JEFFREY BROWN: The week began with euphoria in the markets after Europe and the U.S. announced steps to prop up the global financial system. But just two days later, a much more sober view of the economy led to a market plunge.
We take our own look now with: Liz Ann Sonders, chief investment strategist for Charles Schwab; Mark Zandi, chief economist at Moody’s Economy.com; and Jim Ellis, assistant managing editor at BusinessWeek magazine.
Well, Liz Ann Sonders, the markets took a hard look at the economy today. What did they see?
LIZ ANN SONDERS, Charles Schwab: Well, there were a couple of numbers that were reported. Retail sales was, for lack of a better word, ugly.
Even without inflation taken into consideration, retail sales were down 1.2 percent. And it was for the most part across the board. About the only glimmers of some strength were in the true non-discretionary areas, you know, food stores and drug stores. And, obviously, that is not what you want to see to see any kind of health in retail sales.
The Federal Reserve’s Beige Book came out, which is just a broad measure of economic activity across the country. That was much weaker than expected.
There was another consumer comfort poll or index that came out today with the second worst reading in history and a record jump in the percentage of respondents to that survey that believe the economy is worsening from here, fully 82 percent, which we’ve never seen a number that high.
So it was quite a mix of negative news today.
JEFFREY BROWN: And, Mark Zandi, how — fill in the picture a bit more. Regionally were there differences, strengths or weaknesses?
MARK ZANDI, chief economist, Moody’s Economy.com: Well, you know, the Beige Book, which is a compendium of observations on the economy put together by the 12 Fed district banks across the country, in Boston and Chicago and San Francisco and elsewhere, were uniformly negative.
I don’t think I’ve ever read a report as uniformly bad as this one. They’re suggesting that retailing is bad. Housing is bad. Manufacturing is bad. Tourism is weak, banking.
The only thing that is doing at all well is agriculture and energy. And based on my own work, there are now 27 states across the country that are in recession, in my view, and another 14 that are pretty close and probably will be in recession by the end of the year.
So one of the hallmarks of the current economic environment is that the problems are so broad-based across the country.
Uncertainty and lack of exports
JEFFREY BROWN: And stay on Mark, I noticed that one thing that Ben Bernanke pointed to today was the exports would be down. And that's because of slowness overseas, I guess, right?
MARK ZANDI: Yes. And that's a real disappointment, because the only source of growth we have had over the past year are exports. And that was because the global economy outside of the United States was doing reasonably well, particularly in Asia and Latin and South America.
And you combine that with the previously weaker dollar, and we got a lot of exports. And that was very important to technology, agriculture, aerospace.
But now our economic problems are everyone's problems. And we're probably now in a global economic recession. And that means that our export growth will slow sharply. And that source of growth will no longer be there for us.
JEFFREY BROWN: Now, Jim Ellis, the focus for days leading up to this was on the credit markets. Is it correct that those markets have opened a bit? And if so, why has that not translated into positive news for the economy?
JIM ELLIS, BusinessWeek magazine: Well, if you look at some of the numbers, like London interbank trading or trading in short periods of time between banks, there's been a slight decline over the last three days in the amounts that a bank would require another bank to pay it. You know, and that shows that they're a little less worried.
The problem is that there was all this euphoria at the beginning of the week, when people said, "Great, we've actually found a way to stop some of the, you know, turmoil in the financial markets or in the credit markets." And then they woke up the next day and discovered, "But there's a severe recession ahead, so let's not be too quick about this."
Basically what's happening now is stock investors are saying, "We've got no good news on the horizon. It's time to basically re-price, you know, the markets." We're taking away all the pricing that was built up from basically five years of speculation, five years of over-leverage. And now we're saying let's get back to more realistic valuations.
Valuing markets is difficult
JEFFREY BROWN: But, Jim, we're always told not to pay too much attention to the market on any one given day, but when you have -- that's the mantra I've always heard, as long as I've been doing this.
But when you have these wild swings, you have 950 up one day and 730 down, is there anything rational going on, or is this just a sign of pure confusion? How do you read it?
JIM ELLIS: Well, there's definite pure confusion here because people are trying to figure out, what's the market telling us? And the only thing the market really is telling us is that we were way overvalued. And the problem is that the market is not saying what true value is.
Remember, markets -- there's no such thing as intrinsic value. And basically value is what a person is willing to pay you today. And the market is saying, with a lack of capital out there to get from banks -- banks are hoarding capital, because they're so desperate to stay solvent -- they're not lending, which means that people don't have money to spend, and so, therefore, commerce sort of comes to a halt.
If that's the case, everybody says there's no reason to invest in stocks right now.
JEFFREY BROWN: Liz Ann Sonders, what's your answer? Same question about rational behavior on the markets or sheer confusion?
LIZ ANN SONDERS: Well, I think one of the factors is we have to understand the mechanics of the market and who the big players are. That may help to explain these wild swings that we're seeing, in many cases on an intraday basis, let alone from day to day.
We know what's going on in the traditional mutual fund industry. We know that there are record-breaking redemptions. Investors in those mutual funds calling up, saying, "Get me out. Sell my shares."
We had $72 billion come out of equity mutual funds in September. We're approaching that in October at only the halfway point. So we will break the record in October that was just set a month ago in September.
We know a lot of those redemptions not only come in at the end of the day, but the mutual funds themselves will do their selling in order to meet those redemptions at the end of the day. That's one piece of it that we actually can get hard data on.
Another big piece of it is the vast amount of money in hedge funds. They're unregulated. We don't have the same kind of access to information. We know that they are very, very highly leveraged, so they're being forced not only to de-leverage, but to sell in order to meet these redemptions.
They also tend to kind of watch the market throughout the day and really unleash a lot of their trading at the end of the day. That's the piece we know that's contributing a lot to volatility, but we can't really get the hard numbers like we can for mutual funds.
We know it's there. It's just harder to quantify.
JEFFREY BROWN: But you're saying a lot of these big swings, especially down, could be these very big players, the hedge funds, selling?
LIZ ANN SONDERS: Selling and de-leveraging. So, in many cases, it's not necessarily even because of redemptions. They're just trying to bring their leverage down from what was unbelievably elevated levels.
Risking panic, job loss
JEFFREY BROWN: Now, Mark Zandi, when you come back to the economy and how this hits people, how do we measure consumer confidence at this point? How much do we know about how much people are really hurting already?
MARK ZANDI: Well, I think this is a body blow to confidence, consumer confidence, business confidence. You can see it in the retail sales numbers. Those numbers were as bad as I've ever seen them.
In the last three months, sales have declined at a rate that we've not seen in the 40 years of the data that's available.
We are starting to get some survey data. And it's showing that there's panic, particularly business people. We've run a survey off of one of our Web sites every week and that plunged last week to a record low, so I think there is a general breakdown in the collective psyche. I think that confidence is really under a lot of pressure.
JEFFREY BROWN: And the real worry, Mark, I guess, would be the extent to which this turns into -- translates into job loss or salary freezes. How much of that are we seeing?
MARK ZANDI: Well, I think we will see that, clearly see it. We're already losing jobs. We've lost 750,000 jobs since the beginning of the year. And all the indications are that those job losses are intensifying.
I think it is important, though, to make one point and that is I do think this is largely a panic, but panics can become self-fulfilling. And I think that's what we're seeing right here. People are so nervous, so scared that they're battening down the hatches. They're not spending; they're not hiring; they're not investing.
And the result is that it's resulting in an increasingly dark reality.
JEFFREY BROWN: Jim Ellis, weigh in on that. How do you measure how people respond and when it is panic and when it is grounded in the realities of their lives?
JIM ELLIS: Well, there's a difference from, you know, looking at the way that consumers respond to markets today than there might have been 10, 20 years ago.
Now, increasingly, companies don't provide, you know, traditional pension plans where they guarantee you a benefit. Instead they've shifted that over to the employee, where the employee directs his own retirement fund. I think that a lot of people, therefore, have become much more sensitive to moves in the market and they have decided to move with their feet.
I think we're really going to see a drop in confidence over the next few weeks, when people are starting to see the results for their third quarter in their 401(k)s. I mean, basically, the Congressional Budget Office last week said that there's been about $2 trillion in 401(k) and private pension declines in the last 15 months.
And, you know, we're not even counting what happened in, you know, the three days this week. I mean, a lot of people are going to say that and they're going to say, "I've got to either push back retirement, I've got to -- or save more." And you know Americans don't like to save more.
And either one of those things is not particularly good for the economy, particularly the not -- you know, sort of not spending, not spending sort of is a bad thing right now. I mean, we're not seeing people go out and say, "Spend," like we did after 9/11.
But in some ways, we can't afford for all this liquidity to fall back into the marketplace, which is what the Fed is trying to do, and people choose not to spend or borrow, it sort of works against that.
Shifting economic priorities?
JEFFREY BROWN: And yet, Liz Ann Sonders, Ben Bernanke today said that, in spite of the length that this will clearly take and the difficulties out there, he said that we're using all the tools available and he expressed every confidence in the American economy.
So they clearly have to try to get that message out there. What do you look for to see if it's taking hold?
LIZ ANN SONDERS: Well, I think you have to continue to look for an easing in spreads, much as Jim talked about earlier. But, you know, to another point...
JEFFREY BROWN: You mean credit spreads?
LIZ ANN SONDERS: Credit spreads, yes, those borrowing rates between banks come down, because if banks are unwilling to lend to each other, they're sure not going to be willing to lend to businesses or consumers.
But here's the other problem with the lending to businesses and consumers. We're so focused right now on the supply of credit, getting the credit seizure to unseize, and bringing that liquidity into the system, we're not really focused much on the demand for credit side.
So if we do unfreeze the banking system, the idea that that's going to automatically lead to lending, businesses borrowing, consumers borrowing, businesses borrowing to expand, consumers borrowing to spend, that's the thing that I think is going to be a secondary concern, certainly on the part of consumers.
I just don't really see where that demand for borrowing, particularly if it's for consumption, to come from, because we are moving into more of a savings orientation.
I think ultimately this is one of the longer-term silver linings is that, as a society, we are moving away from credit-driven consumption to savings. And I think we'll ultimately all be better off. But the transition in that process is going to be a tough one.
JEFFREY BROWN: All right, Liz Ann Sonders, Mark Zandi and Jim Ellis, thank you, all three.