Campaign roundtable
GEOFF COLVIN: John Kerry and John Edwards are off and running, touring the country with their message of two Americas -- one well off and getting further ahead, the other struggling and falling further behind. But George Bush's campaign says no -- the economy's growing, jobs are increasing, and everyone's gaining. Who will be more persuasive? The answer could determine the election, because even though pundits say it's a referendum on Iraq, voters keep saying the economy, jobs, and healthcare costs are the top issues for them.
Kevin Hassett is a resident scholar at the American Enterprise Institute in Washington and a Bush supporter. Peter Cohan is president of his own management consulting firm focusing on technology companies and a Kerry supporter; he was at the Democratic National Convention and joins us from Boston. And Mark Zandi is chief economist of Economy.com, a non-partisan research and consulting firm.
Peter, you say President Bush is economically the worst president of the past 60 years. How come?
PETER COHAN: Well, actually I didn't come up with this. Forbes magazine wrote a couple of articles last week in which they measured the performance of the presidents over the last 60 years on the basis of six indicators, things like GDP growth, employment growth, deficit reduction. Forbes is not really what I would call a liberal magazine. And based on their statistics, Bill Clinton's performance in office was the best out of the last 60 years, and George W. Bush's, while his term isn't over yet, was the worst performer, both in terms of the economy and the stock market.
COLVIN: Kevin, I'm sure you don't think President Bush is the worst, but where would you rank him?
KEVIN HASSETT: Well, I think that ranking presidents is a very difficult exercise for an economist. It's sort of above my pay grade. The fact is that each president inherits his own set of challenges and advantages, and I think that President Bush inherited some very difficult challenges and responded to them I think quite decisively. And so if the Clinton administration was so wonderful, then why did a recession start as soon as President Bush took office? The fact is that there was a lot of cleaning up to do after the 1990s and it was a difficult time for our country, but I don't think that he did a particularly bad job getting us through those messes.
COLVIN: Mark Zandi, he did inherit a lot of trouble. The recession was either beginning or about to begin the day he was sworn in. The stock market had already begun its plunge. How much blame or credit should President Bush get for the state of the economy today?
MARK ZANDI: Well, he's had four years. It's a long time.
And he did inherit a difficult economy coming in, but four years is a
long period, and he's used all the economy's resources that were at his
disposal. We went from a $250 billion closed surplus to what will be over
a $400 billion deficit, lots of tax cuts, a big increase in government
spending. So I think he should take credit or blame for a lot of what
has happened to the economy over the past four years.
COLVIN: It's been four years, it was on his watch, and so he has to answer for it.
ZANDI: He does. I mean he's certainly had circumstances that have been difficult to overcome, but I think he should take credit and blame for what's happened.
COLVIN: John Kerry made several very specific and very
ambitious promises in his acceptance speech. Let's listen.
(video clip begins)
JOHN KERRY: "And we're going to return to fiscal responsibility
because it is the foundation of our economic strength. Our plan will cut
the deficit in half in four years by ending tax giveaways that are nothing
more than corporate welfare -- and we will make government live by the
rule that every family has to live by: pay as you go. And let me tell
you what we won't do: we won't raise taxes on the middle class. You've
heard a lot of false charges about this in recent months. So let me say
straight out what I will do as president: I will cut middle-class taxes.
I will reduce the tax burden on small business. And I will roll back the
tax cuts for the wealthiest individuals who make over $200,000 a year,
so we can invest in health care, education, and job creation."
(video clip ends)
COLVIN: Okay, that was a lot in there. He's going to cut taxes on the middle class and on small business, spend more on job creation, education and health care, while cutting the deficit in half, and the only tax increase he mentions would be on people making over $200,000 a year, and on those he would simply restore the tax levels to what they were before the Bush tax cut. Kevin Hassett, does it all add up?
HASSETT: No, it doesn't even come close to adding up, and in fact the Kerry people have not presented the American people with any kind of a careful accounting that shows how it does. The fact is that the Kerry tax plan will reduce revenues over the first ten years of the tax plan by about $440 billion, according to the Brookings Urban Joint Center which is a very, very I think reasonable source for such a thing. It tends to be a slightly left leaning think tank organization. His health care plan alone costs by one estimate almost a trillion dollars over that same ten years. So if you combine his promised health care plan and his promised middle class tax cut, then you're already at minus 1.5 trillion over ten years. And so there's just no way that a pay as you go system will work with those promises.
Now Kerry originally said that he would wall off his middle class tax cut and his health care plan from the pay-go rules, and subsequently it seems like he's backing away from that statement, which was only about a month ago. And right now I don't really know how they all interact, but I do know that he can either have his pay-go rule or he can have his campaign promises, but he can't have both.
COLVIN: Peter Cohan, has he promised more than he can deliver, more than anyone could deliver?
COHAN: I'm not an economist and I can't quantify the impact of all his proposals, but I can tell you that he has with him some of the advisors from the Clinton campaign, and the Clinton economy was so successful, I think people like Robert Rubin, Gene Sperling and others who are advising him I think will devise practical solutions to help get this economy growing again and to create the capital gains that generate the kind of surpluses to fund the needs that we have.
COLVIN: Well, it's an interesting point. I didn't hear any of the network commentators mention this, but during Kerry's acceptance speech, seated in the audience next to his wife, on one side of him was John Edwards. On the other side, on her right hand was Robert Rubin, who of course was Treasury Secretary during the Clinton administration. Mark Zandi, would the markets like to see Bob Rubin in a Kerry administration?
ZANDI: I don't think they have any problem with that. Bob Rubin is a very well respected Wall Street old hand. He's been a wonderful Secretary of the Treasury. He'd be a great choice for any position in the Kerry presidency, and I think Wall Street would be very happy with that.
COLVIN: Peter, do you have any reason to think Bob Rubin would serve in a Kerry administration?
COHAN: Well, I don't have any inside information about what he might do, but I do know that he's surrounded himself with these excellent economic advisors who have generated tremendous results for our economy. And I'm confident that they will remain involved and help him to do what happened in the Clinton economy.
COLVIN: Kevin Hassett, you've spent a lot of time in Washington. You've worked on a campaign or two. Robert Rubin seated next to Teresa Heinz Kerry doesn't happen by chance at a political convention. What does it mean?
HASSETT: I would have to say that what it means is that Kerry's trying to signal that even though he's promised things that don't add up and that would vastly increase the deficit, what he really is is a deficit hawk of the Rubin style, and that really what's going to happen after he's elected is he's going to give up those promises and pursue deficit reduction first.
COLVIN: Another critical topic, Mark, is job growth.
Only twice in the past 60 years has job growth been less than 5 percent
during a president's term, and in both of those cases the incumbent party
lost. There was Nixon in 1960 and George H. W. Bush in 1992. Now George
W. Bush will apparently be the only president of the past 60 years with
negative job growth during his term. Leaving aside whether it's his fault
or not, isn't that a huge obstacle to his reelection?
ZANDI: Yeah, I think it is an obstacle. I think when voters go to the polls, they're going to be assessing what's happened to the job market most and foremost, and it's not been a pretty picture, and that's best represented in terms of jobs. The number of jobs that will be in place at election time will be lower than when he took office, and more important than that, in many of the key battleground states, the job market is still reeling, Ohio, Michigan, PA, still very difficult conditions.
COLVIN: Well, let's talk about those, because of course the real news in the election, the way it's decided is it's not a national election. It's a lot of state elections, and a few key states may hold the key, and just as you say, Ohio, West Virginia, Michigan, perhaps Missouri. If you look at the economy in those states, what does it tell you?
ZANDI: Well, it's a difficult time. And in fact I don't think conditions in those states are going to improve to any measurable degree by Election Day. Many of those states are very dependent on what's going on in the domestic vehicle industry. Vehicle manufacturers are having a heck of a time maintaining sales, even with these big discounts and zero percent financing deals. They're cutting production. Inventories are too high. That means employment probably will be no higher in those states come Election Day than it is today, and that means it's going to be tough for the President in those states.
COLVIN: Kevin, what does President Bush do about that? Those are the key battleground states. Both campaigns know it. And the economy is particularly bad, especially for job creation, in those states.
HASSETT: Right. There are a couple of states, I think Michigan and Ohio come to mind immediately, that have not necessarily shared in the recovery that we've seen in the last year. The first thing is that if you look at the empirical literature, the people who have studied how the economy relates to the election, most people have found that what matters most is after-tax personal income for predicting voting behavior. And so the job creation numbers, they're definitely an economic challenge for policy makers, but they don't do a good job of predicting voting behavior, because really what people do is they look in their wallets and see, well, do I have more money. And most people who vote have a job and have had their income go up, and that will be good for President Bush. In those states, I think what you're going to find is specific policies are going to be discussed.
For example, Senator Kerry proposed massive increases in fuel economy standards, increases that most people think would have really harmed U.S. automakers had they passed when he was a Senator. You can bet that President Bush is going to be running ads reminding all the autoworkers in those states of that I think unfortunate proposal by Senator Kerry.
COLVIN: Peter Cohan, another issue, who would be better for the stock market? I know you think that Kerry would be, but the markets are not quite so sure. When he surges in the polls, the markets seem to ease off.
COHAN: Well, there's been some analysis done of the performance of the stock market under Republicans and Democrats. Over the last 60 years or so, Democrats tend to produce on average returns that are 11 percent in excess of the Treasury bill rate, and Republicans produce returns 2 percent in excess of the Treasury bill rate. And I think one of the reasons for that is, I don't think anyone's really figured out exactly why it is, but my contention is that investors have a tendency to assume that Democrats will not manage the economy well, so they sell off in anticipation of a Democratic presidency. And then when it turns out that they do a good job, the stock market rebounds quite aggressively. And if you look at the performance of the Clinton economy versus the Bush economy, I mean Bush is the 11th out of the presidents in the last 60 years and Clinton is number one, and I think that the market should have a more optimistic view if Kerry is elected.
COLVIN: Mark, it is one of those counterintuitive findings, but it's well established. The markets on average do better under Democrats than under Republicans. Do you have any view on which candidate in this election would be better for the markets?
ZANDI: Well, in terms of the stock market, I think President Bush probably would do a bit better, only because a President Kerry would roll back the tax cuts on dividend income and capital gains, which clearly goes to stock values. In terms of the bond market, here I differ with Kevin a little bit. I actually think a President Kerry would be much more concerned about the deficit. The deficit would be actually smaller over a 10-year period than if President Bush is reelected and we make these tax cuts permanent, and I actually think the bond market would be better off with a Kerry presidency.
COLVIN: I want to ask each of you, Kevin first, economically, what is the most important case that each candidate has to make in the next three months?
HASSETT: I think that both of them need to tell us what they're going to do next. The fact is that we've inherited the state of the world that we have, and now we have to look ahead and say what are the best things for us to do? How are we going to fix entitlements? How are we going to fix the alternative minimum tax and so on?
I think that the Kerry plan is really out there now and we can see what his proposals are, and it seems to me like he's ducking most of the big important issues. President Bush is going to release his platform soon. He's got second mover advantage, and he can even control the news cycle some in September and October where he can release his proposals for the first time and get lots of coverage. I think that the key question is will President Bush excite people with his plan for his next four years or not. I think if he does, then he'll probably win reelection.
COLVIN: Peter Cohan, the most important case economically for each candidate in the next three months.
COHAN: I think both of them have to focus on how they can unleash investment in creating new jobs and new technology and innovation. And I think what we've seen in terms of the performance of the Bush economy is that the innovation and investment is being unleashed in the area of energy and defense. I think what we need to do is see a President Bush, if he wants to win reelection, find ways of unlocking investments in innovation that free us from energy and defense as the base of our economy.
COLVIN: Mark, what do you say?
ZANDI: My view is that the central economic proposals here revolve around the tax cuts and what we should do about them. The President has proposed making them permanent; Kerry has proposed rolling those back for the folks that are making over 200K a year. And the question is which is better for the economy? Making those tax cuts permanent for everybody including high income, high net worth households? Or should we roll those tax cuts back and use those monies to insure a broader swath of the population at this point who don't have health care insurance? That's the key question. That's where most of the money is with regard to these proposals.
COLVIN: Mark Zandi, Peter Cohan, Kevin Hassett, thank you so much.
Hulbert interview
KAREN GIBBS: Mark Hulbert is hands down one of the keenest
market observers around. His specialty is analyzing that not so rare breed
of people who make market prognostications. His insights on who gets it
right and who seems to steer investors over a cliff has made the Hulbert
Financial Digest the bible of the newsletter industry for 24 years.
Mark, it's great to see you again.
MARK HULBERT: My pleasure. Thank you for having me.
GIBBS: And congratulations. Twenty-four years is a lifetime for many investors and people that follow the market. What have you, what insights have you gleaned over the past 24 years?
HULBERT: Well, of course there are many, but I'd say one of the main ones is though the conditions, the outer conditions of the markets obviously change, the fundamentals probably stay the same. And I think one of the most fundamental aspects of the market is human psychology. We will swing back and forth between the polarities of greed on the one side and fear on the other. And as long as that's the case, and I don't see human nature changing, then the market's going to have these long swings towards the excessive bullishness that perhaps we saw at the late part of the 1990s to then excessive bearishness. And so I think that will be a perennial condition that will always allow for good investment advice to help out the individual investor.
GIBBS: So I guess the burning question for investors is what they think the market is going to do, a continuation of this strong bull market rally that we saw that started in '82, or whether this is just a head fake, a bear market rally and a sell-off.
HULBERT: Well, that's right. Or even opposed to a bear market in the sense of just going straight down over the next several years, another possibility that a number of the newsletter editors that have been around many years are suggesting is a repeat of what we saw between 1966 and 1982, where the market was in a trading range. It never got above 1,000 or below, right below 600 on the Dow. But over that period of time, there was no net movement in the Dow over a 16-year period. So you could go into an extended trading range where the market isn't necessarily going up on balance or going down on balance, but nevertheless providing a huge contrast to what we saw in the 1990s where it seemed the market was going straight up.
GIBBS: So is there a benefit then in that type of environment, a sideways market, to heed the advice of newsletters?
HULBERT: Absolutely. And in fact, no one would like to ask for an environment that's going to be a trading range. 1966 to '82 was an incredibly frustrating period, but nonetheless, in that period actually investors need a good adviser far more than they would when the market's going straight up. In fact, my data going back 24 years suggests very few newsletters were able to beat the market over that period of time. If we had known in 1980 how the world would turn out, the best thing to do would have been to put your money in an index fund and do nothing for 24 years. In fact, if we do not have as bullish a period for the next 10, 20, or 24 years, then you'll find a much greater percentage of investment advisers doing better than simply putting their money in an index fund.
GIBBS: I know you've done a lot of work on it, and we've
got a list of the top five newsletter performers that you've seen over
a past 10-year time frame, and the number one was The Prudent Speculator;
number two, the No-Load Fund-X; number three, BI Research;
number four, Equity Fund Outlook; and rounding out the top five
is The Oberweis Report. Was there any common theme in those newsletters?
HULBERT: I think that perhaps the generalization that might apply to these as well as the other top-performing newsletters is that they have a discipline that they're willing to follow through thick and thin. Every approach will go through a period of time in which it's out of sync with the market. The key is to stick with that approach during those hopefully temporary periods in which they're out of sync. Otherwise, you're simply just jumping back and forth between strategies, and you'll probably make your broker very rich but not be very happy yourself. And what each one of these five that you mentioned, as well as most of the other top performers, have been able to do is show that they have the discipline, which takes a lot of psychological courage to stick with their system during those times when they're out of sync with the market.
GIBBS: Well, also in your discoveries and research over
the past 24 years, you've found some facts that actually challenge conventional
wisdom. And I'm looking at one in terms of dividend plays, because of
course last week Microsoft announced, they opened the cash drawer basically
for their stockholders, stock buybacks, dividends, also one-time payments.
To some of those investors of Microsoft it was almost like manna from
heaven. Why haven't we seen with the new tax treatment on dividends more
companies offering dividends?
HULBERT: Well, a number of people have looked at that. The explanation that makes a lot of sense to me is that investors today just aren't demanding of their companies that they provide a high dividend. If you roll back the clock 30 or 40 years, everyone expected, I shouldn't say everyone, but most investors had grown up with the notion that stocks provided a good dividend payout, and in fact that was how they valued stocks was looking at what their dividend yield was. And so a company couldn't even compete for investor cash, they couldn't raise money, they couldn't attract investors unless they provided a very attractive dividend yield.
Today's investors have grown up without even looking at dividend yield. In fact, many investors today will calculate returns on a stock without even paying attention to what the dividend yield is, which would have been unheard of 30, 40, 50 years ago. And so because investors aren't demanding that they get a dividend yield, companies don't need to pay it in order to attract investors, and if companies feel as though they don't have to pay it out in order to attract investors, they'll do other things with the money.
GIBBS: Well, you know I can't let you go without you telling us the funds that are most recommended by the most highly successful newsletters, and I'll let you explain what you mean by successful newsletters.
HULBERT: Well, of course there are million different ways of identifying it, but for a newsletter, we'll look at the 10-year market beater, so it's those select few newsletters among the 170 or so that we track that have actually beaten the market over the last 10 years, and of course that 10 years includes the latter part of the '90s when it was very bullish as well as the very severe bear market that began in 2000. And so neither a bullish nor a bearish stopped clock would be able to beat the market over that period of time. And so we read earlier in the show the five newsletters that are a part of that select group. There are others as well, but still we're only talking a handful of newsletters that have been able to beat the market over that period of time.
GIBBS: And those handfuls of newsletters that have outperformed the market actually have selected several funds that are really quite good. They like Baron Select, the Heartland Value, Janus Mid-cap Value, RS Partners, and the Rydex Ursa fund. That's the bear fund.
HULBERT: That's right.
GIBBS: So value is there, but the bear fund is also there.
HULBERT: Well, that's right. A number of things to point out there. For example, value, as you point out, it's interesting that value ends up being one of the favorites among the 10-year market beaters, which I think is worthy of note. Secondly, the fact that Rydex Ursa makes it into the mix of most recommended fund among, or one of the most recommended funds among the 10-year market beaters suggests that the 10-year market beaters currently are not all that confident that the market is going to go up from here. Otherwise they wouldn't be recommending the Ursa fund as much as they are.
So as a counterpoint to what we were saying earlier about how the sentiment among all newsletters, not just the best performers, but among all newsletters right now, is that there's too much complacency, at least according to my data, which is from a contrarian point of view a bearish thing. Then we add yet another data point, which is the fact that the 10-year market beaters, a very small subset, are themselves worried about this market as we triangulate I think a conclusion that perhaps the future is not as rosy as we'd otherwise like it to be.
GIBBS: And in the face of rising interest rates, the
stocks that are most recommended at the end of the second quarter, also
quite a surprise, eResearch tech and Washington Mutual, the big finance
company. Techs and finance companies are supposed to be hurt when interest
rates are on a rising path. That's kind of interesting.
HULBERT: That's right. I mean the overall point I would say there is that those would not be ones you'd guess. If we were to sit in advance and try to think which stocks would be recommended by the 10-year market beaters, I doubt, I know I wouldn't have come up with either one of those stocks. But this shows again I think one of the benefits of investment newsletters is that they can provide you advice that you'd probably not see elsewhere and is counterintuitive, and those two are clearly out of what you'd expect.
GIBBS: Mark, happy 24th anniversary and many, many more.
HULBERT: Thank you.
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