TOPICS > Economy

Calmer Markets Cap a Week of Investors ‘Being Smoked out of Safety Zone’

August 12, 2011 at 12:00 AM EST
The closing bell at the New York Stock Exchange on Friday capped one of the market's wildest spells since the meltdown of 2008. In the end, the major U.S. stock indices only dropped a small percentage for the week. Judy Woodruff discusses where things stand for investors with Bloomberg Businessweek's Roben Farzad.
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TRANSCRIPT

JUDY WOODRUFF: In the end, after all that volatility, the major stock indexes dropped for the week by just small percentages. The Dow finished down 1.5 percent. Still, in just over three weeks, the Dow has fallen by more than 1,400 points.

To look at where things now stand on Main Street and Wall Street, we turn to Roben Farzad. He’s a senior writer for Bloomberg Businessweek.

Roben Farzad, thank you for joining us.

So, after this roller-coaster week, why were things today calm by comparison?

ROBEN FARZAD, Bloomberg Businessweek: You know, frankly, people want to just go home for August and forget about the markets.

(LAUGHTER)

ROBEN FARZAD: And a lot of people feel indignant that this happened now. We know to expect this kind of stuff in September and October, but, gosh, you want to be fly-fishing now. You want to be in Aspen. You want to be in the Hamptons. And world events kind of flung this on to Wall Street.

And I think people stepped back and realized that, for all of that record volatility in four days, 400 points up, 400 points down, 600 points up, 600 points down, that, in the end, this isn’t really accomplishing anything, but generating so much stomach acid, so why don’t we step back and wait for events to unfold?

JUDY WOODRUFF: Well, we did have these good retail sales numbers today. What do they tell us, if anything, about the health of the economy. And, by the way, they seem to be contradicted by consumer confidence survey numbers, which are down.

ROBEN FARZAD: Yes, consumer confidence numbers are down to Reagan “morning in America” levels.

I mean, 30 years ago, or 31 years ago, it just tells you how far this economy has fallen. I mean, after all, unemployment is near double digits. There isn’t much to really hang your hat on if you are someone looking for wealth effect. Gas prices are up, certain food prices are up. Cost-of-living for people is not keeping up with wage increases.

And yet you go to an Apple store or you go to certain places in the economy, luxury car dealerships, and you practically have to get in a line. And I think this speaks to the very bifurcated nature of this economy. Certain people are doing very well. And on the flip side of it, you have the CEO of Wal-Mart come out recently and say, you know, you should see the traffic in the store the night that food stamp benefits are recharged.

I mean, people are literally paycheck to paycheck, benefit to benefit.

JUDY WOODRUFF: So do we just — does the country just live with this kind of contradictory information, you know, for some time to come? And we keep hearing the word psychology, the psychology of what investors are doing. And how much is that a factor?

ROBEN FARZAD: You know, psychology is not monolithic. If you could put the market on a therapist’s chair, I mean, one week, it’s feeling really bullish. The next week, it’s bearish. The next week, it has mother issues.

(LAUGHTER)

ROBEN FARZAD: I mean, look, let’s not forget almost a month ago, I — we were talking about a LinkedIn tech stock bubble. Dunkin’ Donuts was going public. The markets were frothy. Volatility was at a multi-year low.

And then, bam, Europe is unhinged, the United States is getting its credit rating cut on Friday. I mean, things turn like that. And I think when you step back, it speaks to the fact that the financial crisis, which kicked off four years ago, hasn’t played out in earnest. I mean there were some false starts that maybe we’re out of the woods.

And yet, when you see what Europe is grappling with, when you see the potential of entire economies, not just Greece now, but Italy, France, Spain, potentially defaulting, not being good on their money, it is far bigger in terms of order of magnitude vs. Lehman Brothers or Bear Stearns or Merrill Lynch, which by itself was very difficult to cordon off in September 2008. Imagine if entire economies in Western Europe fall.

JUDY WOODRUFF: Well, speaking of Europe, Americans don’t usually pay that close attention to Europe, but how much are people in this country going to have to continue to monitor what’s happening on the continent?

ROBEN FARZAD: We’re all connected.

It’s like that old New York telephone ad. The Federal Reserve here came out this week and pretty much telegraphed and showed its hand and said that we’re going to keep rates at record lows, at least until 2013. And now what that is forcing people out of — into cash, but making it prohibitively difficult to be in cash.

Meanwhile, European investors, institutional traders, investors and the like there are piling into U.S. Treasuries, at the very time that you have Standard & Poor’s saying that we’re not as good for our money as we were a couple of years ago.

And so that is just pushing everything down in terms of interest rates. And you see investors almost being smoked out of their safety zone, being forced to go and dabble in markets. But — and, yet, put us, put Europe, put Asia, everybody together, we have lopped $7 trillion off stock market values in just three weeks.

JUDY WOODRUFF: But it — and it is another one of those contradictions we were talking about a minute ago.

You know, we had two economists on the program earlier this week who said the odds of a second recession are now rising. How does that look to you at the end of this week?

ROBEN FARZAD: To me, it looks like flogging a dead or terminally ill horse at this point. I don’t feel like we ever truly recovered out of this great calamity of 2008.

Unemployment effectively doubles. The economy loses something like eight million to 10 million jobs. And when we’re creating something like 15,000 or 20,000 or 50,000 or even 100,000 jobs a month, that’s just not cutting it. It’s not keeping up with population growth in the labor force.

So this isn’t a recovery in the truest sense of the term. I know that’s very coldly comforting, but to say that we are on the verge of a double-dip really kind of overstates what we have just experienced in the way of recovery.

JUDY WOODRUFF: Last — last question, Roben Farzad. For ordinary folks who are watching this, what are they to look for? How are they to think about all this, as the rest of August unfolds and we head into the fall?

ROBEN FARZAD: Shut it off. I mean, stick to your knitting. If you had a discipline before the United States credit rating was downgraded a week ago, had you just stick to your guns and stick to your plan and your discipline and tuned it out and said, I’m going on vacation, and not navel-gazed every day, and resisted the urge to sell into these monster sell-offs, which were then followed by monster rallies, again, you would have preserved a lot of your stomach lining, and you would be more apt to see the big picture.

And time and again, that is the lesson here, to have a discipline, to have diversification, to ignore the day-to-day and the noise.

JUDY WOODRUFF: At the same time, appreciating a lot of people can’t go on vacation, so keeping it all in perspective.

ROBEN FARZAD: Make it a — make it a staycation then.

(LAUGHTER)

JUDY WOODRUFF: Roben Farzad, thanks very much.

ROBEN FARZAD: Thank you, Judy. Pleasure.