00:00:45.440 - 00:01:25.260

mhm from Gainesville, Florida Hello, I'm Mike Cannon. And this is conversation. My guest this evening is B. Carter Randall, vice chairmen of Sun Banks of Florida, an investment advisor to the Trust Investment group, with combined trust assets of approximately $1.8 billion. Mr. Randall is a well known writer, radio commentator, TV Panelist and occasional host for the PBS television program Wall Street.

00:01:25.260 - 00:01:52.510

Week Prior to joining Sun Banks, he was senior vice president of Equitable Band Corporation in Baltimore and senior vice president of Royal Trust Bancorp in Miami. Randall attended Harvard and Johns Hopkins University's and taught at the University of Baltimore, Hopkins and Stetson University. I'll return in a moment for a conversation about the stock market and about the economy in general.

00:01:52.800 - 00:02:26.090

With Carter Randolph. Yeah, I've I presents conversation from the University of Florida, a discussion of social, political, scientific and religious issues of the day. Your host is Dr Michael V. Gannon, professor of history and ethics, an assistant dean of the College of Liberal Arts and Sciences at the University of Florida.

00:02:28.940 - 00:02:45.120

Carter. Welcome to conversation, Mike. It's very nice to be here. You are a television veteran and I watch Wall Street week regularly. I'm sorry that we didn't have a beautiful woman escort you to your chair as you do on Wall Street week. So why not? I'm quite used to it.

00:02:45.120 - 00:03:09.760

Mike. Who is that person? I'm sure many people wonder, since she's never introduced on the program. Well, Mike, uh, we're live television and you don't see much live television anymore. And, as always, was the case with live television. She's in effect an extra, but she's really an assistant director of other shows, and she's an expert in lighting and camera and Sam.

00:03:10.240 - 00:03:31.700

And if we get a coughing spell, she gives us a cough drop. And those people who uh, might ask why we don't allow her to say anything. And are we, uh, male chauvinist or something? The answer is no. Our executive lady producer insists on it. Oh, well, there's a certain mystery or mystique about her appearances.

00:03:31.910 - 00:03:52.960

By the way, where is the show? Produced? Uh, Owens Mills, Maryland, which is the investment capital of the world. It's located in horse country, beautiful rolling hills. But all of the people from all over the nation come there too. Say what they think, and Louis Rukeyser and all of the investment and banking experts who appear on the show.

00:03:53.190 - 00:04:17.200

And you yourself traveled to Oh Ensberg each week, or whenever you're scheduled to Owings Mills. Yes, very few mills. Yes, very few of them live in that area of New York. Chicago, Florida, wherever. Well, I want to talk about the stock market because people have spoken of the events of the last weeks of August as the guns of August.

00:04:17.200 - 00:04:33.870

There was a tremendous explosion, a bombardment of sales, and the volume on the Big Board topped one billion shares in a 10 day buying spree. The popular media would have us believe that all of this was the result of one man's announcement that interest rates were going down.

00:04:33.870 - 00:04:54.660

That man being Henry Kaufman, chief economist at Solomon Brothers brokerage firm Uh, I understand that a rumor swept Wall Street that Mr Kaufman had decided that yes, interest rates are going down, and as a result, we had the guns of August. Well, what about that? Well, Mike, there's an old saying in the investment business.

00:04:54.660 - 00:05:11.300

They don't ring a bell when a mark has hit the top or a bottom, but that was as close to a bell ringing as I know. We've had a very lackluster stock market for about 18 months, and really prices have been drifting down on a steady basis.

00:05:11.840 - 00:05:33.680

And then all of a sudden was the realization that the last holdout, as far as an economic recovery, was concerned. Henry Kaufman had capitulated, and I must admit that was that was an impetus. But interest rates have been falling. Most of the experts had already predicted they would fall further.

00:05:33.690 - 00:05:55.590

Henry Kaufman is probably the best known man in the street on that subject, but he was a little late in his prediction, so he did have an influence on what happened. He had a very short term influence. But the real direction of the market is prediction of the economy and corporate sales and earnings ahead.

00:05:55.600 - 00:06:22.410

Were you surprised at the tremendous volume it was larger than had ever occurred in the stock market? No, I wasn't surprised because it's typical of other periods in the market. Now I know records were set, and to that extent, of course, I was surprised. But the heavy volume and very volatile stock trading with prices going up and down on a volatile basis is quite typical of a period where the market is changing direction.

00:06:22.410 - 00:06:42.510

And I I say that that market was a precursor of a change in direction that over the next several months we'll have a strong market. But let me put a hedge in there. That doesn't mean straight up or whenever you get a big rise in stock prices, people start to take profits and sell and back down a little bit.

00:06:42.510 - 00:06:59.020

So we may see a correction here in the next two or three weeks. In general, Would you say that the heavy volume and the tremendous changes in prices are a dependable, if not inevitable, sign of a turnaround in the economy? Yes, without much question about it.

00:06:59.020 - 00:07:17.160

And I think most economists would would verify that the stock market predicts the future. It does not reflect the past. This strength and what I think will be continuing strength over the next few months will be predicting a rising economy for the next year or two.

00:07:17.640 - 00:07:33.970

I wonder if a lot of people well, I should begin by saying that it was the institutions which made the first major investments isn't that correct? That is true. And they made them primarily in blue chip stocks such as IBM, Procter and Gamble, Sears, uh, A, T and T, and so on.

00:07:34.180 - 00:07:54.460

But individual investors followed in the wake. Did they not? Yes, but it's been mainly an institutional market so far. The way you can tell that is by the big blocks that trade of 10,000 shares of this, or or 20,000 shares of that. And there there have been, over the last few weeks, several blocks trading.

00:07:54.940 - 00:08:16.990

Ah, the number of trades has not been heavy, certainly relative to the volume. So you can tell us institutional, big investor chemical banks by a billion, for example, Chemical Bank or Morgan Guaranty or the Prudential or some mutual funds, or what have you Even the Sun Banks was in there?

00:08:17.050 - 00:08:40.540

Good. I wonder if among individual investors who followed the institutional investors, there was not a feeling that sitting on money was no fun anymore. People had money and money banks. I understand there's $227 billion in in, uh, money funds, and, uh, everybody wanted to gamble again, and that was a chance.

00:08:40.540 - 00:09:00.340

Well, I don't think everybody is ready to gamble yet. There's there's still a lot of bad economic news currently, and and that is, uh, wearing people, no question about it. A lot of bankruptcies, a lot of news about government deficits and international problems, etcetera, etcetera. But you're right.

00:09:00.350 - 00:09:23.280

There is tremendous liquidity in the hands of people who are investors. And those people, incidentally, are starting to realize that the interest on their money is going down and they're earning less income on those money market funds. And they were used to that money. Eventually we'll go to work, and that's why I think we're going to see a better market ahead.

00:09:23.290 - 00:09:47.880

Here's a quotation Carter from Jay Goldinger, a broker with Cantor Fitzgerald in Beverly Hills. He says the economy is really much worse than anyone wants to believe. This rally is a trap. The market is reacting to lower interest rates, and various other commentators have added that you can't expect to pull strongly out of a recession as long as housing, autos and agriculture are in a depression.

00:09:48.540 - 00:10:17.250

Well, the last part of that is certainly true if if they're in a depression and they don't come back. Then the economy won't come back. But lower interest rates are precipitator of their recovery, and they will recover. Furthermore, we did have a tax decrease that took effect as of July 1, and the consumer now has more spendable money after taxes and that money goes into consumption and consumption buys goods, which produce sales and profits for companies.

00:10:17.800 - 00:10:46.790

This is not unlike other economic cycles that we've been through before. Very, very similar. You mentioned problems. I mentioned problems. Let me name four in a series here and let's see where it takes us, All right. First of all, the dip in productivity it is. There's been a long term decline in the industrial production index, which is very worrisome then, uh, the unemployment rate, which is still higher than at any time since the Great Depression.

00:10:47.640 - 00:11:10.770

Then 27 banks have died, Um, a mortality rate UN approach since the years of the Great Depression. If this has made people stop and think about their money and their banks, and together with that, a long list of major bankruptcies Braniff being the best known and some other companies are reeling International Harvester and Johns Manville for different reasons.

00:11:10.780 - 00:11:27.940

Right? What does all that tell you? Well, let me You want to take them one at a time if I take productivity? Alright, Uh, productivity. I would call slightly with the definition that you you give to that industrial production has not been going down for a long period of time.

00:11:27.940 - 00:11:52.160

But productivity, meaning efficiency of production has been for quite some time. Oh, I do think we're turning the corner on that, but I think it's a long turn around that corner. Oh, one always has increased productivity when production goes up, because there's more work put out per our unit of labour.

00:11:52.540 - 00:12:12.500

But what we really long term are shooting for, and I think this is part of the administration's goal is modernization of plant and equipment so that we use less people to do the same job. And that's increased productivity or efficiency. Oh, that will happen. But not soon.

00:12:13.040 - 00:12:39.130

We do have a national policy of inducing savings and investment to produce the capital for that plant modernization. Uh, and eventually we will get it through robotics and other automation devices. Our second problem is unemployment. Well, unemployment the latest figure latest monthly figure was 9.8% slightly below 10% on a national basis and much higher than that in some sectors of the nation.

00:12:39.640 - 00:13:02.160

I don't expect the unemployment rate to decline by much over the next several months. First of all, it never does during the early stages of her recovery. Secondly, we have a continuously increasing labor force. Uh, the numbers are growing, so if the percent of unemployment remains constant, is more in people.

00:13:02.740 - 00:13:27.990

Uh, that will remain high until we have a very strong recovery, which I don't anticipate soon. Uh, the propensity of more than one person in the family to work is another cause of unemployment, and the figure on a relative basis is really higher than is really lower than than it appears to be on a historical basis.

00:13:28.510 - 00:13:49.640

In that connection, many Democratic politicians are blaming Reaganomics for unemployment. Was this, uh, movement of unemployment rates going higher, something that one can already discern in the last year or years of the Carter administration? Well, there's a trade off between inflation and unemployment, and that's almost a given economic axiom.

00:13:49.800 - 00:14:21.760

Certainly the Reagan administration has had as his main opponent. Public enemy number one inflation, which hurts everybody. But to the extent you stem inflation, you hurt the employment scene. There's no question about that. There is a trade off. Uh, I don't think I can say that the Reagan administration is directly responsible because this is an economic cycle which would have happened almost regardless of national political policy.

00:14:22.240 - 00:14:39.740

But certainly unemployment is higher than it would have been if the Reagan administration had been willing to have high interest rates and high rates of inflation. All right, the third problem that we mentioned was the number of banks that have gone under. You see any special trend here or any reason for the phenomenon?

00:14:40.120 - 00:15:10.950

Well, a lot of the financial institutions got very over extended during the booming years preceding this recession, and they made unwise loans to the extent they did. They're in trouble, the savings institutions in particular in trouble because they made very long term mortgage loans at relatively low rates and and in recent years have had to borrow at high rates and this is eroded their profits in their capital.

00:15:11.540 - 00:15:31.650

But no, I'm not concerned about the total financial service industry in general, it's very strong. The commercial banking industry is profitable and well and can handle the relatively small amount of bad loans and banking in Florida. You include among those institutions that are in good health.

00:15:31.660 - 00:15:49.490

Well, as a matter of fact, in this particular economic cycle, the Florida banks are in much better shape than most of the larger banks nationwide because they have not made the very large energy loans. And they have not made the very large industrial loans or the international loans, which are the problem ones.

00:15:49.490 - 00:16:14.600

At the moment, Florida, relatively speaking, is not suffering at all. You expect the Florida based banks to be hurt by interstate banking, the introduction of Citicorp chase and so forth. Sure, it will give them more competition and it's coming. But, you know, competition is something on which we should thrive rather than suffer, and I welcome the competition.

00:16:14.600 - 00:16:41.500

I think the competition makes us sharper. I think the competition sells our products to the public, and I think it's good for everybody to have competition. So I'm not worried about that. And then the final of the four problems, which I name the major bankruptcies, companies going into Chapter 11 or other forms of bankruptcy, uh, again, Do you see a downturn in that phenomenon, or are we likely to see more companies go under in the same fashion?

00:16:41.500 - 00:16:58.050

Mike, we're likely to see a few more, and I'm just waiting for a couple of unexpected ones. I don't know who they may be, obviously, but we're likely to see a few more. But again, I don't mean to be Pollyanna, but this is a syndrome of every economic cycle.

00:16:58.050 - 00:17:18.530

Downturn. Uh, we just have to reckon with. It is bad news. It This employs people. No, it provides this service to the public. But, you know, we're in the survival of the fittest economy and those who can't cut the mustard this can't stay with you. Can't overextend in times like these.

00:17:18.540 - 00:17:47.810

That's right. If government spending returning to the President Reagan administration economic policy again, if government spending were substantially reduced in order to conform with reduced tax revenues, would we actually be better off? Well, Mike, that's a commonplace to say that we would be. But it's a very easy thing for people to say if those fellows in Washington only stop spending money, all of our problems would be solved.

00:17:47.820 - 00:18:06.200

But of course, that's not true. If government spending were immediately decreased to equal the revenue of government, we wouldn't be in a recession. We'd be in a depression. We would be dis employing millions of people. Uh, and furthermore, government budgets are different from yours and mine.

00:18:06.360 - 00:18:31.380

When government decreases its spending, it also automatically decreases its revenue, for instance, in defense spending. If it cuts defense spending, then it can't tax back the profits of the contracting corporations nor the income taxes the people employed as such. In fact, uh, it's expenditures go up as a result because it has played unemployment conversation Very interesting.

00:18:31.380 - 00:18:47.740

This is not the way that most of us look at the problem. Well, I don't want to be misunderstood. Government deficits and huge government deficits are not good for lots of reasons. Their inflationary and to the extent government has to borrow money is in competition with private enterprise.

00:18:47.740 - 00:19:09.800

But it's an oversimplification to say government should cut back in spending by $150 billion a year, a little worried about banking and, uh, about savings and loans. Institutions in particular, Uh, it's cost them more to borrow, and they're getting a smaller return on what they had lent out.

00:19:09.810 - 00:19:31.670

I think that's called borrowing short and loaning long. That's just what it is, and they've been in trouble as a result. How are they going to be pulled out? What is going to save the SNL institutions? Well, Mike number one declining interest rates, which were experiencing will help them because their costs of money will decline.

00:19:32.150 - 00:20:03.150

This may be a partial salvation number two. We're seeing a lot of mergers, reorganizations, Uh, and we're seeing a lot of them expand into other areas of endeavor. I'm worried about the industry, but I am much more worried about the attitude of people toward the industry and that I'm worried that people might lose confidence in it, and that could create very poor economic condition.

00:20:03.150 - 00:20:20.710

I don't think that will happen. I think the s and L's will be all right, and the depositors will not suffer. But but lack of confidence is what I worry about. There's a popular conception that SNL's and banks want and make money from high interest rates.

00:20:20.840 - 00:20:44.450

Well, that popular conception again is wrong and I'm speaking generally, banks like low interest rates because banks make money on the difference between what they can lend it out for and what they have to pay for it. As interest rates go down, that spread widens and and bank profits go up.

00:20:44.500 - 00:21:02.690

As interest rates go up, their cost of money goes up faster than the rate of return, which they're making. And some loans are pegged long term at fixed rates anyway, and bank earnings suffer as interest rates go up. So we don't like high interest rates any more than the bar.

00:21:02.880 - 00:21:21.250

There is one person who likes high interest rates, one type. And that's an investor. Yes, who has cash in a money market? Yes, but the money market becomes less attractive as interest rates come down has become more attractive. There's no question about that. And so do bonds and bonds.

00:21:21.250 - 00:21:41.920

Yes, yes, right. Uh, if I understand your remarks correctly, interest rates and inflation follow a parallel course. As one goes down, the other goes down as one goes up, the other goes up. Is that because of the natural force of of the market? Or is that because of government policy?

00:21:41.930 - 00:22:06.000

No, no, that that's, uh that is basic economics. Almost the historically the spread between inflation and the cost of money. Money, after all, is a commodity like any other commodity. And it has a price known as an interest rate. The spread between the growing interest rates and inflation has historically been about 3%.

00:22:06.160 - 00:22:27.710

In other words, if inflation is at 5% Uh, you had three to that, and you get something akin to the prime rate of the banks, which should be 8%. Uh, that's the real cost of money being 3% on a constant basis. Now that's all gone a little out of whack recently, we're running about 5% this year in inflation.

00:22:27.710 - 00:22:48.260

And yet the prime rate of the banks is still in double digit figures, 13% or 13.5 in many places, and I believe that spread will narrow. I don't think it'll get back to a real rate of 3% anytime soon, but I predict it might come to a real rate of, say, five.

00:22:49.010 - 00:23:08.200

And if you if you are gloomy and you think inflation is going to go back up to 6%. Add five to that. You get a possible prime rate of the banks of 11% which means all other interest rates would come down to. Are you personally optimistic that the rate of inflation has stabilized or that it perhaps may decline even further?

00:23:08.440 - 00:23:29.960

I'm very optimistic about that, Mike. I think we're going to see lower inflation, at least for the next several months, and I have several reasons for that. One is that we're not seeing price increases of manufacturing goes to any great extent because companies are trying to increase volume, not not raising prices to offset costs.

00:23:30.510 - 00:23:55.930

Number two. There's ample food supply in the farm belt of this nation, and therefore there's no shortage of food to push food prices up. Number three. There's a glut of oil worldwide, and oil will not be a major factor in increasing prices. And lastly, uh, at least at the present time, labor is not demanding and getting exorbitant wage and benefit increases.

00:23:55.930 - 00:24:16.370

In fact, labour is fighting hard for job security, not so much higher wages and benefits. You have said that, in your view, it is a wrong policy for individuals to make investments for the purpose of avoiding taxes. Would you elaborate on that? And and explain what you mean.

00:24:16.370 - 00:24:32.560

Why would an individual How would an individual secure relief from taxes through an investment in the first place? Alright, well, there are lots of ways to avoid taxes, uh, through tax shelters through investing in tax exempt bonds, et cetera. I'm talking about the legal ways to avoid, of course, sure.

00:24:33.240 - 00:24:53.790

Uh, I'm not opposed to avoidance of taxes, but I'm saying avoidance of taxes should not be a goal of investment. In fact, just the opposite. I sometimes think that if you have a goal of paying more taxes every year, that will help you in in the decision making on how to make more money every year.

00:24:53.800 - 00:25:17.000

Now, avoiding taxes is a tool towards making more money. But the goal is making money, and so many people invest in poor investments just to avoid taxes. And that's ridiculous. Our I r A s still the good investment that they seem to all of us lay people as well as professional economists when they first came on the scene.

00:25:17.000 - 00:25:49.060

And are they still a good bye for people at middle age? as they appear to be for younger investors. IRAs. Which I might explain, uh, individual retirement accounts. Yes, yes, this was one of the great Bonanza is given to working people by the Tax Reform Act of 1980 81 where you or I can put away $2000 per year, get a tax deduction for that and invest that money tax free until retirement.

00:25:49.640 - 00:26:13.990

I think if I had advice to almost anyone, it would be to save money that way, get the tax deduction and invest tax free until retirement. Young, old, it doesn't make any difference. The younger ones will benefit, of course, more than the older ones. But, oh, it is really a bonanza for people.

00:26:14.090 - 00:26:41.110

And incidentally, it's for the good of the nation to it will help to provide a lot of capital to do some of that plant modernization I was talking about. There was some questionable promotional literature that came out when the I R. A s were first announced, Um, including such pronouncements that if a young person put away $2000 for a year and it grew in the investment by the time he or she was able to take it out at age 62 or whatever.

00:26:41.110 - 00:26:58.440

The limit is that it would amount to a million or several million dollars. But if the inflation rate and continue to increase all during those years, $1 million would not be very much in terms of buying power. Well, Mike, I think that was irresponsible advertising and, frankly, on part of some financial institutions.

00:26:58.440 - 00:27:26.170

You're right. They use statistics assuming interest rates would stay where they were then. But if that's so, we'd have rampant inflation over that period of time. I'd rather say that you can get a real rate of return on your money tax free at whatever the going rate is over a long period of time, and you can earn after tax instead of before tax and how much money in dollars will be available.

00:27:26.540 - 00:27:45.270

It depends on a lot of things, but I think it was irresponsible advertising. How do you think Reaganomics will fare in the elections of November 2? I think the administration will lose seats in Congress After all, we've been in a poor economic period and people don't like that.

00:27:45.640 - 00:28:04.360

I think they will lose seats in Congress But, you know, this is no different. Oh, than any other by election year. Usually the administration loses seats. I predict by 1984 when the economy is doing quite well, unemployment down and inflation down to that, it will recover.

00:28:04.370 - 00:28:27.380

And more so seats in Congress and very quickly in the 10 seconds we have left. What date would you set for a general turnaround in the economy? Starting November 16 at 11:01 a.m. 1982. May I write that down? Thank you, Carter. Randall, For being with me on conversation.

00:28:29.940 - 00:29:17.650

Mhm. Mm hmm. Yeah. Mhm. Yeah, yeah.