By Bill Steigerwald
February 23, 2008
Q: Should we be jumping out of windows or buying stocks right now?
A: We should not be jumping out of windows. We should be buying stocks, and I say that for two reasons: Number One, the market basically today is priced for almost the end of the world. The conditions that have preceded previous periods of rough economic times just don't exist. The other thing is, if you look back at the last 230 years of U.S. history, there has really hardly ever been a bad time to buy stocks -- especially if you are holding them for the long run.
Q: You say we are not in a recession and we are not even headed for one, right?
A: That is correct. Every single recession in the United States for the last 80 years has been preceded by a tight Federal Reserve policy -- in other words, excessively high interest rates. And we clearly don't have that today -- and by the way, I don't think we had it last year either; a 5.25 percent Fed funds rate was not too high. It was still a very low rate. Recessions are also preceded frequently by tax hikes or protectionism. So I would say that today we have very low interest rates, we have low tax rates, and we are not moving in a protectionist direction. As a result, those conditions that have led to recessions in the past don't exist. One last point: I know of no point in history where we have ever scared ourselves into a recession. It just has never happened before and I don't think it will happen this time, either.
Q: What's a real economic or financial problem that we should be very worried about fixing or dealing with?
A: The thing that scares me the most is that we have become very politically oriented in our economic policy. In other words, we are doing things today because we are in an election year or because of some political expediency. This reminds me of the 1970s, where it was all about getting through the next election, or getting through the next few months without a political problem. What this eventually does is it leads to economic inefficiencies. It leads to economic problems, like inflation. For example, the European Central Bank under Jean-Claude Trichet has not cut interest rates. Since August they haven't cut them at all, whereas we have reacted very rapidly in cutting interest rates. I would argue that this is a politically expedient thing to do and we will pay a price for it down the road. I think inflation should be our Number-One fear. We also have some longer-term fears, and that is, that entitlements are slowly and every year creeping closer and closer to becoming a major burden on the economy. We know these will be a problem, yet we continue to kick the can down the road. In one sense we have issues that we won't address and in another sense we have issues that we are addressing too radically, too quickly and without much thought. I think both of those things are going to lead to problems down the road.
I just wrote a little thing in what we call our "Monday Morning Outlook" about the fact that in one hearing room last week Congress was complaining about baseball players taking artificial stimulus, and in another hearing room they were yelling at the Fed chairman and the Treasury secretary to provide more artificial stimulus for the economy. Just like steroids can cause problems for athletes, so can easy money and rebates cause problems for the economy.
Q: Is there a problem that is being overhyped by the mainstream general news media -- The New York Times, CNN, USA Today?
A: Yes, I think there are. The biggest one is this whole subprime lending issue. At its worst, and this is using the worst assumptions that I can make, it'll be about a $250 billion problem. I don't even think that we'll get to that level; that's the worst I can make it. $250 billion is less than .3 percent of all the economy's assets. We have a $14 trillion GDP. We have $100 trillion in assets. It's just too small of a problem to take the economy down. So I think we are blowing it out of proportion today and it is causing more fear than it should.
Q: What do you think of John McCain's economic thoughts and plans so far?
A: I think the question for him is open. He voted against the Bush tax cuts. When it comes to economics, and he's even said it, he's kind of agnostic. He's going to have to be a quick study to really get conservatives on his side. Conservatives are not convinced about John McCain's economic credentials and I think there is a good reason for that.
Q: If President McCain hired you and made you his "Economic Czar," what's the first thing you'd set out to fix in Washington -- either economically or politically?
A: The first thing we'd need to fix is our tax code. It is a system that is broken. It is inefficient. It is causing us to lose competitiveness in the world. Just one example is that we have the second-highest corporate tax rates in the world. They are much higher than European tax rates and by fixing our system -- bringing down those corporate tax rates -- we could make the United States a much more competitive country.
Q: Are we -- i.e., the Bush administration -- wrecking the economy by printing too much money and spending too much?
A: This is a great question. It is clear to me that the Federal Reserve is running an excessively accommodative -- you know, the monetary policy is way too easy, and that is running the risk of creating inflation. The Bush administration, on the fiscal side, has a mixed record. On the one hand, the tax cuts of 2003, I believe, have led to an incredible increase in wealth in the last five years. However, when they were put into place they had an expiration date, which is a problem. And then at the same time, we also increased spending a great deal -- and not just for the war, but we put in a brand new drug entitlement program.
So I think right now there is a very easy monetary policy and what I would call a problematic fiscal policy, and the mix of those two things can create serious problems for the economy. As of right now, we are not at a point of no return. But if we get out to 2009 and 2010 and we have interest-rate hikes and tax-rate hikes at the same time, that will be a very, very problematic period for the U.S. economy and financial markets. You could argue that because we have been lax in these areas, we are setting ourselves up for problems down the road.
Q: If we get a President Obama or a President Clinton, should we be terrified at what they might do to the economy?
A: Maybe my answer here will surprise you, but I am going to say "No." One of the reasons I will say no is that the president cannot get everything he or she wants. It will be easier for a Republican minority to hold up a plan of a Democratic president that would be bad for the economy than it would be for a Republican minority to hold up bad ideas of a Republican president. So I would argue that if you are in the minority in Congress you almost want the other party to be in control because it's easier to stop bad things. When it's your own party, it's harder to do, especially when we are talking about tax increases and things like that.
Here's the thing: If you go back in history, the stock market has had great times when the Democrats are in office and it's had great times when Republicans are in office. Bill Clinton is one of the test cases for this. When he first came into office, he tried to take the country left. He did increase taxes and he tried to move to national health care, but he was rebuffed and ended up turning back to the right. In his middle four years, he was the best free-trader -- along with Robert Rubin -- that we've had in a long time, as good as Ronald Reagan ever was. We got the capital gains tax cut and we had welfare reform. Those were all fabulous policies. I'd say he was the best "Republican" president in those middle four years that we've had since Ronald Reagan.
In other words, I don't like
necessarily what I am hearing from Obama and Clinton, but what
you hear is not always what will happen in reality. And my final
comment on this is, it's not about the party or person; it's
about the policy. That's what really matters. We'll have to wait
and see. I've tried very hard in my 25-year career to not be
knee-jerk, especially when it comes to politics, about what person
might be worse or better. I'm not powerful enough to change the
course of the election. What I am in control of is what I do
with my investments or how I advise my clients. So I always say,
"Let's wait and see and let's not pass judgment too early."
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