Tape 191 - The economic summit
Loading the media player...
Transcript
Transcripts may contain inaccuracies.
- | Welcome, once again, as MIT Professor Paul Samuelson | 0:02 |
discusses the current economic scene. | 0:05 | |
This series is produced by | 0:07 | |
Instructional Dynamics Incorporated. | 0:08 | |
Professor Samuelson, what is the outlook | 0:11 | |
for the summit meetings that President Ford | 0:13 | |
will be attending soon? | 0:15 | |
- | I don't think there's much point in my | 0:19 |
trying to guess what will happen at the summit meeting, | 0:22 | |
because a certain air of cynicism | 0:26 | |
has been exhibited towards almost everybody | 0:31 | |
about this meeting. | 0:34 | |
Giscard, the French Chief of State, | 0:37 | |
wanted to have a summit meeting. | 0:41 | |
It would be, perhaps, churlish of the Chief of State | 0:43 | |
of the United States, to refuse to sit down | 0:48 | |
with the other leaders of the world. | 0:52 | |
Usually, one can predict in advance | 0:56 | |
what might be accomplished by a meeting of heads of state. | 1:00 | |
If a war just ended, there's a need for a peace treaty | 1:05 | |
or you're setting up the United Nations, | 1:08 | |
however, it seems to me very dubious that anything | 1:11 | |
substantial can be accomplished at the summit meeting. | 1:18 | |
If that's the way I feel in advance of the meeting, | 1:24 | |
I think that there's very little useful that can be said. | 1:27 | |
Why don't we leave the summit meeting for a postmortem. | 1:31 | |
Perhaps I'll be surprised, maybe pleasantly surprised, | 1:35 | |
by more progress than I had thought. | 1:39 | |
I don't believe that it will be possible to decide | 1:41 | |
that we'll go back on the old gold standard, | 1:45 | |
or that the great debate between flexible exchange rates | 1:47 | |
and pegged exchange rates will be resolved, nor even | 1:52 | |
an effective rule of conduct which decides | 1:58 | |
on how much dirty floating and how much clean floating, | 2:02 | |
that is how much government intervention | 2:06 | |
will be the rules of the game. | 2:08 | |
Nor do I think that the general problem | 2:13 | |
of international liquidity, which used to be regarded | 2:16 | |
as a problem of too little international liquidity, | 2:19 | |
and which now is regarded in many circles | 2:21 | |
as a problem of too much international liquidity, | 2:23 | |
I don't think that that problem can be solved | 2:26 | |
at a weekend meeting. | 2:28 | |
Let me, therefore, turn to certain miscellaneous | 2:31 | |
considerations that will be of interest to anyone | 2:38 | |
who wants to follow the course of economics | 2:41 | |
at the modern period. | 2:46 | |
Very briefly, we got about a week ago, | 2:51 | |
some rather disappointing news; it was a one-two punch. | 2:55 | |
The unemployment rate went from 8.3% up to 8.6%. | 3:00 | |
That was fairly universally regarded as bad news. | 3:05 | |
At the same time, the wholesale price index | 3:11 | |
came in on a seasonally corrected basis, | 3:15 | |
not having dropped in the usual way | 3:18 | |
that it drops in October, and registered | 3:20 | |
a rate which if you annualize it, | 3:26 | |
was certainly in the two-digit range. | 3:27 | |
Most disturbing of all, to many observers, | 3:32 | |
was the fact that industrial wholesale prices, | 3:34 | |
not just sensitive raw material staples, | 3:37 | |
industrial wholesale prices were very much up. | 3:42 | |
This has kind of put a damper on the high spirits | 3:49 | |
of many people who had been basking in the 11% | 3:55 | |
annualized rate of growth of the American economy | 4:00 | |
in the third quarter. | 4:03 | |
They also had been basking in the sunshine | 4:05 | |
of what they regard as easier money, namely, | 4:09 | |
a tendency for the Federal Reserve | 4:15 | |
to want to encourage interest rates to come down. | 4:17 | |
Reflecting itself in a lowering of target | 4:21 | |
federal funds rates, and in successive cuts | 4:23 | |
of the prime rate at which the big banks | 4:28 | |
lend to their best customers. | 4:32 | |
That went from the general vicinity of 8% | 4:35 | |
down to the general vicinity of 7%, | 4:41 | |
and the last heard from, | 4:43 | |
was still, if anything, heading down. | 4:44 | |
I say this is what's called easy money | 4:48 | |
because, perhaps, 70% of the world | 4:50 | |
thinks of this as easy money, falling interest rates, | 4:54 | |
but since it's prime cause has been the failure | 4:57 | |
of the money supply to grow at the targeted rate | 5:01 | |
of between five and 7 1/2%, the other 30% of the world, | 5:07 | |
which defines easiness and tightness of money solely | 5:13 | |
in terms of the monetary aggregates, | 5:16 | |
they're cursing the Federal Reserve as, at this time, | 5:20 | |
being engaged in very tight money. | 5:24 | |
Well, I don't think that as far as motivation is concerned, | 5:28 | |
the Federal Reserve has particularly turned tight | 5:32 | |
in its thinking in recent weeks. | 5:36 | |
It's rather that there has been | 5:39 | |
a somewhat unexplained drop in the demand for money. | 5:42 | |
Nobody quite understands this, and we don't even understand | 5:48 | |
how much of a shift in the demand for money | 5:52 | |
is gonna be called for by the figures | 5:55 | |
when we have the revised figures in. | 5:57 | |
But let me paint the story of the picture | 6:00 | |
of what it is that seems to need to be explained. | 6:05 | |
You had very rapid growth in real GNP, that's called 11%. | 6:09 | |
Maybe that'll be revised a little bit downward | 6:15 | |
as they revise the inventory decumulation figures, | 6:16 | |
perhaps towards more decumulation. | 6:22 | |
Prices have risen by the GNP deflator at about 5%. | 6:27 | |
That gives you something like 16 plus percent of money GNP | 6:33 | |
rate of growth. | 6:39 | |
In the face of this, the quarter to quarter, | 6:43 | |
that second quarter to third quarter money supply, | 6:47 | |
grew at only 7%. | 6:51 | |
The difference between 7% and 16% is eight or 9%, | 6:53 | |
at which as an annual rate of growth of the velocity | 6:58 | |
of circulation of money, seems a bit excessive, | 7:02 | |
unless if it were accompanied by a great stiffening | 7:05 | |
of interest rates. | 7:08 | |
However, we know that although interest rates | 7:10 | |
had risen earlier and there are some lagged effects, | 7:14 | |
the interest rates have not, in this period, | 7:18 | |
been rising very much, and so there is a puzzle. | 7:19 | |
The puzzle one might hope to explain | 7:24 | |
by what's happening to foreign central banks | 7:27 | |
flush with Arab money, | 7:31 | |
whether they are buying treasury bills. | 7:33 | |
But that seems to be the reverse of the truth, | 7:36 | |
if I can judge from last week's | 7:40 | |
testimony by Arthur Burns | 7:44 | |
before the Senate Banking Committee, the Proxmire committee. | 7:45 | |
We don't seem to be able to explain matters there. | 7:51 | |
The way the treasury handles its cash balance | 7:55 | |
can probably explain part of the problem, granted. | 7:58 | |
I think maybe part of the problem | 8:04 | |
might be explained by the fact that so much | 8:06 | |
of the growth rate imputed | 8:08 | |
to the money GNP is in the form of inventories. | 8:11 | |
That could be just things which require | 8:15 | |
no transactions at all, just the building up of those, | 8:20 | |
and that might explain some of the behavior. | 8:25 | |
It may be that | 8:32 | |
a partial clue to the problem may come from | 8:35 | |
the New York crisis. | 8:39 | |
The New York crisis, which may result in default, | 8:41 | |
has scared people. | 8:47 | |
It's shifted a lot of people towards short-term securities, | 8:49 | |
and the safest short-term securities, | 8:53 | |
namely, treasury bills. | 8:55 | |
This shift of liquidity preference towards safety, | 8:59 | |
towards the shorter securities, would be expected | 9:03 | |
to put downward pressure on interest rates. | 9:06 | |
It might be part of that shift in the demand for money | 9:11 | |
that we've been talking about. | 9:15 | |
People, well, it's a little hard to believe it, | 9:17 | |
put that way, namely, that people are so scared | 9:22 | |
that they're holding less money, | 9:25 | |
and holding more treasury bills. | 9:28 | |
It would explain the decline in interest rates, | 9:29 | |
but I don't think it quite explains | 9:31 | |
the behavior of the velocity of circulation of money. | 9:33 | |
There is a puzzle there. | 9:40 | |
Well, just as everybody was feeling very good though, | 9:41 | |
because people in the marketplace, | 9:43 | |
even when they are not themselves monetarists, | 9:47 | |
I think there are some kooks in the marketplace | 9:50 | |
who may be monetarists, and they think that the | 9:52 | |
Federal Reserve has, in its schizoid behavior, | 9:55 | |
a strong monetarist leaning a good deal of the time, | 10:00 | |
they've just been rubbing their hands in glee | 10:05 | |
because if the money supply has been growing very slowly, | 10:07 | |
then they know it's got to grow faster in the future, | 10:10 | |
and this means that downward pressure | 10:13 | |
in the very short run will be put upon interest rates. | 10:15 | |
And many of them have convinced themselves | 10:18 | |
from very pleasant experience, | 10:21 | |
that whenever interest rates fall, | 10:23 | |
the stock market's likely to go up. | 10:25 | |
They already have some profits in the bond market | 10:28 | |
if they are not in the New York municipal market. | 10:30 | |
Well, it's tough to spoil this euphoria by having | 10:39 | |
a new concern that maybe inflation is back, | 10:44 | |
and maybe the recovery is not doing so well. | 10:46 | |
Let me very briefly give some reactions. | 10:51 | |
I don't feel that my knowledge has changed very much | 10:57 | |
by having unemployment come out reported as 8.6% | 10:59 | |
instead of 8.3%. | 11:03 | |
The 8.3% always looked a little bit low, | 11:04 | |
given the usual regression equations of past experience. | 11:07 | |
We had dropped from 9.2% in just last May | 11:14 | |
in the unemployment, and the drop had been a bit faster | 11:18 | |
than one would have expected knowing that unemployment | 11:21 | |
is a lagging series, so maybe the 8.3% was a little lower | 11:25 | |
than the truth really | 11:29 | |
should have asked for, | 11:33 | |
and maybe the 8.6% is a little bit higher. | 11:34 | |
You can't make too much of month-to-month behavior. | 11:38 | |
What we know is that the march downward to 7% unemployment | 11:41 | |
to 6 1/2% unemployment to 6%, | 11:49 | |
to wherever you think the next ultimate goal should be, | 11:52 | |
we've known that that's going to be a long, | 11:56 | |
slow, stretched out march, and that it won't be until | 11:59 | |
really quite late in this decade | 12:03 | |
that we'll begin to get there. | 12:04 | |
I would say from the standpoint of government policy, | 12:08 | |
moving into the election period of next year, | 12:12 | |
the fact that the reported number of unemployment | 12:15 | |
is still very high should be regarded as an expansionary | 12:17 | |
factor rather than as a contractionary factor. | 12:20 | |
If the unemployment rate had dropped from 8.3% to 7.9%, | 12:24 | |
people would say, aha, a lot of that unemployment | 12:29 | |
was false, was artificial. | 12:31 | |
We're eating into the unemployment too fast. | 12:34 | |
We're gonna create a recurrence of demand-pull inflation. | 12:36 | |
You'd better start being very conservative on fiscal policy | 12:42 | |
and very conservative on monetary policy; | 12:46 | |
that is very contractionary, non-expansionary. | 12:49 | |
Well, this is the reverse of that. | 12:52 | |
On the Wholesale Price Index, | 12:54 | |
I think one has to reserve judgment. | 12:57 | |
The 5% number reported in the third quarter | 13:00 | |
was much too low. | 13:03 | |
The chain index, as I have mentioned earlier, was above 7%. | 13:04 | |
The cost of living, the Consumers Price Index so-called, | 13:09 | |
has been rising at 8%. | 13:12 | |
I don't think that the baseline rate of inflation | 13:14 | |
in the American economy on a smooth basis | 13:17 | |
over the remaining months of this year | 13:20 | |
ought to be regarded as anything like 5% or below. | 13:23 | |
We may find ourselves there, | 13:28 | |
but I think that this baseline rate | 13:29 | |
has the smell of being more like six to 8% at least, | 13:35 | |
and that's compatible with a month or two of bad news, | 13:39 | |
even in the two-digit price inflation, | 13:45 | |
but it's something worth watching. | 13:48 | |
My suggestion is that we wait to see whether | 13:52 | |
New York gets through its next crisis | 13:56 | |
and the one after that before we start making | 13:59 | |
any agonizing reappraisals about what's likely | 14:03 | |
to happen in the strength of the recovery. | 14:07 | |
Let me, therefore, use my time today | 14:09 | |
to comment on a question that I'm always being asked | 14:13 | |
by subscribers and by people who read my various writings. | 14:17 | |
The question that is directed toward me is: | 14:25 | |
Do you still have the view that security analysts cannot | 14:30 | |
deliver to their clients a performance worth paying for, | 14:36 | |
that is any better than the clients themselves can do | 14:43 | |
by broad diversification which in its broadest aspect | 14:47 | |
would involve just buying the Standard & Poor's Index? | 14:53 | |
And my answer to that is, | 14:58 | |
all the experience that's been coming in in recent years, | 15:02 | |
has been in the direction of reaffirming in my mind | 15:04 | |
that view, rather than undermining it. | 15:10 | |
There have been odd periods during the performance euphoria | 15:14 | |
of the 1960s, when it looked as if, crudely, | 15:20 | |
the money managers were doing a bit better | 15:25 | |
than the comprehensive averages. | 15:29 | |
Part of that was an illusion, maybe all of it, | 15:36 | |
because they were just being more risk taking. | 15:40 | |
And when the market's going up, one of twin brothers | 15:42 | |
who borrows money and goes into the market on leverage, | 15:46 | |
even if he has no superior security selection ability | 15:50 | |
to his twin, is going to look better on paper. | 15:54 | |
Well, of course, these money managers by and large | 15:59 | |
did not borrow and leverage, | 16:01 | |
so I can't pooh-pooh their good performance on that basis. | 16:03 | |
But if you have twin brothers and both of them | 16:07 | |
are under restraint and not being allowed to borrow, | 16:10 | |
but one of them wants to be more leveraged than militant | 16:13 | |
in what he thinks is an up market and which proves | 16:18 | |
to be an up market, then all he has to do, really, | 16:22 | |
is buy more volatile securities. | 16:25 | |
And more volatile securities go up more in an up market, | 16:28 | |
and they go down more in a down market, | 16:31 | |
but he would look in the up part of the market | 16:33 | |
as if he is better. | 16:35 | |
Well, we correct for that by a crude, | 16:36 | |
it's by no means a perfect correction, | 16:39 | |
but it's remarkable how good and useful | 16:43 | |
the crude correction is by calculating the beta | 16:48 | |
of the securities which the money manager | 16:52 | |
has put his money into. | 16:55 | |
The beta is the regression slope showing | 16:57 | |
how those securities in the past, the recent, relevant past, | 17:01 | |
have moved dollar for dollar with the overall market, | 17:06 | |
as measured, say, by the Standard & Poor's Index. | 17:11 | |
If you find a fellow has done well in an up market, | 17:16 | |
but he's got a big beta, then you divide through | 17:18 | |
by that big beta, and then it turns out | 17:22 | |
that he's just rejoined the human race | 17:24 | |
and hasn't done exceptionally well. | 17:26 | |
In fact, he may have done worse than just the index, | 17:28 | |
because that sort of money manager is almost certainly | 17:33 | |
having a turnover rate in a securities | 17:38 | |
of anywhere from 30% a year up to over 100%. | 17:41 | |
That means that if you had a 100% turnover rate, | 17:47 | |
that on the average, whatever security was in the portfolio | 17:49 | |
last year isn't gonna be there today, | 17:53 | |
unless it's there for the second or third time | 17:55 | |
as you've been churning your portfolio. | 17:57 | |
While churning portfolios makes for brokerage commissions, | 18:01 | |
even in this age of negotiated commissions, | 18:04 | |
but it's a dead-weight loss taken right out of the | 18:08 | |
total yield over a period of time of any fund. | 18:12 | |
And nobody should ever do, engage in buy and sell | 18:16 | |
transactions, unless he has reasoned confidence | 18:19 | |
that he's going to make more than the cost | 18:24 | |
of those commissions. | 18:27 | |
The hidden cost, by the way, has to be added on | 18:28 | |
to the commissions. | 18:32 | |
Every time you buy and sell in any magnitude, | 18:33 | |
you actually push the price a little bit against yourself | 18:37 | |
both ways, and since you're initiating the transactions, | 18:39 | |
you have to pay through the nose for those. | 18:45 | |
It's very hard to calculate what that is, | 18:48 | |
but experts in the field can make a calculation. | 18:50 | |
Perhaps it's this churning that explains why the analysts | 18:55 | |
do worse on the average than the overall averages. | 19:01 | |
I have to put to rest, once again, | 19:06 | |
it comes up again and again, people say yes, | 19:08 | |
but you can't buy the averages. | 19:11 | |
Well, that is untrue. | 19:12 | |
It's certainly the case that one dentist | 19:14 | |
cannot himself buy the comprehensive averages. | 19:18 | |
There's been a proposal that the Dow Jones Averages | 19:23 | |
be put as a unit on the Chicago Options Board. | 19:26 | |
I don't know how that proposal is faring. | 19:30 | |
I think it would point up | 19:33 | |
what I think is obvious to anyone, | 19:36 | |
namely, that most of the people | 19:38 | |
who indulge in transactions on the buy side | 19:41 | |
in the Chicago Option market, are not | 19:45 | |
hedgers protecting themselves and playing safe. | 19:51 | |
They're people with strong hopes | 19:56 | |
about how the market's gonna go up, | 19:58 | |
and with limited liquidity and for a price, | 20:02 | |
the sellers, through the good | 20:06 | |
agency of the market, the seller or writers of the options | 20:12 | |
provide them with that. | 20:15 | |
Plus you have to modify and qualify my statement | 20:17 | |
for that part of the purchases which are matched | 20:20 | |
by sales and which simply represents spreads in that market. | 20:23 | |
Well, my reason for bringing this up today | 20:28 | |
is an article in The Wall Street Journal | 20:32 | |
of some few days ago with a headline, On the Average. | 20:35 | |
More pension funds try to tie the market | 20:40 | |
instead of beating it. | 20:42 | |
These are the headlines. | 20:44 | |
They seek to match the S&P 500 | 20:45 | |
because money managers often fall short of index. | 20:47 | |
You could say almost always fall short of the index. | 20:51 | |
And this is very hard on the ego | 20:54 | |
of the security analyst profession | 20:57 | |
and the portfolio decision makers. | 21:00 | |
It's also, in the end, gonna be very hard | 21:03 | |
on their pocketbooks. | 21:06 | |
It means, if it's correct, that you need a lot less people | 21:07 | |
in the brokerage community to engage in these | 21:14 | |
pointless turnover buy and sell transactions, | 21:21 | |
and it means that there's no reason | 21:26 | |
why you should be paying out | 21:29 | |
to somebody a living doing security analysis | 21:32 | |
in beating the average when you can't beat the averages. | 21:37 | |
What's brought this up, what's made it newsworthy, | 21:40 | |
is that AT&T, with some really tremendous pension funds, | 21:44 | |
has thrown in the sponge on the belief | 21:52 | |
that they can buy money management | 21:55 | |
which will improve performance over the indexes, | 21:59 | |
and so they're now using the one or two or three | 22:03 | |
agencies which are available to anybody of any size | 22:08 | |
to match the indices. | 22:13 | |
What are those agencies that are available | 22:15 | |
to anyone of any size? | 22:16 | |
I mean any corporation with a pension fund | 22:19 | |
and really anyone with | 22:22 | |
a million dollars, and for that matter, | 22:27 | |
it won't be very long before somebody with $10,000, | 22:29 | |
I dare say, will be able to invest | 22:34 | |
on a no-load, no-management fee basis | 22:38 | |
in something like this, because it's the kind of idea | 22:40 | |
whose time has come. | 22:43 | |
Well, first you have the Wells Fargo Bank | 22:45 | |
in San Francisco, which has been experimenting | 22:51 | |
for some period of time in this and doing very well | 22:55 | |
in matching the index. | 23:00 | |
The Wells Fargo Bank actually tried to set up | 23:04 | |
a stagecoach fund which would have done this | 23:07 | |
on a fee basis, very small fee basis, for pension funds | 23:14 | |
but I guess that didn't get off the ground, | 23:18 | |
but they still, as a fiduciary, | 23:19 | |
do this, and that's one name to remember | 23:22 | |
if you have an interest in this matter. | 23:24 | |
Secondly, I'm just going in terms of chronological time, | 23:28 | |
the Batterymarch Financial Management Incorporation | 23:32 | |
of Boston offers this service, | 23:35 | |
and I think has something like 40 million dollars now | 23:38 | |
in this kind of indexed fund. | 23:42 | |
Batterymarch, I think, is named after | 23:47 | |
the Batterymarch Street in Boston. | 23:49 | |
Finally, there's a bank in Chicago, | 23:53 | |
the American National Bank of Chicago, | 23:58 | |
which has been offering this service. | 23:59 | |
There are some differences as described | 24:03 | |
in this Wall Street Journal article, | 24:05 | |
and has been discovered by professors of finance | 24:07 | |
who've looked into the matter. | 24:13 | |
Wells Fargo, by and large, goes out and buys all the stocks | 24:15 | |
in the Standard & Poor's 500. | 24:18 | |
That means that they're holding a lotta little stocks | 24:23 | |
along with the big stocks. | 24:25 | |
You've gotta be pretty big to do that, | 24:28 | |
and there are a few problems. | 24:31 | |
They don't buy them all, | 24:32 | |
because a fiduciary might get sued | 24:34 | |
if it held certain stocks that the courts | 24:36 | |
would hold to be risky, | 24:40 | |
so those always have to be excluded. | 24:41 | |
American National Bank and Batterymarch, | 24:45 | |
they just try to do a sampling and just match very closely | 24:48 | |
to the Standard & Poor 500. | 24:52 | |
I haven't really time to develop this, | 24:55 | |
but it's a mistake, in my judgment, | 24:57 | |
to try to match perfectly, | 24:59 | |
the S&P 500. | 25:04 | |
It's not a mortal sin to try to do that. | 25:06 | |
It's just a little venial sin; it's a little blunder. | 25:10 | |
There's nothing perfect about the S&P 500. | 25:14 | |
It's only the single most comprehensive index | 25:18 | |
easily available, that comes very close to, say, | 25:23 | |
matching 85% of the American equities. | 25:27 | |
But it's not 100%. | 25:33 | |
Moreover, if it matches, say, 80% of some defined | 25:36 | |
universe of American equities, | 25:42 | |
then if you count in closer-held corporations, | 25:44 | |
it's slipping down from 80% to 60% over-the-counter | 25:49 | |
and so forth, towards 50%. | 25:54 | |
If it's good to hold all of the American market, | 25:57 | |
then in this one world that we have, | 26:00 | |
why isn't it in principle good to hold | 26:02 | |
all world securities, or at least the universe | 26:07 | |
of publicly traded world securities, | 26:10 | |
and then the S&P 500 begins to slip down towards 40%. | 26:12 | |
Well, if it's the best wheel in town, | 26:19 | |
why don't you use it for making your bets | 26:23 | |
until a better one comes along? | 26:27 | |
I think the answer as to why there's a danger | 26:29 | |
in matching it too closely is the following. | 26:32 | |
The S&P Index itself is a changing index. | 26:37 | |
An example mentioned in this article, | 26:42 | |
W.T. Grant and Company, big chain, | 26:44 | |
is in some kind of trouble. | 26:47 | |
Some of these banks have already eliminated that stock | 26:50 | |
from the S&P 500. | 26:53 | |
I don't know that the S&P officials have yet removed it | 26:55 | |
because it's in bankruptcy, | 26:59 | |
but it's a good bet that it might be removed. | 27:01 | |
Well, if you're trying to match the shibboleth | 27:07 | |
of the S&P 500, then your instructions are, | 27:09 | |
you hold it until it's out of the S&P. | 27:12 | |
The morning it comes over the broad tape | 27:15 | |
that it's no longer in the S&P, you've gotta get rid of it. | 27:18 | |
Well, suppose a lot of people are doing this, | 27:22 | |
and you're beginning to get not 40 million dollars, | 27:25 | |
not 20 billion dollars, but you're beginning to get | 27:28 | |
hundreds of billions of dollars | 27:31 | |
just trying to match the S&P Index. | 27:32 | |
That morning, when W.T. Grant goes out of the S&P 500, | 27:35 | |
is gonna be a dreadful morning to put in | 27:40 | |
sell orders at the market. | 27:43 | |
Similarly, when a security is added, | 27:44 | |
suddenly all the index followers | 27:48 | |
will begin to add that security. | 27:49 | |
So I would say that in setting up your charter, | 27:51 | |
you'll have to give yourself a rule of reason. | 27:55 | |
Don't stick just to the shibboleth, | 27:56 | |
but to what is the letter, the spirit, | 27:58 | |
behind the letter of the rule | 28:02 | |
of trying to buy the whole market. | 28:05 | |
One caveat before I finish. | 28:08 | |
A reason for matching the S&P 500 | 28:12 | |
is that if you hang your shingle out, | 28:15 | |
and say you're running an index fund, | 28:17 | |
it's something which people can understand. | 28:18 | |
It's something you can promise to do, | 28:21 | |
and which they can count upon your doing. | 28:23 | |
And, so, I wouldn't want to say flat-footedly, | 28:27 | |
that you should on the basis of what I said, | 28:31 | |
agree not to match it slavishly, | 28:34 | |
but I think you ought to weigh, very carefully, | 28:37 | |
the possible disadvantage as these index funds | 28:41 | |
become more popular, and just like the money market funds, | 28:46 | |
they're going to become more popular. | 28:50 | |
You wanna weigh what the disadvantages will be | 28:52 | |
against the advantages of non-ambiguity | 28:55 | |
and of clarity in contracts. | 28:59 | |
- | If you have any comments or questions | 29:05 |
for Professor Samuelson, address them to | 29:06 | |
Instructional Dynamics Incorporated, | 29:09 | |
450 East Ohio Street, Chicago, Illinois, 60611. | 29:11 |
Item Info
The preservation of the Duke University Libraries Digital Collections and the Duke Digital Repository programs are supported in part by the Lowell and Eileen Aptman Digital Preservation Fund