RAY SUAREZ: For more on the market turmoil here and abroad, we turn tonight to Jeffrey Saut, chief investment strategist with the firm Raymond James, and Susie Gharib, the anchor of “Nightly Business Report” on PBS.
Susie, what’s driving this? There have been triple-digit plunges all through this recent spate of weeks. Why another one today?
SUSIE GHARIB, “Nightly Business Report”: I think you hit on it in your setup story there, that the combination of those weak economic data in the U.S. on inflation, housing, the labor market, and manufacturing, and with that Morgan Stanley report saying that we’re dangerously close to a recession, these are not the kinds of headlines that investors like to see anywhere in the world, and, on top of that, a report today in The Wall Street Journal that the Federal Reserve Bank in New York is having extensive meetings with leaders of European banks, worried about their solvency, with their ability to meet financial obligations.
So, all of this made for what some traders called a perfect storm.
RAY SUAREZ: Jeffrey Saut, the bad news seems to move from time zone to time zone across the globe. Is everyone so exposed to everyone else that now your retirement is, at least a little bit, depending on whether Silvio Berlusconi is getting along with his finance minister?
JEFFREY SAUT, Raymond James & Associates, Inc: Yes, there is interconnectivity in the world’s markets.
I think the European thing is overblown. I just got back from a two-and-a-half-week tour over there, speaking to institutions and portfolio managers. I don’t think they’re all that worried about Greece and Portugal. The worry is Spain. And if Spain goes, then I do think you have huge issues. But I — my hunch is Spain is not going to default.
RAY SUAREZ: But then, just today, we got reports that several countries are balking at the terms of a Greek bailout, that we may be seeing bailout fatigue, or the early signs of it, very heavy in many of the Eurozone countries.
JEFFREY SAUT: I think that’s especially true in Germany. The German accounts I spoke to are — they are just tired of continuing bailing out of other countries.
But I don’t think you’re going to get the financial meltdown that’s going to spill over into the U.S. And I also think the U.S. is going to skate on Morgan Stanley’s prediction of a recession.
RAY SUAREZ: Susie, also, from the…
SUSIE GHARIB: Let me just say something, Ray.
RAY SUAREZ: Go ahead.
SUSIE GHARIB: I was going to say that, on this whole European thing, I think what worries so many investors is that, is there going to be a default by a major bank or by a country? And they want to see some assurances from policy-makers that there will be some kind of bailout, that this won’t happen.
And some analysts have been talking about a TARP-like solution for the solvency of — of banks there. And, on Tuesday, the head of Germany and the head of France met, and they had a meeting, and everyone was hoping for some kind of action. And it was more about agreements to talk with each other, but no action.
So, I think people are looking for some plan of action.
RAY SUAREZ: So, on just that point, every day that there’s not a final settlement, every day there’s not reassurance, is that a day that we could see this kind of volatility yet again?
SUSIE GHARIB: Well, I mean…
JEFFREY SAUT: Well, I liken it to the decline to what happened in October of ’78 and October of ’79.
You came down, made a selling climax low, and then you rallied, like we did the latter part of last week, and then you came back down and rested the lows. And I think that’s what we’re doing right now. I think we’re in a bottoming phase.
RAY SUAREZ: Susie, you were going to say?
SUSIE GHARIB: You know, yes, I was going to say, I was speaking with — interviewing the CEO of Dow Chemical, which will be on our program in a little bit, and I asked him about all of this.
And he says, you know, confidence is the key to everything here. And businesses, in order for them to invest and to hire, they need to see that policy-makers are giving them incentives to hire and to invest, whether it’s about regulations, whether it’s about tax policy or tax breaks.
And they’re — they’re just not getting it. And confidence is key to everything. So until we see policy-makers taking some kind of action, people have just lost confidence.
RAY SUAREZ: Jeffrey Saut, who the VIX, or volatility index, and if it’s over 30, what’s that measuring and why should we be worried?
JEFFREY SAUT: Well, it does measure volatility on the CBOE.
And it has picked up dramatically in the past few weeks because of the increase in volatility. But if you map it up against the ’87 crash or some of the readings that it gave off in the financial fiasco of 2008, it’s nowhere near of where it was in the ’87 crash or 2008.
In fact, in 2008, the market, as measured by the Dow Jones Industrial Average, experienced 12 sessions where it was off more than 400 points. So I don’t think we have nearly the volatility we saw in 2008.
RAY SUAREZ: So what’s an individual investor to do? Are they running — are they leading the charge out of the markets right now, Susie?
SUSIE GHARIB: Well, we sure have seen the statistics that — of huge fund flows out of stock mutual funds, much more so than with bond funds.
And there is this feeling that it’s just not safe to put your money in stocks, that now we’re talking about the average individual investor. And so they’re — that’s why you’re seeing the price of gold skyrocket to record highs, $1,800 an ounce, and into Treasuries, where you get no yield, because they just feel that it’s a place — even if you’re not going to make money on your money, at least you won’t lose it.
RAY SUAREZ: Jeffrey Saut, we have got high unemployment, low growth, rising inflation. Does it sound like the 1970s to you?
JEFFREY SAUT: I lived through the 1970s, and this certainly doesn’t feel like the 1970s to me.
You had 14 percent, 15 percent mortgages for homes. You had severe contractions in the economy. And we’re just not seeing that right now. To Susie’s point, this is the kind of stuff where you get market liquidation of mutual funds that you get around major lows like you saw in October of 2008 through March of 2009. The time to panic was four or five months ago, not at valuation levels that we haven’t seen since the mid-1970s.
RAY SUAREZ: So, Susie, what now?
RAY SUAREZ: It seems like the Asian markets will be watching, and their opening is in a couple of hours. Will the Dow and major indices in the United States affect what happens in Tokyo and China tomorrow morning?
SUSIE GHARIB: Ray, my crystal ball is kind of cloudy today. Maybe Jeff will be better on this.
But, look, I really don’t know. I don’t think anybody knows. And anybody who says they do know, they don’t know. I think that what’s going on here is that we need to see some good headlines. The headlines are more negative than positive. Even corporate profits that we were really counting on to be a reason to buy, a lot of companies now are ratcheting down their forecast.
They’re talking about a negative and cloudy outlook for the future. Some people are talking — some companies are talking about laying off more workers. None of this is positive right now.
RAY SUAREZ: Susie Gharib, Jeffrey Saut, thank you both.
JEFFREY SAUT: You bet.