline in the market | 8:07 | |
of the last days and weeks and months | 8:12 | |
is perhaps greater than would be justified | 8:19 | |
if even the more pessimistic appraisals | 8:23 | |
of the economy were the case. | 8:25 | |
I'm thinking of the fact that I used to be able to buy | 8:31 | |
20 years ago, a little more than that perhaps, | 8:35 | |
stocks at four and five times | 8:40 | |
price earnings, times earnings. | 8:43 | |
Prices, price earnings ratio of four to five. | 8:45 | |
And many of those stocks would have divined yields | 8:48 | |
of nine and ten percent. | 8:53 | |
To me, the market at that time was a sitting pigeon. | 8:56 | |
And those days have disappeared. | 9:02 | |
I'm thinking by the way of stocks like Goodyear rubber | 9:04 | |
and really Blue Chip Lodge Corporations. | 9:07 | |
If you look at the stock page today, | 9:13 | |
and I include the fireworks of the last couple of days, | 9:16 | |
you begin to see that there are stocks again | 9:19 | |
which can be brought at the six, seven, | 9:21 | |
times their earnings. | 9:27 | |
Evidently the mark that somehow is not believing | 9:29 | |
in the permanence of those earnings, | 9:33 | |
or, and or, I should say, the market is applying | 9:35 | |
a much more conservative price earnings ratio generally. | 9:40 | |
Let's just look at that particular problem. | 9:44 | |
Standard Oil New Jersey, | 9:50 | |
it's one of the largest international corporations, | 9:52 | |
very diversified. | 9:54 | |
If it encounters trouble in Venezuela, | 9:55 | |
it has plenty of ventures out in the Middle East. | 9:59 | |
If it encounters trouble in the Middle East, | 10:02 | |
it has north slope and domestic American reserves. | 10:06 | |
It's a very diversified package of energy resources. | 10:13 | |
I haven't seen the latest quotation | 10:19 | |
but roughly speaking you can get Standard Oil in New Jersey | 10:20 | |
with a dividend yield of over 7% today. | 10:24 | |
That's a dividend which is amply protected by earnings. | 10:29 | |
Gulf Oil would be a similar case. | 10:35 | |
Somebody has coined the phrase petro-phobia | 10:38 | |
for the attitude of the existing stock market | 10:41 | |
towards the oil stocks in, in general. | 10:44 | |
And so one could go down the, down the list. | 10:47 | |
I call your attention to the fact that there are | 10:53 | |
high grade bonds now, outstanding, | 10:55 | |
with some rather phenomenal yields | 10:59 | |
I'm not toughting any particular securities, | 11:03 | |
but I noticed in today's newspaper, | 11:06 | |
a Puerto Rican electric revenue of bonds | 11:09 | |
that have come out at seven to seven and a half percent. | 11:15 | |
These are tax-exempt at both the state and the local level. | 11:19 | |
Puerto Rico has been a very rapidly growing economy. | 11:25 | |
It was not the case ten years ago, 15 years ago, | 11:31 | |
that you could've dreamed of getting any such | 11:35 | |
tax-exempt yields like this. | 11:38 | |
I may say that to a person in the high marginal tax bracket, | 11:41 | |
these are like yields of over 20%. | 11:45 | |
The market is capable of generating movements more violent | 11:54 | |
than these present ones. | 11:58 | |
And is capable of doing so purely in terms | 12:00 | |
of the economics of the situation. | 12:04 | |
But, and I now return to the point | 12:07 | |
which David Rockefeller made in his testimony, | 12:09 | |
in his judgements and I concur in this considerable measure, | 12:14 | |
they malaise in the stock market is reflecting | 12:17 | |
more than the malaise in the economic system. | 12:20 | |
It's reflecting the malaise in the political system, | 12:24 | |
in the body politic, in the American society. | 12:28 | |
It is disturbed by the cleavage that it's going on | 12:34 | |
between those who favor, | 12:38 | |
let's say the President's policy in Cambodia | 12:42 | |
and in the China generally, | 12:46 | |
and those who are rather strongly and even mildly | 12:47 | |
opposed to that policy. | 12:52 | |
Now if that is the case, | 12:56 | |
then I think it's extremely difficult | 13:01 | |
for an economist to say anything very sensible | 13:04 | |
about whether we have or have not seen the mod. | 13:08 | |
If the stock market briefly touched the level of below 650, | 13:13 | |
I, I do not think that anyone who is wise and experienced | 13:19 | |
will doubt that it is capable of going below 600. | 13:24 | |
In the same way, it's capable | 13:33 | |
and in the same creative time of going above 700, | 13:34 | |
and going to 750. | 13:39 | |
If I were wiser than I am, | 13:44 | |
indeed if I were wiser than any economist is, | 13:47 | |
I would be able to tell you what is | 13:52 | |
a fair price earnings ratio. | 13:55 | |
What is an equilibrium price earnings ratio. | 13:57 | |
What is a price earnings ratio for a typical common stock, | 14:00 | |
say one of the 30 in the Dow Jones Industrial Average, | 14:05 | |
or one selected from a wider list. | 14:09 | |
What is the equilibrium price earnings ratio | 14:14 | |
such that if you can buy the stock at below that, | 14:18 | |
the odds are very good that it will move back | 14:21 | |
up in price toward that level. | 14:24 | |
Or, if the market is quoting a price higher than that level, | 14:27 | |
that you would be then well-advised | 14:33 | |
to sell that stock, go into some alternative to equities, | 14:35 | |
in the confound expectation that those prices will come down | 14:40 | |
and you will be able to pick them up, | 14:44 | |
those same stocks up, at a more advantageous figure. | 14:46 | |
I'm sorry to say that the economic analysis, | 14:50 | |
economic theory, does not give us the right | 14:54 | |
to specify an equilibrium price earnings ratio. | 15:00 | |
I recall that in the stock market break of 1962, | 15:07 | |
which was during President Kennedy's term, | 15:12 | |
the secretary of the treasury, | 15:15 | |
when asked whether stocks ought to have gone down | 15:18 | |
as much as they went down in May, | 15:21 | |
said on the record, for the record, | 15:25 | |
before a Congressional committee, | 15:28 | |
that the proper price earnings ratio was 15 or 16. | 15:30 | |
This was the honorable Douglas Dylan. | 15:36 | |
He happened to be, in my judgment, | 15:39 | |
a very good secretary of treasury. | 15:40 | |
He was a non-partisan, he was a republican | 15:43 | |
who served in the Kennedy administration, | 15:46 | |
had served in the Eisenhower state department. | 15:48 | |
He also is the son of the Financier Craz Dylan, | 15:51 | |
founder I guess of Dylan Reed, | 15:57 | |
and in his own right is a man | 15:59 | |
of considerable financial experience. | 16:02 | |
He's the head of a large closed in mutual fund. | 16:04 | |
He is the trustee of many investment boards, | 16:07 | |
also many charitable boards. | 16:12 | |
I admired his rashness, because I deemed it rashness, | 16:15 | |
in being prepared to give such a number. | 16:20 | |
Of course he may have thought it was his duty | 16:24 | |
as a public official in the time of stress, deplore | 16:27 | |
soothing oil on the troubled waters, | 16:31 | |
just as President Nixon recently, | 16:34 | |
when the market was a good deal higher than it is now, | 16:39 | |
but after it had shown signs of weakness, | 16:43 | |
said in order to reassure the market, | 16:45 | |
that if he had some money | 16:47 | |
that he would be buying common stocks. | 16:49 | |
Well of course nobody stops him. | 16:52 | |
He can always sell somebody's real estate property | 16:54 | |
if he really thinks that stocks | 16:56 | |
are that much a bargain and buy stocks. | 16:58 | |
But if he had followed his own advice on that date | 17:01 | |
as no shortage of commentators have pointed out | 17:03 | |
he would be considerably now in the hole. | 17:09 | |
Speaking as a disinterested scientist, | 17:15 | |
interested scientist but disinterested, | 17:20 | |
I am not able to say what is the price earnings ratio. | 17:23 | |
But let's take the Dylan number. | 17:26 | |
The Dylan number, 15 or 16% if it is correct, | 17:30 | |
then represents the average of values | 17:34 | |
that will prevail over the next five years, | 17:37 | |
does suggest that stocks are now a bargain, | 17:40 | |
because at the latest calculation | 17:44 | |
for the Dow Jones Average is 30 stocks. | 17:47 | |
I speak them only because how many commentators | 17:51 | |
the market make computations for them. | 17:53 | |
The price earnings ratio was something like | 17:56 | |
12 and a half or 13, | 17:59 | |
meaning there was considerable room on the upside. | 18:01 | |
Now, I must hasten to give a caveat, | 18:03 | |
there is no guarantee that the earnings | 18:06 | |
which the Dow Jones Average is, have earned | 18:12 | |
for the last year, | 18:16 | |
or which informed estimates placed for the Dow Jones Average | 18:19 | |
for the current year, | 18:23 | |
that those earnings will be continued into the future. | 18:24 | |
And so it's possible that a price earnings ratio | 18:28 | |
of 12 and a half on current estimates of earnings | 18:33 | |
really represents a 30 to 1 price earnings ratio | 18:38 | |
on the dire low earnings which are ahead. | 18:42 | |
And on that basis one must make, must make a judgment | 18:47 | |
Here I think that become us can throw a little light. | 18:54 | |
Profits are notoriously difficult | 19:00 | |
to estimate with precision. | 19:03 | |
The current secretary of the treasury, David Kennedy, | 19:06 | |
is finding that President Nixon's budget estimates | 19:09 | |
already have to be revised to show a larger deficit, | 19:15 | |
a smaller surplus, a shift from surplus into actual deficit. | 19:20 | |
In part because our treasury has overestimated | 19:24 | |
corporate profits of the present time. | 19:29 | |
They did this in connection with their | 19:33 | |
estimate of tax revenues. | 19:34 | |
And those tax revenues are falling short | 19:35 | |
of their own estimates. | 19:38 | |
So I cannot give you a magic formula or philosopher's stone | 19:40 | |
which will give you the ability | 19:45 | |
to pinpoint the quarterly profile of profits. | 19:49 | |
However, if we take the profit position | 19:55 | |
that is implicit in the forecast of a monochrist | 20:00 | |
who believes that the upturn is likely to come | 20:06 | |
around the fourth quarter, | 20:10 | |
that does not appear to show | 20:13 | |
a great deterioration of profits | 20:15 | |
after taxes from the present level. | 20:19 | |
And if you'll add to this, | 20:23 | |
the premise borrowed from Secretary Dylan, | 20:25 | |
that the 15 or 16 to 1 is a proper price earnings ratio, | 20:32 | |
then I would say that stocks are not badly valued now. | 20:36 | |
In fact, show a major of undervalue. | 20:42 | |
I said that economist cannot tell you | 20:47 | |
what the equilibrium price earnings ratio is, | 20:50 | |
but I think we are in a position | 20:53 | |
to give you some of the considerations which bear upon it. | 20:54 | |
If interest rates are going to be very high, | 21:00 | |
then it will follow that the price earnings ratio | 21:05 | |
will be quite low. | 21:13 | |
So we're back to something in the economics sphere | 21:18 | |
that I've talked about many times, | 21:22 | |
namely what is the future of interest rates? | 21:25 | |
Now in order to get the future of interest rates, | 21:30 | |
this takes us right back to what | 21:33 | |
the strength will be in the overall economy, the GNP, | 21:36 | |
and what the outlook is with respect to inflation. | 21:39 | |
And so let me leave the exciting sphere of the stock market, | 21:44 | |
I'm not leaving it permanently, | 21:52 | |
cause I am connecting up, | 21:54 | |
but let me go into | 21:55 | |
the current macroeconomic scene as I see it. | 21:57 | |
First, as I said last time, I think that | 22:07 | |
the stock market decline itself | 22:12 | |
is a source of bearishness and weakness | 22:14 | |
on the total economy in some measure. | 22:17 | |
And so I think that the, I have to | 22:22 | |
take the numbers which I have had in the past, | 22:25 | |
and been ploring to you, | 22:28 | |
and wite them down perhaps a little. | 22:30 | |
If I spoke of a 982 billion dollar GNP, | 22:34 | |
infected as I have to be | 22:40 | |
by the pessimism of the fireworks in Wall Street, | 22:42 | |
I'm inclined to write that number down by a billion or two. | 22:45 | |
That's for the calendar year. | 22:53 | |
That means that the number for the fourth quarter | 22:55 | |
that was implicit in my forecast | 23:01 | |
has to be written down by a few billion. | 23:03 | |
Three or four billion. | 23:07 | |
That isn't very much. | 23:10 | |
And of course, of course my view may be, may be wrong. | 23:12 | |
But I haven't seen on the basis of what has happened | 23:16 | |
any great need to change that. | 23:20 | |
On the great guessing game as to when the national bureau | 23:23 | |
will record the end of the midi recession | 23:27 | |
or the full-fledged recession | 23:31 | |
if that's what it turns out to be, | 23:34 | |
I thought it was between the first and the second quarter. | 23:38 | |
The April figures have come in. | 23:41 | |
The April figures by the way are previous | 23:43 | |
to the Cambodian decision. | 23:46 | |
And in a couple of respects, | 23:48 | |
they are a bit weaker, | 23:51 | |
using that particular knowledge that I have now, | 23:54 | |
I still would think that on a monthly basis, | 23:58 | |
the turn will be a bit before the middle of the year | 24:04 | |
rather than a bit after the middle of the year. | 24:11 | |
You can see that I'm not very different | 24:15 | |
in this respect from the Nixon team in Washington itself. | 24:16 | |
Nobody believes the Nixon team in Washington | 24:24 | |
in so many matters, that's the sad fact, | 24:27 | |
but actually I have no reason to disagree at all | 24:31 | |
and I'm not a republican, | 24:36 | |
with the utterances of Doctor Palmer Krafton | 24:38 | |
or Doctor Herbert Stein or the president himself, | 24:42 | |
secretary of treasury, | 24:46 | |
when they say that the last half of the year | 24:47 | |
should be a year of rise. | 24:50 | |
One can't say that with full confidence | 24:54 | |
because the recession could intensify | 24:56 | |
as a result of all the things that we've been talking about. | 25:01 | |
But I would like simply to say that looking at the figures | 25:04 | |
on a quarter by quarter basis | 25:09 | |
and writing them down the ear and up a little bit there, | 25:11 | |
I think that the turn will come about the middle of the year | 25:15 | |
and it doesn't matter whether that's a bit before that | 25:24 | |
or a bit after that. | 25:28 | |
I also think, and again the credibility gap | 25:31 | |
is so big that people don't believe somebody | 25:35 | |
when he really is telling the likely truth. | 25:39 | |
I think that there will be | 25:41 | |
some let-up on the rate of inflation. | 25:42 | |
Most of the regression equations, | 25:46 | |
which showed or conferred with, the 5% increase | 25:48 | |
in the rate of inflation, | 25:54 | |
is measured by the implicit inflator, | 25:57 | |
in fact more than 6% now that we have the revised figures | 25:59 | |
with the government pay increase in the first quarter | 26:02 | |
put in retroactively, | 26:04 | |
most of the regressions show a decline to below 4% | 26:07 | |
rate of inflation in the last quarter of the year. | 26:12 | |
Somehow the boat in my knee suggests to me | 26:18 | |
that that's too optimist. | 26:21 | |
And if it is too optimistic, | 26:24 | |
then I really should not write down | 26:26 | |
my 982 billion dollar money figure at all. | 26:30 | |
But that's what Washington has been saying | 26:35 | |
and I as a member of the opposition | 26:37 | |
wish to record agreement with Washington on that fact. | 26:41 | |
This is not a miracle and I think | 26:44 | |
they exaggerate the decline in the inflation, | 26:46 | |
but qualitatively they are in the right general ballpark. | 26:49 | |
Well unfortunately my time is up, | 26:55 | |
I can't go into the details of the reasons for this, | 26:59 | |
but I hope the next time | 27:04 | |
in a couple of weeks I can give you a roundup | 27:06 | |
of what to make of the nation extra conference board | 27:09 | |
rather pessimistic consumer survey. | 27:12 | |
What to think about the planning equipment expansion | 27:15 | |
and of course by that time | 27:18 | |
we'll know something more about the stock market. | 27:19 | |
- | Thank you Professor Samuelson. | 27:22 |
If you have any questions or comments | 27:24 | |
for Professor Samuelson, | 27:26 | |
address them to Instructional Dynamics Incorporated, | 27:27 | |
166 East Superior Street, Chicago, Illinois, 60611. | 27:30 |
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