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this podcast is brought to you by
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knowledge at Warton please visit
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knowledge. won. up.edu for more
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information the US presidential race has
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reached a critical point the Republicans
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have a confirmed nominee in John McCain
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as for the Democrats Hillary Clinton has
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bounced back while Barack Obama retains
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a marginal lead in terms of delegates
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how the presidential race evolves will
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be sh shaped in part by the increasingly
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worrisome state of the US economy though
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it has not yet gone through two
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consecutive quarters of negative growth
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the common definition of a recession
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signs of a Slowdown are evident
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everywhere meanwhile consumer prices are
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rising oil is crossed $13 a barrel and
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gold is nudging $1,000 an ounce
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suggesting that the economy could be
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entering a phase of 1970 style
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stagflation fed chairman Ben banki
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however told Congress last week that he
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doesn't anticipate stagflation and he
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continues to indicate his willingness to
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keep cutting interest rates what lies
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ahead for the US and World economy and
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stock markets what is the right strategy
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for investors in this environment
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knowled of Wharton discussed these
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questions and more with Finance
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Professor Jeremy seagull author of the
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future for investors Professor seagull
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thanks very much for joining us today
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happy to be here given all that's going
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on in the primary elections what do you
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think uh a president uh Clinton or Obama
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or or McCain would mean for uh the US
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economy right uh well certainly had some
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exciting uh primaries uh last night
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Hillary came back and uh you know could
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be a factor uh if Democrats beat
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themselves up that might improve the
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chances of the Republicans a bit um a
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lot of people talk about what kind of
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policies and um uh I I think that uh
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whoever is uh president or whatever
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party that uh the question of tax is
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going to necessarily come up first and
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the reason for this is under current law
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uh all the Bush tax cuts will expire in
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2011 um and uh that means that if
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nothing's done we go back to the Clinton
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uh way of of of Taxation which is a
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major uh factor and of course what is
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also very important is the fact that no
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matter whether McCain or a Democrat wins
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uh as long as Congress remains
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democratic and that is considered over
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uh uh 90% now on the odds makers uh uh
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they will draft the legislation and uh
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even if McCain uh vetos that says and I
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don't want these rates to increase it
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will automatically go up anyway so
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they're going to be wrestling about
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taxes a First Health Care which everyone
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talks about probably will have to take
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uh you know second fiddle to that
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anything about homeowners I think that's
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going to be done during this year the
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last last year the Bush Administration
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although all the presidential candidates
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are are really talking about that issue
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now I think that uh really any
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legislation that might come out of it
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will come out of it this year but I
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think the first priority really is going
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to be uh taxes and uh uh the the battle
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will be uh fought on that front Okay
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many have been saying that we're
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entering this period of 1970s style
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stagflation do you agree with that
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assessment no not not at all uh uh
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1970s uh we got inflation up to
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14% uh interest rates up to uh uh uh
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almost 20% I mean these uh we are
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certainly moving to slightly higher
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inflation rates but nothing like the
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1970s so we want to call it a tiny
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little touch of stagflation I I I would
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tend to agree with that because we have
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a soft economy with some Rising prices
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but we have to realize we're not going
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to be in that situation there I mean I I
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look for inflation
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you know topping out at most uh maybe
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five five and a half and that's with oil
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uh prices there uh on the core rate of
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inflation I think we won't go above 3%
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on that okay uh fed chairman Ben banki
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has indicated that he's willing to keep
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on cutting interest rates do you agree
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with that that t well you know I I've
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been a big fan of of Bernan uh through
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his two years uh I am I I'm a little bit
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disturbed recently
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because I don't think he is
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acknowledging the inflationary threats
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now I just said I don't think inflation
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is going to get as bad as the 1970s but
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but and I and I agree there but we have
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had a tremendous rise in kamay prices
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we've had a tremendous fall in the
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dollar imported costs are going up uh
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there's even a possibility of
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revaluation of Chinese currency as as a
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result of this so raise import prices I
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think uh I I I worry about the
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International Community losing faith in
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bernanke's anti-inflation
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credentials and um that is not good so I
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I I think uh we're we're going to get a
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50 basis point reduction in rates on
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March 18th the next fomc meeting but I
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would like him to say at that point
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we're signaling an end of the cuts to
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see how much they're going to work
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because otherwise an open-ended Cuts all
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going down I think could uh revive
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inflationary expectations and just make
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it harder for Bernan uh down the road uh
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to stabilize the economy you mentioned
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the rising commodity prices what impact
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will those have on the US and World
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Markets well I I you know the uh if the
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dollar continues to sink downward and
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that of course is is partly the
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confidence uh in beran's policy that
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will raise these imported prices
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particularly for energy uh uh and Al all
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sorts of other materials I'm I'm
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particularly concerned uh that that
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China may do a a revaluation of the Yuan
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because their inflation because they've
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pegged their currency or or sliding
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their currency slowly against the dollar
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has has reached a nine-year high there's
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pressure in China to to to revalue to
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lower uh prices and that would just jump
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up prices of everything we import from
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China uh so the the falling dollar does
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have uh potentially uh inflationary
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consequences uh here in the US although
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it will you know it will improve our
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trade balance uh on uh when we take all
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the positives and negatives uh we don't
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want the dollar to keep on going down
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that will not be good and how does the
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falling dollar affect uh sort of the
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European business Market well I mean
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that makes it a little harder for the
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Europeans to compete because the the US
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manufacturers now become more
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competitive and they are a little bit
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comp uh complaining now the Euro has
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gone over a150 uh you know can we
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compete the interesting thing is that
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Europe has been able to compete even
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with a strong Euro on average their
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trade balance is is pretty uh near
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balance why ours is still very much uh
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in deficit although improving um uh the
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world out there is very very competitive
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a falling dollar does help our
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competitiveness but I think the downside
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of higher import prices uh is something
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very seriously to be considered okay
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well meanwhile the manufacturing um
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sector seems to be contracting what does
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this mean for the economy in general
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well the manufacturing sector has been
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contracting for uh 30 years now we've
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lost uh 50 to 55% of manufacturing jobs
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over the last three decades so this is
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something that is continuing uh it is
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happening in all the developed countries
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of the world uh you know as well as the
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United States uh and it's irreversible
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it has to do with the patterns of global
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trade and wages and if it isn't China
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it's going to be India if it's not India
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it's going to be Indonesia it's going to
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be Vietnam and then maybe even Africa so
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so uh we have to learn how to be a
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service economy we have to learn about
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uh using intellectual capital and and
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and using our our strengths and and and
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and and that is not going to be except
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for some specialty items which we will
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manufacture require High technical
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expertise in general manufacturing uh
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jobs will will continue to be lost okay
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well the the employment report should be
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out this Friday yeah that's a very very
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important report report uh we just got
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uh this morning something called the ADP
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report automatic data processing report
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which gives you a little preview and
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that showed a loss of jobs um the
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expectation of Wall Street is for a gain
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of maybe 20,000 that's very low but we
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did have a surprise loss last month um
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with the it could very well be a loss
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this is an important one if we're going
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to have a recession uh you got to have a
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loss of payroll jobs and by the way
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20,000 30,000 is usually not enough to
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bring a recession you need 100 to
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200,000 you need it for several months
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we haven't had that yet we are still
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skirting the recession just just barely
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at this particular uh juncture um but I
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would the employment report coming out
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on Friday is very important uh I also
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look at jobless claims which come out
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every Thursday they have been ratcheting
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upward again not quite into recession
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levels but close to recession levels um
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uh you know
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you know we going to have a recession as
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people know I I think we're going to
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skirt it but just barely but we're
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certainly having a Slowdown um whether
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it's technically a recession or not uh
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you know is is perhaps secondary what
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about the threat of prolonged inflation
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is that is that well that is you know
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that is a a threat if we have a
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continually falling dollar and commodity
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prices um uh and continue to rise I mean
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I have been concerned that despite the
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tremendous slowdown in the US economy
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which is usually uh coupled with a
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Slowdown of commodity prices we have not
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seen it now it is true that Emerging
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Markets have still been strong Europe
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has been slow down not a lot but
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nonetheless the fact that oil and all
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these commodity prices are so strong in
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face of declining economy is is even
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more evidence that the fed and Bernan
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must uh you know take that into
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cognizance we're going to have fiscal
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stimulus uh with the uh uh the rebates
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starting at the end of the second
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quarter and end of the third quarter
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this is going to boost spending um uh
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you know that is another boost to
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commodity prices if we if we don't get
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some sign that the FED is going to stop
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keep on lowering rates I'm afraid that
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will move into inflationary expectations
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and the FED even the FED claims we don't
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want inflationary expectations to get
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out of hand that's one of the hardest
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things to solve in the economy so you
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know we're not going back to the
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stagflation of the 70s that was mist
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Stakes that were made way worse than
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anything that we face today but the fact
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that we have to nip inflation in the bud
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we can not let those inflationary
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expectations get anchored I think that
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that's a top priority of uh of the banki
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FED okay well um banki also spoke
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yesterday about um providing relief to
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homeowners who are facing just uh
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foreclosure uh do you agree with his
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approach of having Banks write down
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loans well I I I I prefer we're already
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seeing all sorts of
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accommodations um I I rather the private
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Market do it I mean if if if the
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government or the FED wants to provide a
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few blueprints that might be suggested
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that's fine but we're getting the
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service uh mortgage service industry
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move in and and making deals everyone
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has a a particular thing some are the
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interest rates some might be forgiveness
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of of of a certain amount of principle
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remember a lot of these mortgages are
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selling in the open market at 50 cents
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on the dollar so uh you know if we if
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you if if a bank could actually say 10
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or 20% we'll forgive and they actually
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then get the uh the the loan they're
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going to be making a huge profit on this
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so in a way the incentive is there for
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them to do it I don't think we need
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legislation I don't think we need
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governmental action I think the private
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sector can handle this and is beginning
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to handle this now okay uh you've
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written in the past that when the US and
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Europe are in trouble emerging economies
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such as China and India uh could come to
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the rescue do you think that's the case
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well I think they're much you know the
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US is not the only engine of the economy
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it's an important engine of the world
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economy but it's not the only engine of
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the world economy um you know we're
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we're we're about 20% of world GDP at
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the present time that that's going to be
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shrinking and that's much less than it
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was 30 years ago when we were onethird
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of world uh GDP so you in in essence uh
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um uh you know used to be said us
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sneezes and the rest of the world uh you
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know has a cold I don't think that
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happens anymore that being said um if
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there is a significant slowdown in the
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US and a recession it's almost
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impossible that India and China will not
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be affected by that I mean there's just
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too many Goods that are being sent over
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here but will this necessarily trigger
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you know a worldwide recession no not
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necessarily there's a huge middle
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classes certainly in India and even in
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in in China and the truth of the matter
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is that because China is providing a lot
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of goods uh that that if if income goes
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down those cheaper China goods are going
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to be in demand so my feeling is is you
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know China might go from uh 8 to 10%
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growth down to 4 to 5% growth uh but but
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no recession as we Define it here in in
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the United States so given all that's
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going on what do you think investors
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should be doing well in right now now um
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uh my feeling short run uh I I've I've
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turned cautious on the stock market um I
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think there could be some more downward
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adjustment until Bernan uh makes a stand
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and and the International Community
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begins to see we are going to be
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fighting in inflation um we could see
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short run another five or even 10%
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decline in in the market I consider that
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maximum 10% downside risk if we should
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have that I think it could be the buying
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opportunity of the decade for investors
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because longterm I'm bullish and
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long-term I think valuations are still
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are very attractive short term still
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going to be a little rocky I think until
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the inflation uh situation gets
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clarified um but long term I think it
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it's very very strong so anyone who has
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their stock position longterm they're
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going to be fine if you have a little
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cash you might be deciding to put some
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of that to work re uh in the next couple
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weeks as stock prices decline you might
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be getting
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uh some some very good bargain well
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thank you very much for speaking with us
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today thank you
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Steve for more information please visit
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knowledge. Warton do.edu
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