Liz Ann Sonders of Charles Schwab & Company and Brian Wesbury of First Trust Advisors Size Up The Markets & The Economy
Monday, October 06, 2008
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SUSIE GHARIB: Joining us now to talk more about the markets, the economy, and your investments, Liz Ann Sonders, chief investment strategist at Charles Schwab & Company; and Brian Wesbury, chief economist at First Trust Advisors. Hi, Liz Ann. Hi, Brian.
LIZ ANN SONDERS, CHIEF INVESTMENT STRATEGIST, CHARLES SCHWAB & COMPANY: Hi, Susie.
BRIAN WESBURY, CHIEF ECONOMIST, FIRST TRUST ADVISORS: Hi, Susie.
GHARIB: Liz Ann, let me begin with you, so is this a time to sell or a time to buy?
SONDERS: Well, you know what, it may not be either. I think this whole get in, get out idea that often gets bandied around, neither of those are strategies. I think if you do take -- your prior guest talked about long- term strategies, diversification, rebalancing. And if you actually go through that process, you would have been trimming back your equity positions, particularly your emerging market positions a year ago when they had ballooned in your portfolio. Now down 35 percent year-over-year for the market, we have only see seen that happen three times before, 1974 and twice in the '30s, those were not great selling opportunities.
GHARIB: Brian, you made a bold call today, you said that the Federal Reserve should cut interest rates immediately by 1 percent. You know, not too long ago you were saying just the opposite, so what changed in your mind?
WESBURY: Yes, well, what changed is that we've had a hoarding of cash, kind of a panic that has taken place. And banks are having a tough time lending to each other. Consumers are hoarding cash. Credit standards have tightened dramatically because of fear. And what this has done is it has caused a slowdown in the turnover of money. And the only way to combat that is for the Federal Reserve to print more of it and push more into the economy, and that means cutting interesting rates again. So that why I made that call. I thought we had avoided a recession until this panic hit in just the last three weeks. And now I think we are in a recession. So I -- the whole world has changed in just a three-week period of time.
GHARIB: All right. Let me come back to you in a minute about the economy. But I want to ask Liz Ann, do you think a big rate cut will restore investor confidence and take some of the fear and panic out of the markets?
SONDERS: I think it may help on the margin, but I think what would be more important is either a coordinated set of rate cuts by global central banks or at least a string of them. And I think given the crushing of inflation expectations thanks to a slowing global economies as well as commodity prices having imploded here, I think the impetus is there now not to mention what is happening to global markets and economies for there to be other central bank rate cuts. And I think it is the combination of those that would be most helpful.
GHARIB: Brian, back to what you were saying. So you see a recession now, which is also new for you. But a lot of people are talking depression.
WESBURY: Right. And I think that's way overblown. You know, in the second quarter we grew 2.8 percent. And so up until, you know, August or so the data looked reasonably good, not great, but no recession. But now all of a sudden things have slowed down very dramatically. And I think this is more of a temporary slowdown, a pullback by consumers. We are not in the kind of environment that causes a depression. That was a hugely deflationary period where the Federal Reserve had interest rates too high for too long. And we had 20 percent declines in the money supply. There is nothing like that going on today. So I think that's just.
GHARIB: Liz Ann, do you agree with that?
WESBURY: . too much to worry about.
GHARIB: Do you agree with that, a short recession?
SONDERS: Well, I don't know. I think that the -- no, I actually think the -- you know, Susie, I've thought we have been in a recession since late last year and the 2.8 percent GDP was artificially high by virtue of an artificially low deflator. And we won't get into the funny math of that. But all of the other indicators that the bureau that dates recessions looks at, including industrial production, wholesale and retail sales, incomes, employment, have all basically affirmed a recession for quite some time now. So I think it started late last year. And I think it is likely to be longer than the norm, which does take us into 2009.
GHARIB: Real quickly, Brian, do you think that this calls for a coordinated rate cut? France was calling for an emergency meeting of the top eight economies. Is that a positive development?
WESBURY: You know, it possibly could be. I think we've got a slowdown in the turnover of money, this velocity slow down is what economists call it. I think it is important that we counteract that. We haven't had a drop in consumer spending yet. And I think it has just happened here in September. So I don't really believe we've been in a recession until this point. And now what we've done is we've scared everybody into backing off from the economy.
GHARIB: Liz Ann, we have just a few seconds left. How long is this bear market going to last? When can investors feel like they are going to get some relief and things go back to normal?
SONDERS: Look, the shorter answer is, I don't know. But I mention the statistic of the year-over-year decline reaching that down 34, 35 percent, and the last time we saw that was at the low in '74, prior to that was in the '30s on percentage of stocks, deep distance from their 50-day moving average. There is a lot of technical things that are similar to where we have been in bottoms, but those are things that happen over time. They are not moments in time.
GHARIB: OK. We're going have to leave it there. Thank you both for coming on the program, really appreciate your analysis.
WESBURY: Thank you, Susie.
GHARIB: My guests tonight, Liz Ann Sonders, chief investment strategist at Charles Schwab & Company; Brian Wesbury, chief economist at First Trust Advisors.
