Air
date: September 5, 2003
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GEOFF COLVIN: The great issue in the economy, in the nation, in Washington, is jobs. We have new reports today that employers are still cutting jobs, even as the economy keeps growing. And with the presidential race getting more intense, the Administration is taking a lot of heat for this extraordinary jobless recovery. Gregory Mankiw is chairman of the President's Council of Economic Advisers. We should also mention he was a columnist for FORTUNE in 2000 and 2001. He joins us from the White House.
Professor Mankiw, the Labor Department reported today that employers cut 93,000 jobs last month, though the economy is expanding. More broadly, President Bush is the only president since World War II under whom the U.S. has lost rather than created jobs. What is your explanation for this?
GREGORY MANKIW: Well, the economy's suffered through a series of quite difficult shocks in the past few years, the end of the high-tech bubble, corporate governance scandals, terrorist attacks, and the economy is now starting to recover from that. We haven't seen it in the labor market yet. The labor market's often sort of a lagging indicator. We've seen lots of other good indicators in the past few weeks. Private forecasters are raising their expectations for the rest of the year. So I think you'll see the labor market coming back before the end of the year.
COLVIN: Politically, the president is getting beaten up fairly badly on this. Is the administration in fact doing all that it can do to reverse the job drain?
MANKIW: Oh, the president is very focused on the economy. We've had historic tax cuts. The most recent one only went into effect in July. The president's focused on tort reform and energy policy. The president wants to get the economy growing and he's going to. This quarter we're going to see growth approaching 4 percent, maybe even higher, and that will lead to job creation before the year's out.
COLVIN: You mentioned the tax cut. Last year the Council of Economic Advisers said the president's tax cut should create 510,000 new jobs this year. Why hasn't that happened?
MANKIW: Well, the economy's still struggling will all these series of shocks that I mentioned a moment ago. I think the tax cuts are going to create jobs, and I think we've started to see it in some of the preliminary indicators and the leading indicators. But to actually see the jobs numbers, I think we're going to have to wait a little while longer.
COLVIN: As an economist, you have generally favored letting the market work. Do you think the Administration should be doing any more to create jobs?
MANKIW: Well, I think the President is constantly sort of focused on the economy and on what he can do to cause more rapid economic growth. There's still things left on the agenda. Right now the energy bill is in conference in Congress and that will come out soon. And there are other things on the agenda that will be pushed forward. We believe in free markets. We believe in letting the economy grow with private enterprise and private initiative. But that also means the government has a role in creating an environment in which those incentives can work and those markets can function.
COLVIN: We're seeing a very significant growing, new phenomenon, which is high level, high paying jobs leaving the U.S. for other countries, not just factory jobs, but software writing, engineering, accounting and other jobs. Is the Administration planning to address this issue?
MANKIW: We need to get the economy growing. Free trade is actually good for the economy. There's no question that there are winners and losers in free trade, that some jobs will go abroad, but other jobs will come here. We'll export goods to other countries, and that will create jobs here. Countries benefit from trade. Trade is sort of win-win. And the President's very committed to greater free trade and Bob Zoellick is helping the world move in that direction.
COLVIN: The message seems to be, the message I'm getting, is that we should wait, the economy is coming back, and eventually we will see jobs recover. Is it possible that there just isn't a whole lot more that the federal government can do in this regard?
MANKIW: Well, there are still things on the agenda to be done. The President, for example, wants to make permanent the tax cuts that are now sunset. As I said, there's the energy bill and there's tort reform, healthcare costs. So the President's focused on many things. But I think jobs are going to come back. Remember the recent tax cut only went into effect in July, and the economy just doesn't move on a dime. It's like a supertanker. It moves slowly in response to monetary and fiscal policy. So I think the policies that are in effect now will create a lot of jobs before the year is out.
COLVIN: Professor Mankiw, thanks for being with us.
MANKIW: Thank you very much.
Job roundtable
COLVIN: So the President's top economist tells us that jobs are on the way, just be patient. Well, joining us now with three illuminating perspectives on the issue: Jyoti Thottam of TIME Magazine, who wrote a recent article on the hot-button topic of high-level U.S. jobs streaming overseas; economist Gary Shilling, who thinks the near-term outlook is bright but the long term is decidedly not, he joins us from New York City; and John Zogby, the well known pollster, who has conducted some fascinating research on how Americans feel about this issue, joining us from Utica, New York.
John, you have done some research that amazed me, something you call the anxiety index, which is people who have jobs but are afraid of losing them in the coming year. And among people making $75,000 a year or more, the figure was 8 percent back in April of 1999. This past June, it had risen to 24 percent, a huge increase. What does it mean?
JOHN ZOGBY: That's how you define an economic downturn on Main Street. And essentially it can have political implications, but it can also have productivity implications and so many other sociological and psychological consequences as well. Above all, what we're looking at is a tripling in one of the factors that we call the anxiety index. And behavior can certainly change the way the economy runs. I mean one of the numbers that's out today suggests that productivity is up while employment is down. Well, this is how we spell anxiety. These are the people then who are afraid of losing their jobs. They don't care about productivity. They care about their jobs today and food on their table.
COLVIN: Jyoti, speaking of anxiety, I gather that you found tremendous anxiety among white collar workers who worry that their jobs may go overseas. Now, they didn't used to worry about that. So what has changed?
JYOTI THOTTAM: Well, I think that it's really technology that's made it possible for almost any job that's done sitting at a desk using a computer to be done anywhere in the world. And I think there's really a sense of bewilderment almost among some of the people I spoke to who thought that, you know, getting a degree in computer science would just guarantee you a job, and they're realizing that it's not the case anymore.
COLVIN: Absolutely. Gary, do you buy the administration's explanation of why this recovery has been jobless so far?
GARY SHILLING: No, not at all. The basic fact is that American business has no pricing power. They can't raise prices to pass on costs, and with volume growth rather benign, the only way to preserve and improve profits is to cut costs. And most of costs are labor costs, so you've got to get rid of people, whether you move them abroad or you simply automate them out of existence, you move to cheaper areas within this country. It doesn't make any difference.
COLVIN: But with the economy growing at what, a 3 percent annual rate in the most recent quarter, wouldn't you expect a pick up in demand to translate into some new hiring?
SHILLING: No, not really. Because the demand right now is artificial and probably won't last. It's spurred by three factors. One are the tax cuts, and they're going to be over. And with the deficit the size it is and the President's promise, in an election year we're probably not going to see additional new tax cuts unless there's a very weak economy. Second is the cash taken out of refinanced mortgages, and with a jump in interest rates that's obviously history. And third is the military push, particularly Iraq, but you've got a huge bulge in spending. Now we're down to the occupation costs, which are high, but nothing like that initial military hot war aspect of it.
So what you've got here is continuing layoffs. Income is barely growing. I mean you've had half a million people who have become self-employed since May. That speaks to John's point about anxiety. These are people basically a lot of them unemployed. They just hang out a shingle and say, "I'm a consultant." But the point is that as these stimuli run out, then what you're going to find is that the labor layoffs are going to take front and center. We think there will be a recession start next year as a result as consumer and housing basically retrench.
COLVIN: Right. Well, John, right at this moment I could paint a picture of the economy that makes it look pretty good, growing at a 3.1 percent rate, which is very respectable. The unemployment rate has come down each of the past two months, now at 6.1 percent, historically quite a low number. You could say this is a nice picture. I guess your message is people don't feel that way. Is that right?
ZOGBY: We're not an "in the long run" people. We don't want to know that, oh, it's great that we're helping India, we're helping software engineering in Ireland. We want to know what's going on with us today, and then down the road we can be hopeful or not hopeful.
Generally we are hopeful, but the perception of Americans today is that more and more people are out of work, more and more people may be out of work, including themselves. And it's almost irrelevant then what the traditional economic indicators may be suggesting. Macro indicators don't necessarily spell out, as they used to, food on my table.
COLVIN: Well, then what would be your advice to the President and to all those Democrats who want to take his job away as far as the message they should be conveying?
ZOGBY: The message has to be conveyed in terms of the here and now. Tax cuts down the road, you know, those are limited. I would say to the president then, "What kind of creativity can the government do?" The government has always stepped in to bail out economic problems. Americans, for a while anyway, used to expect their government to do good things. I would say to the Democrats they need to worry about jobs today and address jobs programs today.
By the same token -- and we'll talk about this, I'm sure, in the future -- what about all of those people who now are members of the so-called investor class? They may be working, they may not be working today, but they've got portfolios, so they're looking out for their short-term and mid-term future as well. Democrats need to understand the investor class and Republicans need to understand jobs today.
COLVIN: Jyoti, I think a lot of people don't really appreciate the extent to which companies can hire good, well-educated employees in other countries for much, much less money. We found -- you found that a mechanical engineer who would cost over $55,000 a year here, $5,900 a year in India. A technology manager, $55,000 a year here, only $8,500 in India. Is that trend going to continue?
THOTTAM: Absolutely. Probably the most comprehensive study found that over the next 12 years we'll see about 3.3 million jobs moving overseas, which it's a long time horizon, but what you're seeing is that slowly more and more industries are finding different types of work that they can do overseas more cheaply than they can do here. And as they become more comfortable with the concept, I think they'll continue to do it.
COLVIN: So what workers in the United States should feel threatened by this?
THOTTAM: Well, I think any job that's done primarily at a computer, that's IT-enabled and that doesn't involve a lot of dealing with customers, face-to-face contact, or really specialized knowledge or strategic knowledge. That's the type of work that I think more companies are going to look at and say, well, you know, this is something that we could do just as well and more cheaply overseas.
COLVIN: That's a huge number of jobs. What kinds of jobs will be popular here in the U.S., will be growing here?
THOTTAM: Sure, well, there's the more obvious jobs like nursing or teaching, where we know that there are shortages. And I think, I definitely saw that some of the workers I spoke to are considering those fields because they know that there's a demand for it.
COLVIN: And they have to be done on the spot.
THOTTAM: That's right. They have to be done here. But then I think there's also room for, as I said the really high skilled, design type work. Some of that will still need to be done here. I think you'll also see an increased demand for people who have the sorts of cross-cultural skills that are necessary to make this all happen.
COLVIN: Gary Shilling, you remain convinced that deflation is on the way. What would that mean for job creation here?
SHILLING: It simply puts more pressure on businesses. Deflation is a condition of excess supply, and obviously that means there is even less pricing power. So business is under more pressure to figure out ways to cut costs. They have to to remain viable. And that means there is more outsourcing, more moving of jobs abroad, more simply getting rid of jobs.
I mean, all these people haven't moved abroad. I mean we've lost 1.7 million jobs since the recovery supposedly started in November of 2001, and a lot of these people have simply been cut. Businesses have said, "Hey, I can make do with more people." And what is amazing now, and this is why the productivity numbers are so strong, is that business has picked up. Yes, we did have 3 percent growth in the second quarter, but we did it with fewer people. In other words, people are producing a lot more, and those are the conditions of a weak economy.
COLVIN: That's a big phenomenon. John, final question. Bottom line, could this issue threaten and even end President Bush's presidency?
ZOGBY: Oh, it certainly can. I want to address another question, though, that's related, and that is that there's an economic development expert out there. I'm sure people know about Richard Florida, who has written about the rise of the creative class. How do you bring cities back? How do you bring industries and creative businesses into cities? What you do is you take care of that creative class, the very people that Jyoti is talking about. If there are amenities for those people, if there's hope for those people and so on, that is where economies will grow from the bottom up. If we're talking about on the macro level, as Gary is talking about, one thing, but on the other hand, we're talking about making these people unhappy, you're talking about disinvestment in cities and some real serious problems down the road.
COLVIN: We've got to end it there. John, thank you so much. Jyoti, thank you. Gary, thanks for being with us.
Investor Spotlight: David Dreman
KAREN GIBBS: Recovery or recession, bull or bear market. To keep his job, David Dreman has to make money for his clients, no matter what. The man in our Investor Spotlight tonight is without peer. His Scutter Dreman High Return Equity Fund has outperformed every other fund in its category over the past 15 years. Dreman's 616% return is even more remarkable when you take into account that this "King of the Contrarian Investors" refused to buy into the tech bubble during the 1990s. David, it's a pleasure. Thanks so much for joining us.
DAVID DREMAN: Thank you very much for having me.
GIBBS: Tell me your contrarian outlook on the market and the economy right now.
DREMAN: I think, starting with the economy, there's no question that we're into some kind of a recovery. And probably it will get stronger with time but it seems to me that the market is very much ahead of the recovery at this point in time because we're not really seeing any increase in corporate revenues. We're seeing earnings increases but that's against some pretty poor results in 2002.
But what we're not seeing is major revenue increases and that speaks specifically to about say the Nasdaq and even more specifically about the S&P 500, that index is up very sharply this year. But the revenues are up only in a minute way.
GIBBS: Well, they always say that the stock market is a leading indicator and then it's telling us that six to nine months down the
road, we're all going to be in the money. Do you buy that?
DREMAN: It seems that it's probably going to take a longer time for the economy to come back, particularly say the tech part because a lot of the tech stocks have growth rates now of 3 percent, 6 percent. We're talking about, say, semiconductors or computers and that's much better than last year where they were pretty flat. And given those growth rates when you look at say the price of say, a Dell at 35 times this year's earnings and maybe 40-some-odd times last year's earnings, that's pretty highly priced. And I think the same would be true, in my opinion, of Intel. So that these are companies that have to have a large recovery to just about even their current prices.
GIBBS: We have investors just jumping on the bandwagon, and, surprise, after three really bad bear years but they're willing to jump in
willy-nilly again. Are we out of the frying pan and into the fire?
DREMAN: Well, I'm not quite sure about that, Karen. I almost call the rise in the Nasdaq "Bubble, Junior" or "Bubble II" because the fundamentals, again, aren't that strong and the Nasdaq companies back in '99 had, they were making a lot of money and they looked like they were going to make even more money even faster and that hasn't happened. They're, as I said a minute or two ago, they're pretty much moving up but at a very slow rate and I think because of that, they're probably somewhat overvalued.
I think the other thing that's pretty interesting about this whole scenario with the Nasdaq is we've never had a bubble in American history or anywhere else where we've had the same companies that led the first bubble lead the second bubble only a couple years later, which is something that just makes me think that there were just a lot of true believers that even though they lost a good portion of their capital, still believe.
GIBBS: You're talking the Internet stocks and the Internet bubble. Do you have some right now that you say like avoid?
DREMAN: Well, a lot of the big names there -- they're good companies, eBay is an excellent company but it posts 100 times earnings, it's going to have to have this kind of growth for a decade or more to justify the current price. Amazon is really, if you looked at the regular accounting, the accounting it uses, it's never made money. And I think Yahoo is making some money but has a very high priced earnings ratio, probably getting close to 100 times earnings -- so it's really a stretch for them. They have to have earnings increase at really phenomenal rates, for years to come, and it just doesn't seem that that's in the cards right now.
GIBBS: You're talking about a stock market that people believe is coming out of the doldrums and many buy the idea that you should
invest in small cap stocks because small caps lead the way. What's your contrarian view on that?
DREMAN: Small caps very often do well and they have done exceptionally well this year and pretty much since 2000. 2002's a bad year for all classes of stocks. But if we look at small caps -- even the value portion, which is at lower valuations than the growth portions -- like 29 times earnings, where the average valuation might be 15, 16, so they're way up there. They're certainly discounting a lot of good things to come so they're getting to be somewhat on the high level it seems.
GIBBS: One of your themes that in your book you kept pounding on was looking for low P/E, price-earnings ratios, and those companies that show strong financial balance sheets should be bought. It flies in the face of what a lot of people are saying right now. Why do you look at P/Es as so important?
DREMAN: We have a number of benchmarks, price-earnings or price-to-book or say price-to-cash? But what I think is the interesting thing
about them all is that they've been back-tested, not only by us, but By Baum & French at the University of Chicago and other major academics and they've come up with the same results -- over time, out-of-favor stocks by these ratios have done significantly better and you'd think that this is an easy way to
invest but the problem is, even though they have had much better returns over time, when exciting stocks are moving, people jump away from the boring stocks even though they do have much better returns and they go for the action.
GIBBS: Right. They seem to want that risk, that roller coaster ride. But over time, the value, the blue chips, are those the stocks that are best for investors?
DREMAN: Very much so. We've done studies, but again as I mentioned, Baum & French have done studies and they all come up very similarly. Over time, these are long time periods, 30 years maybe or more, but the out-of-favor stocks by these various ratios have done significantly better and, in fact, I think in one study it was shown, academic study, that if you took every decade since the '30s with the exception of the '30s, the out of favor stocks did much better.
GIBBS: You've been talking about investor psychology even before it was the cliche that it is right now. In fact, the Nobel Prize this last year was for behavioral economics. Tell me how investor psychology and human nature plays a role into the stock market and how we can, investors can seize upon that opportunity.
DREMAN: We're all trained in finance, and we're trained that we're all going to do the logical, rational thing, and so when we get into
markets and stocks start to move higher and they start to move beyond what should be normal valuations, people get very excited. And it's not only the average investor, it's the professional, and they go out and they buy these stocks and they start to make up valuations or reasons why they should be so highly valued.
And this happens every time, and it's not that we don't have very, very bright, sophisticated and well-trained professional investors; it's that we aren't taught about behavior psychology or the psychology of investing. And that takes over very often and it puts aside all the fundamentals we so diligently worked on in graduate school and in training for our jobs and we tend to become very much of a crowd and that -- I mean it happened more clearly in 1999 than in any other period in this country. In fact, the 1999 bubble, or since the 1996, 1999 bubble was larger than the famous South Sea bubble in Britain in 1720s, bigger than any other bubble in American history, and this is with the best-trained, best-educated, best-informed investors that have ever been in markets.
GIBBS: So that explains why we buy at the high and sell at the low.
DREMAN: Unfortunately.
GIBBS: What do you say, then, about the bond market? Investors are fleeing the stock market, poured money into bonds. That a good idea?
DREMAN: Well, for me, unfortunately, I think they're catching the revolving door. A lot of people were hurt and in the bubble, I guess millions of people really had big dents in their savings and their pension plans and so they wanted to get away from all risk and they thought they
could do that by getting into bonds, even a lot of these bonds were paying, short-term bonds were paying, less than bank savings accounts, and money market accounts were paying less than 1 percent, half of 1 percent. But now these bonds, although they, at least the long-term, 10-year bonds, are down to maybe 3 percent, this is very, it wasn't even after inflation and taxes, people were losing money on these investments. And right now with a lot of inflationary factors on the scene with the Feds really, if they're not priming the pumps, they're certainly expanding the money supply at a pretty fast rate and with fuel prices rising, I think we're going to see some pretty serious inflation three, four years out, maybe even sooner, so anybody who buys
longer-term bonds today is likely to lose money. My thought would be to, if I was going to stay in fixed income, I'd say very short, even though I wouldn't be making much doing so.
GIBBS: Do you see any potential bubbles anywhere else on the horizon?
DREMAN: Well, I think the bond market may have been the last bubble. There’s certainly, the bubble we talked in Nasdaq now, I think, as I call it, "Bubble Junior," but it’s there. And I think right now I don’t, but bubbles –- it’s interesting in the post-World War II period, and particularly after the fall of communism, there’s been a lot bubbles. There’s been some in –- there’s a major one in Russia, in a lot of the former Soviet countries that had these bubbles, and it’s just amazing how many there have been. There have probably been more in the last 10 years than there have been in the, you know, past 100.
GIBBS: There are a lot of people that are saying real estate is on the edge of a bubble. Do you think that’s happening?
DREMAN: I personally don’t, because I think the prices aren’t going up that much. It’s not like, say, early 1990 when the prices of houses were three or four times the replacement cost. Now the housing prices are going up, but they’re going up in line with really the land costs and the labor costs, and so forth. So I don’t really think it’s a bubble. There could be a slow-down, but I don’t think we’re going to see prices come down, you know, 30, 40 percent, as we did in the, especially on the more expensive houses as we did in the early 1990s.
GIBBS: Now, you’ve looked at all the stocks, and you’ve crunched all the numbers, tell me what do you like now and why?
DREMAN: Being a little subjective on the subject, being a value player. While the S&P is up 19 times, the earnings of Nasdaq is probably 37, 38 times, what I think are somewhat optimistic estimates, there are a lot of value stocks out there that are 10 to 12 times their earnings. I guess to be a contrarian, too, that I like, are Freddie Mac and Fannie Mae.
GIBBS: They’ve been in the headlines and a lot of people are fleeing those.
DREMAN: They certainly are. And yes, Freddie Mac, there’s no question the former senior management really misstated earnings. But they misstated in a very different way than say a WorldCom or a Global Crossing. They actually made much more money than they declared. The other two companies made much less and eventually went bankrupt. And so, Freddie Mac made something like, I guess as much as $4.5 billion more, and they hit it with derivatives and other trading.
But their basic business is very sound. They shouldn’t have done it, but I guess in fairness to them, other companies have been doing this, including IBM and Microsoft for years. But in the last couple of years, the FCC has been very tough on those. But it seems to me that these are companies that are still growing over time at probably almost 15 percent a year. Freddie Mac’s grown at 15 percent a year for better than two decades. The estimates that I see on the Street now are that, the earnings haven’t been announced yet this year, but the estimates are that they might be at 9, 8-9 times earnings, and at very low prices relative to other characteristics. So, it seems to me that it’s a very strong company, and once they report earnings it could significantly higher. And Fannie has tagged along because of the problems with the regulatory agency and the fact that things may change a little.
But overall, I don’t think they’ll be a major change. There may be a new regulatory agency, and it may be under the auspices of the Treasury. But I don’t think the regulation, it may be a little stricter, but it won’t change the growth patterns much. So I think they’re interesting companies.
GIBBS: You also have bucked the trend in embracing tobacco companies. Altria was, at one time, a large holding. Are you still holding Altria, the old Phillip Morris?
DREMAN: We are. And it’s -- if you put the moral questions aside -- it has been an excellent investment for our shareholders. I think since 2000, those stocks are up something like 70 percent, or 75 percent when you include the dividends. So they’ve really done much, much better than the market. But Altria is really, it has two businesses –- or three businesses in all, but two businesses that are not exposed to the legal situation here. They have the large –- in Kraft they have the largest food business in the United States, with major international operations, too.
And then Phillip Morris, the foreign Phillip Morris portion of the business is totally separated from the domestic, and it’s the biggest tobacco company in the world, and it’s got one of the best growth rates. And analysts have said that if you took these two pieces of the business, they’re worth more than the current market price of Altria, so that the U.S. Phillip Morris is really adding negative value at this point in time. So it seems to me when things are straightened out -- and recently, the legal situations have, and court decisions from the Supreme Court, seem to be much more in favor of the tobacco companies -- I think this company has a lot of upside still.
GIBBS: Now, you talked a little bit about the potential of inflation with all the fiscal and monetary stimulus coming in. Where does that place banks?
DREMAN: Well, that’s interesting because I think that, on the whole, banks should do reasonably well. They’re not doing much in the way of loans now. Some of the smaller banks who may lose some money because they’ve got the, they’re caught in some of the lower yielding mortgages. But on the whole, I don’t think that’s the case, and I think banks have, they’ve always been excellent investments, and they’ve always been a reasonably big part of our portfolio. Financials have always been roughly 30 percent of our portfolio. And over time the banks, I think, will continue to grow, probably almost as fast as the S&P, or as fast. And also the average bank yields 1.5 to 2 times what the S&P yields. So I think they’re excellent investments.
GIBBS: Do you see any specific names there that you like?
DREMAN: I like Bank America. It’s very cheap relative to some of the other banks, and it’s primarily, its operations are primarily U.S. in both bank and the brokerage end. Fleet is another bank that we like. And PNC is a third. And Wachovia, another large, super regional as they call, is a fourth. And they all look like they should have reasonably good growth rates and pay well above average dividends.
GIBBS: The dividends, that really comes into play now, particularly with the tax treatment. Do you see that as a reason that investors should look at companies, the dividend yield?
DREMAN: I think so. Over time, in the past, they do it as much now, but in the past they used to show these mutual fund charts flowing back, say to the 29 or 30, and they would show that over time the big part of the overall return was dividends, not appreciation. And dividends still are important, probably more important now because the, with the maximum 15 percent tax on dividends, it makes them much more lucrative. And our portfolio probably, part of the recent run, we were at 4, a little over 4 percent. I think we’re a shade under that now, but that’s a reasonable income in this market. I think the S&P yield is probably about 1.6, 1.7.
But I think that is an important thing for investors, and it’s also a good check on how financially stable a company is, and also they’re financial strengths, because if a company can continue to pay a good dividend and increase its divdend, it obviously has no type of financial problem.
GIBBS: Let me also ask you about diversification into foreign stocks. It’s very difficult to get a lot of information on foreign stocks, and certainly the recovery globally needs to start, see our engine here in the United States really pick up and go. Do you think it’s a good thing for individual investors to diversify and hold foreign stocks?
DREMAN: I think there’s some merit to it. We will use foreign stocks, but we’ll normally buy the very large ones. I guess a couple of reviews in the past have been Nestle’s and Unilever.
I’m a little more hesitant about overall emerging markets, because I took one of the major indexes a few years back and compared it to the U.S., the S&P, and there really wasn’t much difference; in fact, I think the S&P outperformed it. So there was more foreign currency risk, there was more expropriation risk with probably, you know, (no) extra return for these dangers. So it’s common to have (foreign markets) be recommended for diversification, but I think it’s really not important. Or not as important.
GIBBS: What would you tell individual investors right now to do, given the economy, the jobless situation, and the uncertainty going forward?
DREMAN: It always depends on a person’s age, because the older someone is, the more they should have in bonds or money market funds. And when I say bonds, at this point I mean really pretty short-term securities.
GIBBS: Five years or less?
DREMAN: Absolutely. I probably would say three years or less, right now. But for the average -- if we’re taking the average investor with 20, 30 years ahead of them in working life -- I would probably have better than 50 percent, maybe 55 percent of money in good quality common stocks, and 40 percent or so in bonds, and 5 percent in cash for any kind of emergency that came up.
GIBBS: All right. David Dreman, thank you so much for joining us.
DREMAN: Well, thank you very much for having me.
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