Sometimes it seems that investors get a kick out of lousy economic news. Greg McBride, Bankrate's senior financial analyst, explains that it's about investors' addiction to what the Federal Reserve is providing.
Also in this podcast:
- Economist Robert Brusca wonders whether it's a good idea to install a window into the sausage factory that is the Fed's monetary policy process.
- Janna Herron, Bankrate's credit card analyst, explains what's wrong with free money.
Is the economic recovery at risk?
We ask economist Robert Brusca whether growth is stalling. Bankrate's Greg McBride tells us how the Federal Reserve's strategy has affected investors.
LISTEN TO AUDIO
Mark Hamrick: From Bankrate.com, this is "Your Money This Week." I'm Mark Hamrick, reporting from Washington. This week's edition seems to center around a basic concept that things aren't always as they seem. That's whether you're talking about economic growth, what the Federal Reserve may or may not try to help the economy, as well as the apparent allure of some financial products. We are here to help you sort it all out, and we hope you stick around for our conversations with economist Robert Brusca, with senior financial analyst with Greg McBride and in our final segment covering credit cards with Janna Herron. All that and more on "Your Money This Week." In our first segment, what's going on with the economy and the Federal Reserve? Our guest is economist Robert Brusca with fact and opinion economics. Now that we are in the second half of the year, it appears that growth in the second quarter was on the weak side. Perhaps just above 1 percent for GDP. I asked Dr. Brusca what happened to growth and whether we are in a really precarious position right now.
Robert Brusca: Well, GDP is always kind of a funny thing. The Fed obviously has been mulling the prospect of tapering, that is, cutting down on its extra stimulus, and it wouldn't be doing that if it thought the economy was fading. On the other hand, you look at the economic growth statistics, and you say, "But isn't growth fading?" Well, there have been a number of special factors that have hit the economy related to the government sector, related to budget sequestration, related to tax hikes earlier in the year, and actually, the consumer part of the economy is performing OK. Job growth, really, is rather stable, and it's been in the GDP accounts where we have seen the most weakness. But consumer confidence has been rising. Other metrics of future economic performance, and current performance, are actually performing a lot better than GDP, and those are the things that the Fed is looking at.
Mark Hamrick: Fair enough. So many people do in fact believe that things should pick up between now and the end of the year. Are you in that camp? And is that a risky forecast?
Robert Brusca: I think it's a bit of a risky forecast. We still do have problems from sequestration, and as the Fed chairman highlighted in his recent two testimonies, there still may be more fiscal problems ahead of us because Congress is really not behaving.
Mark Hamrick: Yeah. It's hard to place much reliability, first of all, on the power establishment in Washington if you define that as the administration and the Congress. And then, the Fed seems to want to truly be keeping its cards somewhat close to its proverbial chest on whether it tapers or not, saying that it's data dependent. There's a lot of risk out there.
Robert Brusca: Well, right, I mean the Fed is trying to have its cake and eat it too. It's trying to tell you its providing guidance. On the other hand, its guidance is based on its forecast, and policy will be data dependent, and so if the Fed is wrong, it's going to do something different than what it's guiding you toward. So I don't really understand how guidance is something different. I feel a little bit like a guy at a construction site, who's just picked up a hammer and said, "Hey, look at this new tool I found." I don't see much different or new in this idea of guidance.
Mark Hamrick: Well, you know it is interesting. We're about two years into this process where the Federal Reserve has started to hold news conferences where essentially chairman Bernanke ad-libs responses to reporters' questions. And all that is under the guise of attempting to provide more transparency, but transparency isn't something that central banks have always been engaged in, is it now? Perhaps now thinking that maybe a high degree of transparency isn't always highly advantageous?
Robert Brusca: Well, I think that we have always agreed that you want different kinds of transparency in your living room window compared to your bathroom window. And there are certain things that go on in the Fed that we would prefer not be completely transparent. However, I think the problem the Fed has right now is something a little bit different. I think that it's trying to conjure up tools because its bag of tricks is basically empty. And I also think it's having a hard time giving us honest guidance because there are honest differences of opinion among members on the committee. I just don't think you really want a window of transparency into the sausage factory, and I really think that the Fed doesn't want to be completely honest with us, the extent to which its members are in rather abject disagreement about exactly what they ought to be doing and even more disagreement, I think, about what kind of guidance they should give us. Because I think a lot of Federal Reserve officials see this guidance thing the same way that I do, that it's kind of a sham to give people a forecast that you're trying to convince them to believe, when on the other hand, you're telling them if policy is different -- I'm sorry -- economic growth outcomes are different, then policy will be different. If that's the case, then what's guidance? I mean if you're not saying on one hand, and then on the other hand, if you're instead going to promise people something, well if you're going to promise them something, you sure better be right. But Fed forecasts aren't always right. And this is the strange little world the Fed has injected itself in, and I find it very curious that both the ECB, European Central Bank, and the Bank of England seem to have decided that they want to try to adopt this forward guidance, too. I just don't see what benefit it is.
Mark Hamrick: Well, one thing that's been performing very well lately is the U.S. stock market and seeming to be relying a lot on the Fed's, at least, indication that the economy is strong enough to begin tapering later this year or slowing the growth of its balance sheet. So for investors and savers, and I guess to some degree consumers, too, much of the world is really struggling with weak economies right now, and the U.S. stock market's surging to record highs, and we're constantly told the markets are forward looking, but markets also overshoot. So, do you worry that equities have gotten really ahead of themselves here?
Robert Brusca: Oh yeah, I do worry a load about the stock market. Its metrics aren't terribly overvalued compared to historic standards, and the market looks a little pricey, but of course, it's being helped a lot by these very low interest rates, and we need to argue a little bit about how long interest rates are going to stay this very low. The other problem we have is that when policy begins to go awry, very often the market reactions are going to be expedited, and the Fed's not going to be able to control them. It's a little bit like having wild horses penned up in a corral and then all of a sudden thinking you're going to put a saddle on one and then ride it off into the sunset. It usually doesn't work quite that way.
Mark Hamrick: Well, Bob Brusca, there's a lot going on, and that's why we need economists like you to help explain it. We appreciate your time, thanks so much.
Robert Brusca: OK, thank you.
Mark Hamrick: Bob Brusca, economist with fact and opinion economics; he spoke with us from New York.
We have been seeing the major stock market averages continue to rise, and interest rates have been bouncing around off their recent lows. We sat down with Bankrate's senior financial analyst Greg McBride. I asked Greg: For investors, do the usual rules apply here?
Greg McBride: It's been a little bit of an adverse situation in the sense that bad news has become good news in the sense that when we get bad news, or just less-than-favorable news with regard to the economy, oftentimes investors embrace that because it means that the Federal Reserve will continue their program of liquidity. On the other hand, when we get better economic data, sometimes investors have turned their nose up at that -- use that as an opportunity to sell -- because a trajectory of better economic data would eventually be a harbinger for the Fed to dial back their stimulus. So, what we've seen a lot of here in 2013 is almost an addiction to stimulus on the part of investors, and that's brought about this inverse relationship between good economic data and what we end up seeing in financial markets.
Mark Hamrick: Are the markets any closer to being schizophrenic on the road to a transition?
Greg McBride: Well, we saw a good glimpse of that in the May-June time frame when the Feds started to talk about tapering. You saw a sharp jump in long-term interest rates, but yet only a very minor pullback in the equity markets. Equity markets quickly regained the lost ground, bond market did not, so I think again, you've got the markets kind of sorting out their projections of when they see the Fed dialing back their stimulus, when they see them ending altogether, and what does that portend, not only for economic growth, but ultimately for the performance of various investment classes. And that schizophrenic, that volatility, I think a lot of that is because there's this constant tug of war going on between investors. Is this a good development or is this a bad development, whether it's economic data or just the latest words coming out of the mouths of the Fed.
Mark Hamrick: So, along the lines of these tensions we've been hearing for some time that the end is near for the bond market, the rates should continue to rise. But you think the economy isn't quite as strong as some would have us believe, and indeed, some of the more recent data has borne you out appropriately enough. So, the Fed may not be quite as poised to stop supplying jet fuel for the markets, right?
Greg McBride: No, I mean, when Bernanke outlined the timetable of the Fed meeting in late June at his press conference, and he laid out this timetable whereby the Fed could start dialing back the stimulus later this year and be done completely by June of next year, I think that was a perfect timetable, or perfect scenario in the sense that he said "if the economy continues to perform as we, the Fed, expect it to." The problem with that is, the Fed has routinely overestimated economic output. And when you look at what we've seen in the first half of this year -- we saw 1.8 percent GDP growth in the first quarter, second quarter is projected to be even lower than that, about 1.2 percent, maybe even as low as 1 percent -- the idea that the economy is suddenly going to ramp up here in the second half of the year, at a time when unemployment is still high, wage growth is pretty scarce, I have a tough time seeing that happen. If that doesn't happen, the Fed's not going to be dialing back that stimulus on the timetable that Bernanke had outlined in June.
Mark Hamrick: Indeed, Chairman Bernanke has said that he is more, or the Fed is more, optimistic than many private forecasters are. In your mind, what are some of the biggest risks that investors should be watching out for or perhaps they're missing?
Greg McBride: I don't know that this is a huge risk in the sense that I just, you know, I think that eventually the chickens come home to roost in the sense that it does boil down to fundamentals. At some point, the fundamentals matter. And the fundamentals right now aren't real spectacular. We already talked about the slow pace of economic growth, high unemployment, inflation is really, really low, that's another type of thing that can keep the Fed active a lot longer. The top-line revenue growth, I mean, when you look at what ultimately drives stock prices, it's earnings. And the earnings growth has come from cost cutting, not from top-line revenue growth. Top-line revenue growth is really hard to come by, and yet we're looking at an equity market that's hitting record highs and is up about 17 percent year to date. Why is that? I think it's more of an addiction to Fed stimulus than it is based on the fundamentals, and ultimately, until we start to see top-line revenue growth increase, it's going to be hard to see where the additional earnings growth is going to come. It's going to power stock prices going forward. In the meantime, markets continue to do well, simply on the basis or on the back of the stimulus from the Fed.
Mark Hamrick: And in times past, people could look abroad for performance in economies and markets over seas. But right now, it's hard to find a strong a performing market all around the world, isn't it?
Greg McBride: It really is. I mean, a lot of international markets are really taking it on the chin this year, particularly emerging markets. Japan has been sharply up and sharply down in a short period of time. The U.S. is really kind of the best performing in the sense that we have just had this steady upward trajectory throughout 2013. But again, the fundamentals aren't exactly solid here, but they're even worse in Europe, and they're not great in Japan, either. That's another one that's just a byproduct of stimulus. And the emerging markets have really taken it on the chin, despite the fact that their economies are growing much faster than the developed world.
Mark Hamrick: So does that mean those markets might potentially be a good value right now if they're underperforming?
Greg McBride: Well, I'm the type of investor that I look for that type of value. I like to buy stuff that's been beaten up and that's on sale. The problem with that is, you have to be willing to ride out what could be a pretty wild ride, and a lot of investors don't have that kind of risk tolerance. So yeah, I think there's a lot of value in things that have been beaten up, like in emerging markets. Problem is, that doesn't exactly mean it's going to be a smooth ride from here on out. The investors that are favoring the smoother ride have been putting their money into the U.S. market, and true enough, it's been a fairly smooth ride. Problem is the economic fundamentals and the corporate fundamentals don't exactly portend that we're going to see a continued smooth trajectory in growth.
Mark Hamrick: So with everybody predicting the end of the bond market and the U.S. stock market really having performed well for some time, really the key average is at record highs as we speak, how to you attenuate your expectations and your hopes based on those performances?
Greg McBride: Well, I think the bond market -- I mean long-term -- we're going to see higher interest rates. Long-term, the bond market is absolutely going to get hammered as interest rates rise. Short-term, I think we may have seen a little bit of an overreaction to the Fed in the past couple of months such that those long-term interest rates, I think, bounced up a little bit higher, a little bit faster than people had expected. We get a couple disappointing economic numbers, and I think you could see longer-term yields pull back short-term. But again, long-term, the trajectory is toward higher interest rates. Now, ultimately, if interest rates continue to move up and if they move up at a rapid pace, that's not going to be good for equities either. But, if they are moving up at a slower pace and consistent with a growing economy, that's the type of environment that's actually good for stocks. So I think a lot of this depends on what's the catalyst for those higher interest rates?
Mark Hamrick: Greg McBride, thank you.
Greg McBride: Thank you, Mark.
Mark Hamrick: Greg McBride, Bankrate's senior financial analyst, I spoke with him in North Palm Beach, Fla. One hangover, so to speak, from the financial crisis, is that credit still remains relatively hard to come by. Next up, we hear from Bankrate's Janna Herron. She has some words of advice for credit card users so eager to reap rewards.
Janna Herron: Who doesn't like free money? That's the appeal behind cash-back credit cards. Spend a dollar, get a penny back. But for many of us, the cash back is coming out of our own pockets. A third of cash-back card holders carry thousands of dollars from one month to the next on their cards, according to a recent survey from Lightspeed Research. The result? They pay more in interest charges than what they earned in cash back. The trouble is, cash-back card holders tend to spend more than normal and pay back less. A 2010 study from the Federal Reserve Bank of Chicago found that cash-back card holders increase their monthly spending by $76 since they opened the card. Their average monthly debt increased by almost $200, but they cut their monthly payment by $83. Credit card companies are tempting cardholders to spend more, too. Many cash-back cards offer sign-up bonuses that cardholders get only after spending a certain amount in a short period of time. So while you may get a bonus by spending $1,000 more than you normally would, you can end up paying more in interest on a balance you can't handle. Other cards offer zero percent interest for a limited time. Sounds attractive until you rack up charges that you don't pay off before the interest-free period ends. The bottom line? If you have problems paying off your entire balance every month, skip the cash-back rewards card, or any rewards card for that matter, because you're not getting something for nothing; you're paying for it. I'm Janna Herron, for "Your Money This Week."
Mark Hamrick: Finally, a look back at a moment in business history. It was on July 22, 1933, or some 80 years ago, that an important advancement in aviation took place. Wiley Post completed the first solo flight around the world. He did it in just seven days, 18 ½ hours. Post is credited for helping to discover the jet stream. Just a few years later, both Post and humorist Will Rogers were killed in a plane crash in Alaska.
You've been listening to "Your Money This Week." ITunes listeners, if you enjoyed this podcast, please rate and subscribe to our program. We're hoping you can help us to get the word out. For more on this and other personal finance issues, visit Bankrate.com, and you can follow us on Twitter @Bankrate. Our editor-in-chief is Julie Bandy; managing editor, Katie Doyle; and thanks to producer Lucas Wysocki for his work in the studio. I'm Mark Hamrick. From all of here at Bankrate, here's hoping you have a great week.