Tape 28 - Subscribers' questions
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- | Instructional Dynamics Incorporated begins it's | 0:02 |
bi-weekly summer discussions on economics with | 0:05 | |
Dr. Paul Samuelson of the Department of Economics at MIT. | 0:07 | |
This is the week of May 19th. | 0:12 | |
Professor Samuelson, we have a number of questions | 0:15 | |
that have been sent in by subscribers. | 0:17 | |
This might be a good time to comment on some of them. | 0:19 | |
- | Yes, indeed. | 0:22 |
What's your first question? | 0:23 | |
- | Well first of all our questionnaire asks | 0:24 |
why is that you say in one tape step on the accelerator | 0:29 | |
and once in a while sniff the Benzedrine, | 0:32 | |
then in a later tape you say that you like the people | 0:35 | |
in control with Nixon to move very slowly. | 0:38 | |
Don't you feel that the CPI is going to rise rapidly | 0:42 | |
along with inflation and the president should lean | 0:45 | |
against the wind just a bit stronger? | 0:48 | |
- | I don't know to what degree my advice has seemed | 0:51 |
to be vacillating. | 0:55 | |
If by nature you are eclectic then at one time you | 0:57 | |
lean in one direction and another time in another. | 1:03 | |
My technical point would be this; | 1:06 | |
that if you think that inflation is the most important | 1:12 | |
thing to control and if you think the costs in terms | 1:15 | |
of unemployment are less important or if you think that | 1:19 | |
even in terms of unemployment, by controlling the | 1:25 | |
inflation now we will lessen the amount of unemployment | 1:28 | |
which inevitably will otherwise come in later, | 1:33 | |
then you will feel that the administration has been | 1:37 | |
too gradualist in it's approach and at times I have | 1:42 | |
pointed that out. | 1:47 | |
To repeat; if the Nixon administration set itself | 1:49 | |
a certain budget with respect to price rise, | 1:56 | |
they are now at first three years in office, | 2:00 | |
if we call the Index 100 at the time that we take office | 2:02 | |
and if we call the Index 100 plus X three years later | 2:07 | |
and let them prescribe the number, let's say 112 or 109 | 2:12 | |
representing say a 3% increase in prices to be | 2:20 | |
permitted during the period, then I think they are | 2:23 | |
definitely to be criticized in the way that they're | 2:26 | |
going about it because, from a standpoint of accomplishing | 2:29 | |
that goal, accomplishing it most effectively and in terms | 2:34 | |
of the least average amount of unemployment I think | 2:39 | |
that stepping on the brakes harder than the gradualists | 2:44 | |
now prescribe and then easing up and even going in the | 2:48 | |
opposite direction would be the optimal way to handle that. | 2:53 | |
Now my view, this is not a problem like that that | 2:57 | |
my colleagues in the electrical engineering department | 3:02 | |
have in MIT in which they have a very solid data on | 3:04 | |
the kind of load the a servo mechanism is going to be | 3:10 | |
subjected to, the kind of statistical variation of that load | 3:14 | |
and then they very nicely design an optimal response | 3:18 | |
network or filter or servo mechanism to handle that. | 3:24 | |
It's not exactly like that but it is qualitatively | 3:29 | |
exactly like that and I think that gradualism | 3:33 | |
is not the optimal way to handle this. | 3:37 | |
Having said that, let me say that any inconsistency | 3:41 | |
in my position disappears when you realize that I | 3:46 | |
speak primarily as a person whose valued judgements | 3:50 | |
are those of the democratic party, roughly speaking, | 3:55 | |
rather than, roughly speaking, the republican party | 4:00 | |
and so my concern, my fear, my obsession had been | 4:04 | |
that just as in the years from 1953 to 1960, | 4:09 | |
a republican administration let the high employment | 4:17 | |
slip away, let steady vigorous growth disappear | 4:20 | |
because of an overemphasis upon the costs of inflation | 4:25 | |
and an overemphasis upon the desirability of a good | 4:28 | |
balance of payments position so I had feared that we might | 4:32 | |
get a re-dose of this. | 4:38 | |
In fact, quite a number of particular presidential | 4:40 | |
advisors, whom I know, have been acting and speaking | 4:44 | |
in a more moderate way now that they are in power | 4:49 | |
and I have applauded this. | 4:53 | |
In that sense I'm giving a pat on the back to gradualism. | 4:56 | |
Nevertheless it's very hard to please a professor | 5:03 | |
of economics and get the dosage exactly right. | 5:05 | |
Now, what was another question that has accumulated | 5:08 | |
from our listeners? | 5:11 | |
- | Professor Samuelson, here is a question about | 5:13 |
the stock market. | 5:15 | |
It is evidently written by someone who has done research | 5:16 | |
on Chinese methods as applied to the stock market | 5:19 | |
and it reads like this: | 5:23 | |
you remember 23 stock market comments did not knock | 5:25 | |
technical analysis directly but certainly knocked | 5:29 | |
all analysis quite hard indirectly. | 5:32 | |
You implied support of random walk theory, | 5:35 | |
I spent 20 years proving you are either very naive | 5:38 | |
or the market just isn't your bag. | 5:42 | |
What proof would help change your mind that some | 5:44 | |
techniques can improve any batting average | 5:47 | |
over random selection? | 5:50 | |
- | I intend to return, in a full length tape, | 5:52 |
to my continuing analysis of what it is that is | 5:55 | |
scientifically known about stock market fluctuations | 5:59 | |
therefore I'll confine my remarks in response to | 6:03 | |
this question to the problem of technical analysis. | 6:08 | |
I didn't say much about technical analysis in my | 6:13 | |
first tape on the stock market but I am prepared to | 6:15 | |
say that on the basis of the studies that I have seen, | 6:18 | |
the studies that I have made, I think there's essentially | 6:22 | |
nothing in it. | 6:25 | |
There are no verifiable methods which give promise. | 6:26 | |
I find that this is a view which is very widely shared | 6:33 | |
by experienced people in the market, | 6:38 | |
there are exceptions, our questioner is apparently one. | 6:40 | |
The more common attitude is the following: | 6:45 | |
I don't believe in technical methods but there are | 6:49 | |
other people who do and therefore I've got to | 6:52 | |
keep my eye on the dis-resistance level or that. | 6:55 | |
So these technical methods do receive a certain | 7:01 | |
amount of support. | 7:04 | |
My reason for thinking there's nothing in them is that | 7:07 | |
every method that I've ever heard of which has been | 7:10 | |
put in objective form so that it could be automatically | 7:14 | |
done as, for example by a computer, when subjected to | 7:19 | |
wide experience, not to the particular sample for which | 7:24 | |
it was generated, has proved to be disappointing. | 7:27 | |
There is vast literature on this subject, | 7:32 | |
not as large as the literature on technical methods | 7:35 | |
and I did refer to the Coutner volume. | 7:40 | |
Now you don't have to be a believer in random walk, | 7:45 | |
and I am only a modified believer in random walk analysis | 7:48 | |
of the stock market, to be a disbeliever | 7:53 | |
in technical methods. | 7:55 | |
Someone will say to me; I know Joe Smith, | 7:58 | |
I know him to be a very successful operator | 8:03 | |
in the stock market, he uses technical methods, | 8:06 | |
how can you deny that? | 8:09 | |
My answer is I don't necessarily deny that, | 8:11 | |
it may be that there is a Joe Smith who uses such methods | 8:13 | |
and who does well. | 8:17 | |
The question from a scientific viewpoint is this: | 8:19 | |
is there something transferrable about his knowledge, | 8:23 | |
does he have a flare? | 8:26 | |
If he has a flare, for example, and I believe that people | 8:27 | |
do have that who are floor traders, then can he codify | 8:29 | |
that so that somebody who doesn't have that intuitive flare | 8:35 | |
can also do it? | 8:40 | |
If you have a great physicist and he has learned how | 8:42 | |
to smash the atom and only he can smash the atom, | 8:44 | |
only he can replicate the experiments, that is nothing. | 8:48 | |
It's when his more pedestrian assistants, | 8:51 | |
by reading a handbook, can take his codified knowledge | 8:54 | |
and apply it, then we consider that to be reproducible | 8:58 | |
scientific knowledge and as far as I know there is no | 9:02 | |
reproducible chart knowledge. | 9:07 | |
Now I haven't read the book that this particular | 9:09 | |
questioner has written apparently but the sampling that | 9:12 | |
I've done, and that other people have done, | 9:18 | |
doesn't suggest to me that as a betting man | 9:20 | |
this is a very profitable field for application. | 9:23 | |
- | Professor Samuelson, here is the third question | 9:28 |
and it goes like this: | 9:31 | |
Didn't most of you experts expect the market | 9:32 | |
to be revalued upward? | 9:35 | |
I acted upon such advice to protect my international | 9:36 | |
position and also I must confess in the hope of | 9:40 | |
making some money. | 9:42 | |
I took a speculative position in the mark. | 9:44 | |
I may say that I had to pay through the nose for it | 9:47 | |
but I would've come out well ahead if all you experts | 9:51 | |
had not been shown up to be wrong by the announcement | 9:54 | |
of Kissinger that the mark would not be revalued. | 9:56 | |
Now I've got a good loss and have learned a good lesson. | 10:00 | |
The question is, however, have you learned a lesson? | 10:03 | |
And if so, what is it? | 10:06 | |
- | I don't recall that in any of these tapes I went | 10:07 |
out on a limb and made a confident point blank prediction | 10:11 | |
that the mark would be revalued upward. | 10:18 | |
I didn't make a prediction that the pound is still | 10:22 | |
to be devalued. | 10:25 | |
I don't recall making an outright prediction that the | 10:26 | |
French franc will be devalued. | 10:30 | |
Nevertheless if one of our subscribers had questioned me | 10:33 | |
a couple weeks ago and said do you think the odds | 10:38 | |
favor the mark being revalued upward I would have agreed. | 10:42 | |
I would, I hope, have indicated my degree of confidence, | 10:46 | |
which in a matter of this sort, as I said in one | 10:51 | |
of the other tapes, is fruitless to try to predict | 10:54 | |
the day to day movements in these matters. | 10:56 | |
It depends upon the decisions of statesmen. | 11:01 | |
What I would've said if asked at that time is this; | 11:03 | |
that the German mark by every conventional test | 11:07 | |
is a undervalued currency, just as, in my opinion | 11:11 | |
and although this is more controversial, | 11:15 | |
the American dollar is an overvalued currency. | 11:17 | |
It makes good sense, therefore, from the standpoint | 11:21 | |
of the world for the mark to go up relative to the dollar, | 11:23 | |
for the dollar to go down relative to the mark. | 11:27 | |
Now I don't always bet that what makes good sense | 11:29 | |
for the world will get done because anyone who has made | 11:32 | |
such bets based upon that belief has been burned | 11:36 | |
many a time, but in this particular case since the | 11:40 | |
Germans allege to be afraid of inflation | 11:42 | |
and we keep being told that Germans all remember the | 11:47 | |
1921, 1923 inflation. | 11:51 | |
It's hard for me to believe that there are enough | 11:55 | |
Germans alive, essentially, to remember that dramatic | 11:57 | |
experience but that's part of the conventional wisdom. | 12:01 | |
Taking that at face value, one way to protect yourself | 12:05 | |
from inflation abroad from the wastrel ways | 12:09 | |
of the United States and the other mixed economies would be | 12:12 | |
for you as a German finance minister to revalue | 12:15 | |
the mark upward. | 12:20 | |
There are political reasons against it, | 12:22 | |
there are political reasons of an irrational | 12:25 | |
type against it. | 12:27 | |
There are minor administrative reasons such as | 12:29 | |
that how you handle the book keeping of | 12:33 | |
farm subsidies in the common market are affected by | 12:36 | |
an outright revaluation. | 12:40 | |
There is the much more important political objection | 12:43 | |
that the export industries in Germany have learned | 12:46 | |
to live with the surplus where they have become | 12:50 | |
accustomed to the surplus, they are now vested interests | 12:54 | |
interested in that surplus and they complain that if the | 12:58 | |
mark is revalued upward it will hurt the export business. | 13:02 | |
Precisely, that's the intention of it, | 13:06 | |
there's no point in correcting an undervalued currency | 13:08 | |
except to increase the imports and to decrease the exports. | 13:13 | |
So I thought that the mark had a very good chance | 13:19 | |
of being revalued upward. | 13:23 | |
It is said that Dr. Karl Schiller, the best economist, | 13:27 | |
he happens to be a social democrat in the | 13:31 | |
coalition government, was in favor of an 8% increase. | 13:34 | |
As far as our subscriber's concerned if he's the sort | 13:39 | |
who has an insurable interest and wanted to protect it | 13:43 | |
against a revaluation I think that in buying insurance, | 13:48 | |
even at a considerable price, that was a wise judgment. | 13:51 | |
If he's a man with sporting blood who wanted to take | 13:56 | |
a little flyer in the foreign exchange market | 13:58 | |
up to an exorbitant price, I think a good case | 14:04 | |
could have been made for that and he must be a new man | 14:08 | |
at this game if the fact that he's taken a loss deters him. | 14:11 | |
You can't, as an investor, ever be consumed by idle | 14:16 | |
regret and recrimination. | 14:21 | |
What you must always as yourself, of course, is this: | 14:23 | |
on the basis of the information pattern known to me | 14:26 | |
at the time, on the basis of the analysis that was | 14:29 | |
available to me, did I do the right thing at that time? | 14:32 | |
The fact that the event went the other way doesn't cause | 14:37 | |
you, in the slightest, to criticize yourself. | 14:43 | |
Of course, if you are always making the wrong decisions, | 14:47 | |
always saying it looked to me right at the time but | 14:50 | |
events turned out to be otherwise then you ought to | 14:55 | |
reappraise your own batting eye, your own way of making | 14:58 | |
empirical inductions and decide whether maybe | 15:02 | |
plumbing rather than investment isn't your bag, | 15:06 | |
to use the subscribers, earlier subscriber's words, | 15:10 | |
and as a matter of fact, let's make no mistake about it | 15:14 | |
that if anyone hasn't been doing very well these last | 15:17 | |
10 years, these last 15 years, these last 25 years | 15:22 | |
in the stock market then there's something very much | 15:27 | |
wrong with him and he ought to change his trade. | 15:31 | |
- | Let me turn now from specific questions to the | 15:35 |
questions that everybody is asking these days and | 15:38 | |
continuing to re-ask. | 15:42 | |
How are the macroeconomic business cycle developments | 15:45 | |
doing in the United States now that we are in | 15:50 | |
the middle of the second quarter? | 15:55 | |
- | If we look at the leading indicators, | 16:02 |
they are definitely beginning to show signs of wobbling. | 16:06 | |
Instead of a majority of leading indicators still being | 16:13 | |
pointed upward or flat, a majority of the leading indicators | 16:16 | |
now seem to be pointing flat or downward. | 16:21 | |
The single most successful leading indicator, | 16:27 | |
as scored by Dr. Julius Shishkin of the Census Bureau | 16:30 | |
and Dr. Jeffrey Moore, the Commissioner of Labor Statistics | 16:35 | |
but formerly Vice President of the National Bureau | 16:39 | |
of Economic Research, has been the stock market itself. | 16:42 | |
The behavior of stock market prices gives a more predictable | 16:46 | |
lead than any other indicator according to their | 16:52 | |
mode of reckoning. | 16:59 | |
I may say that I have some doubts about their | 17:01 | |
mode of reckoning, I have some doubts about the | 17:04 | |
false starts, what the statisticians call the | 17:06 | |
errors of the second kind, that the stock market | 17:09 | |
indicator turns up. | 17:13 | |
True, almost always when the economy turns down | 17:16 | |
the stock market has earlier turned down and only rarely | 17:21 | |
when the economy turns down has the stock market | 17:28 | |
not already turned down. | 17:31 | |
One such rare event did take place in 1929 | 17:33 | |
in that very important period, when according to the | 17:37 | |
chronology of the business cycle, around the middle | 17:40 | |
of the year the downturn came, the upper peak was reached | 17:43 | |
whereas it wasn't until Black September and October | 17:47 | |
that we had the great stock market crash but that | 17:51 | |
error of the first kind is fairly rare, I agree, | 17:54 | |
with respect to the stock market. | 17:59 | |
But there is the error of the second kind, | 18:00 | |
namely in which the market turns down when there is | 18:02 | |
no following recession. | 18:07 | |
I expressed this in one of my News Week columns | 18:09 | |
a year ago by saying that the stock market had called | 18:13 | |
11 of the last five recessions and I've had students | 18:18 | |
go through the exercise of getting the stock market | 18:22 | |
time series and not knowing the dates, | 18:28 | |
covering up the dates and then having them make | 18:31 | |
predictions as to what's happening to business activity | 18:34 | |
and I can assure you that uniformly they predict | 18:36 | |
many more upturns and downturns than actually | 18:39 | |
take place in business. | 18:43 | |
Well, now I would say that the stock market prices, | 18:45 | |
which are still going up, perhaps contaminated | 18:51 | |
by peace rumors, are an exception and other indicators | 18:54 | |
such as the length of the working week, | 18:59 | |
which has been a pretty good one, | 19:01 | |
is definitely going down. | 19:04 | |
The rate of change of the money supply, | 19:06 | |
which is not a very good indicator, | 19:08 | |
it has much too long a lag, much too variable of a lag | 19:14 | |
to be given a high rating by Shishkin and Moore. | 19:19 | |
Also, if my memory is correct, it has done relatively | 19:25 | |
worse in the post war years when we live today, | 19:30 | |
most want it than had done earlier. | 19:38 | |
The rate of change of the money supply has been a | 19:41 | |
better indicator of what's gonna happen to | 19:43 | |
the leading indicators and so you might say how much | 19:46 | |
better that is because it's good to know when | 19:50 | |
the bugler is gonna blow the horn that's gonna | 19:54 | |
wake everybody up, but how much more valuable it | 19:57 | |
must be to know when the man is getting up who's | 19:59 | |
gonna wake the bugler up. | 20:04 | |
Well alas no, because the specially good agreement | 20:05 | |
of the rate of change of the money supply with the | 20:11 | |
leading indicators, which is an improvement over | 20:14 | |
it's regularity in predicting what happens to actual | 20:18 | |
business conditions as measured, for example, | 20:20 | |
by the coincidence indicators, simply means that the | 20:22 | |
rate of change of the money supply is better at | 20:28 | |
predicting what subsequently turned out to be revealed | 20:31 | |
to be false signals in the leading indicators than it is | 20:37 | |
in predicting solely the correct signals. | 20:41 | |
Well if we took historical chronology, | 20:46 | |
I suppose that the rate of change of the money supply | 20:51 | |
has took place in, shall I say December, | 20:57 | |
there was the inflection point and if I applied a | 21:03 | |
16 month lag, if that is the historical average, | 21:07 | |
perhaps corrected for more recent chronology, | 21:13 | |
then we would say that any national bureau downturn | 21:17 | |
in business activity is 16 months from last December, | 21:22 | |
that would take us well into the year 1970. | 21:28 | |
The fact that the leading indicators are now | 21:34 | |
beginning to wobble and show some downward movement | 21:38 | |
could be called the beginning of the beginning. | 21:42 | |
It's the beginning of the fight, | 21:46 | |
successful fight, against inflation. | 21:51 | |
However, I've gone back to look over what happened | 21:56 | |
to the leading indicators in earlier recessions and | 22:01 | |
generally you have many months in which those leading | 22:05 | |
indicators are falling and are falling fairly uniformly, | 22:08 | |
you even have that sort of thing in the false recessions | 22:11 | |
like the false recession of 1962, that was not a | 22:17 | |
full fledged National Bureau of Economic Research recession, | 22:23 | |
it was just a slow down. | 22:26 | |
If you wanna make a little joke, not a very deep joke, | 22:28 | |
Jeffrey Moore owns, at the National Bureau, | 22:32 | |
the regular business cycles and Ruth Mack, | 22:36 | |
who was an associate of the National Bureau has, | 22:40 | |
for her research possession, the shorter cycles that | 22:43 | |
the game board won't let you keep and makes you throw | 22:46 | |
back in not as genuine National Bureau recessions, | 22:49 | |
well the 1962 indicators went down from month after month | 22:54 | |
after month and all that they produced was | 22:59 | |
a mac cycle and not a more cycle and similarly during | 23:01 | |
the money crunch of 1966 and into 1967 what turned out | 23:07 | |
to be the case was the mac cycle, a slow down, a pause | 23:14 | |
not a genuine full fledge more National Bureau cycle, | 23:21 | |
so Las Vegas paid off no winners who had confidently | 23:27 | |
predicted in 1967 that there had to be a recession | 23:32 | |
based upon the crimes and felonies and misdemeanors | 23:37 | |
of the Federal Reserve in 1966 in producing | 23:39 | |
the money crunch. | 23:43 | |
Nevertheless, the leading indicators tell us what to | 23:46 | |
look for, what the direction of change is. | 23:49 | |
Let's turn to a very important current indicator that | 23:54 | |
is vital in terms of policy determination; unemployment. | 23:58 | |
Unemployment, you'll recall, had been down at 3.35% | 24:05 | |
for a number of months. | 24:10 | |
It went up to 3.4%, I think at that time I said big deal, | 24:12 | |
one tenth of a percent. | 24:16 | |
Well it's now gone up to 3.5% and I think it's indicative | 24:18 | |
of what seems to be indicated in the economy by the | 24:25 | |
consensus testimony, both of the monetarists and | 24:31 | |
of the GNP model builders whose creations I've | 24:35 | |
been looking at. | 24:40 | |
We have a definite slow down in the real rate of growth | 24:42 | |
of the economy that's been disguised in part by | 24:45 | |
a maintenance of the rate of price inflation, | 24:49 | |
and we would expect that to take it's | 24:54 | |
toll among unemployment. | 24:55 | |
Now I happen to think that the labor market is | 24:58 | |
still very tight. | 25:00 | |
I think that employers are going to be hoarding labor, | 25:01 | |
good labor, skilled labor as demand weakens so I wouldn't | 25:05 | |
expect there to show up rapidly, | 25:10 | |
in the unemployment figures, a great increase | 25:14 | |
but some of it has to show up and unfortunately | 25:17 | |
I have to report that the April figure of 3.5% | 25:21 | |
showed a definite deterioration of the | 25:27 | |
ghetto youth unemployment and, of course, in the tension | 25:30 | |
as to whether to be gradualist or whether to do something | 25:36 | |
very strong about controlling inflation, | 25:39 | |
it's indicators like that, straws in the wind like that | 25:43 | |
that will make it hard for people to say let's step | 25:47 | |
on the brakes very hard and I suggest that's | 25:51 | |
something you should watch. | 25:53 | |
Now, with respect to profits, a let down in the rate | 25:54 | |
of real growth has to take it's toll on profit margins. | 25:59 | |
Productivity was predicted by one of our product | 26:03 | |
consultants in macroeconomics to be doing wonderfully well. | 26:08 | |
Unfortunately I can't see that and now that we have | 26:14 | |
the first quarter figures you have reported what one | 26:16 | |
would have expected, namely that when real growth | 26:21 | |
goes up slowly you will find a deterioration of | 26:24 | |
unit productivity and so costs per unit of output | 26:29 | |
have gone up and profit margins are under pressure, | 26:33 | |
as has been reported by the First National City Bank. | 26:36 | |
We will know more as the weeks and months go by, | 26:44 | |
in the meantime what about that stock market | 26:48 | |
which remains strong up to the time that I am talking? | 26:51 | |
There I suppose one has to assume that it is a | 26:57 | |
peace dominated market and each utterance from Paris, | 26:59 | |
from Washington, from Saigon, that would be what makes for | 27:06 | |
dispersion and variation in the indicators of | 27:12 | |
the stock market. | 27:16 | |
- | Thank you Professor Paul Samuelson of MIT. | 27:18 |
Instructional Dynamics welcomes your comments, | 27:22 | |
suggestions or questions. | 27:24 | |
Write IDI, 166 East Superior Street, Chicago. 6-0-6-1-1. | 27:26 |
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