On Oct. 9, 2007, the Dow Jones industrial average closed at 14,164 points, its all-time high. At that time, many pundits said we were experiencing a “Goldilocks economy,” not too hot, not too cold. Just right.
Hometown: Weston, Mass.
Education: Sarah Lawrence College (B.A.)
- Worked for several prominent research and money management firms, including Mitchell Hutchins and Merrill Lynch.
- Spent over a decade at The Wall Street Journal as the anchor and managing editor of its weekly syndicated business program, “The Wall Street Journal Report.”
- Anchor and editor of “The Asian Wall Street Journal Report,” a weekly business program syndicated throughout Asia.
- Host of the acclaimed weekly PBS program, “Consuelo Mack WealthTrack.”
- Winner of the ACE award, cable television’s highest honor; recipient of the first Lifetime Achievement Award for Women in Print and Electronic Financial Journalism from the Women’s Economic Roundtable, and named “Best Money TV Host” by Money Magazine.
In the fairy tale, Goldilocks was in danger of confronting three bears, but in the financial world, an impending bear market was just beyond the bend. As we’ve since learned, it turned out to be a brutal grizzly.
So, what can we expect going forward? Are our only best options to maintain a cash and fetal position for the foreseeable future, or is this downturn that proverbial “once in a lifetime” buying opportunity for savvy but steel-willed long-term investors?
To gain some insights about what we’re in for and what it all means, Bankrate spoke with award-winning financial journalist and “Cramer-antidote,” Consuelo Mack, host of the acclaimed PBS television program, “Consuelo Mack WealthTrack.”
Yale behavioral economist Robert Shiller put it best on “WealthTrack”: “You can’t blame it on any one person or regulator. What we had was a social epidemic … simultaneous bubbles in a number of different markets.”
We’ve been through this era of being an over-leveraged, credit-based economy, and this deleveraging process that we’re going through means that we’re probably going to go back to growth rates we had seen over 10 years ago. That easy credit we enjoyed did a lot of good things, but it also led to so many bad things — such as the bad mortgage loans we’re now hearing so much about, the lax borrowing standards and all of these people who were being paid fees to make these mortgages and other loans. And then there was that perception that there really was no risk to all of this.
Now, there were people like Robert Shiller and (money manager) Jeremy Grantham who saw this problem coming, but nobody wanted to listen to such doomsayers when everything in the economy seemed to be going so well.
What we’re experiencing is part of human nature and what PIMCO’s Bill Gross describes as the “inherent instability of capitalism.” We go through these booms and busts — and then we learn our lessons during the busts — and then it takes about a generation or so before we get ourselves back into some other asset-based “bubble.”
In my mind it was more than just real estate in this case. It was the credit bubble that developed around real estate and the whole “asset-backed” derivative security movement … that’s what got totally out of hand. You really can’t blame real estate; you have to blame this era of easy money that was worldwide. Whenever you have that much money available looking for a place to invest, bad things can happen. And the “securitization” of America’s real estate assets, the derivatives we’ve heard so much about, unfortunately, they became, as Warren Buffet termed them, the greatest financial weapons of mass destruction known to man.
I think there is some sensationalism going on. I’ve had some guests on my show, people who are in their 70s, who had never seen the sort of credit freeze-up we’ve experienced, and I think that that’s the only decent analogy hearkening back to the Great Depression. Credit is what makes the world go round, and when you can’t access credit, when you have a situation where a company as large as General Electric can’t access credit, which is what happened, I think that that is a fair analogy.
But that’s where the analogy ends and that’s why I honestly feel that all this talk of a second Great Depression is overblown. We don’t have 25 percent unemployment, we have 6 percent unemployment. Half of the nation’s banks shut down during the Great Depression, whereas today we are experiencing some consolidation, but we’re nowhere close to where we were back then. We are just much better equipped, we have much better regulations for banks, and we’re mounting a global, coordinated effort to inject liquidity into the world’s financial system.
So, even though we’re entering into an economic downturn, I don’t think we’re at risk of a depression — that is unless, of course, we become very protectionist next year. That would be our greatest risk and our greatest challenge: If protectionism would be renewed both here and elsewhere around the world, that could really set us back seriously.
The international community has reacted to the current situation in a manner that’s unprecedented, coordinating both interest-rate cuts and “liquidity injections” along with their own versions of “bailout packages” for their respective banks and financial institutions. Do you think that this action has the capacity to calm world markets and restore confidence to investors and lenders over the long-term?
I think a crisis does amazing things to bring people together, and I think we did look into the abyss — the world’s finance ministers and central bankers did look into the abyss. They are much more willing to set aside political differences and act in a coordinated manner. And we’ve seen how people like Ben Bernanke and Jean Claude Trichet (president of the European Central Bank), for example, are now in constant touch with one another. That’s a real positive.
But the real-world economy and the economic reports — all of that data, all of that negative information, is going to be difficult to absorb for the financial markets. It’s not going to be pretty, and that’s what’s going to be dominating the sentiment of the world’s markets for some time.
Are world leaders addressing the problems caused by the so-called “shadow banking system,” and the widespread use of derivatives among unregulated entities such as hedge funds? How much of the current global crisis is attributable to it?
Personally, I think that the shadow banking system was a very visible symptom, but not the cause of the problem. That said, however, it was also a big contributor to what happened. Everyone wanted to keep the flow of money going, everyone wanted to keep the party going, and money was just so cheap and so easy to get because of a lowering of credit standards. Consequently, people became very ingenious at finding ways of doing that and the regulations were just not keeping up.
I think that everyone agrees that our regulatory system, which was established back in the 1930s, has simply not kept up with the realities of 2008. I think that there will be an enormous re-think with respect to regulation, and Mohamed El-Erian has talked about this at length in his book, When Markets Collide and on “WealthTrack.” There really needs to be a new global architecture in place. That’s not going to be easy to put into place, however, and that’s something that the new president will have to deal with, with all of the other leaders of the world. Unfortunately, these are the sorts of issues that are really going to take time to set up and implement.
People now need to recognize that we might be in a lower return environment for a while — perhaps for the next 18 or 24 or even 36 months, as some have predicted. So, as an investor, you have to be aware that stocks might eventually do better than inflation, but not much better over the next few years.
Personally, I think we’re really in a back-to-basics sort of environment. On my program “WealthTrack,” we try to get and keep people focused on long-term investing and on being well-diversified in their investments. If you are investing for the long-term today, you might very well be asking yourself, “What are the alternatives?” Things look bleak and it can be scary, but the fact is, on a total return basis and on a sheer capital appreciation basis, the stock market has historically provided better returns on your cash than any other asset class.
Is there a risk that all of this new “liquidity” that’s now making its way into the financial markets might, in the future, trigger off rising inflation at a time of economic contraction, causing stagflation?
Yes, we are definitely risking that. But it’s my feeling that we have to get our priorities straight. Right now the priority is just to provide the needed liquidity so that businesses have the capital they need to make their payrolls. This has literally got to be the first priority.
We are also in a deflationary environment and certain important assets like stocks, bonds and housing are in need of stabilization. The price for that will be inflation down the road, but we’re about two to three years away from that. The private economy and the supply of money in the private economy is shrinking, whereas the public money-supply from the Fed is expanding. So this might not in fact be a situation that is as inflationary as some fear it to be.
People shouldn’t be freaked out. Yes, we are in a bear market, and you should be aware of that and invest accordingly, remembering always that stock investments are a long-term investment. Dollar-cost-averaging is definitely the best way to invest money right now and you should not forget about the tremendous power of compounding over time.
All of the guests on my show have reiterated that when a place like Macy’s has a shoe-sale, you want to be a buyer at that time. This current market situation is like that Macy’s shoe-sale: It’s the stock-sale of a generation. So keep doing your dividend reinvestment programs, keep on dollar-cost-averaging, and keep investing in increments. Two to three years from now, you’ll be glad that you did or wished you had.
I still believe the U.S. is the best place in which to invest your money, but it’s no longer the only place. I firmly believe in broad diversification overseas. Emerging markets are probably where the fastest growth is right now and selectively they are in much better shape because they had already gone through a contraction back in the 1980s and the 1990s. In a global economy, I believe that you should at least have the market weight representation in your portfolio and having something like 40 percent of your portfolio invested in foreign stocks and bonds.
Where would you not invest your money today?
I think you need to be invested everywhere and you need to own some of everything. Maybe, today, Treasuries have become some of the most overvalued of investments. But today there isn’t a place where I wouldn’t invest money.
Peter Bernstein is a risk-expert, a market historian and he wrote “Against The Gods: The Remarkable Story of Risk.” And he said that you aren’t truly diversified until you own something you’re uncomfortable with. So I think that you need to have representation in every asset class as an investor and I think that there are many more places, today, that represent great value over the longer term than we’ve had in decades.
Top money managers like First Eagle Fund’s Jean-Marie Eveillard look upon gold as a hedge against disaster, against an extreme outcome. But, normally, gold doesn’t pay you any interest and, traditionally, it used to be very expensive to own bullion. You had to insure it, it had to be stored somewhere. Today, with the Gold ETF, individual investors have an accessible and liquid way to invest in gold. So, I think that everyone should put about 3 percent to 5 percent of their portfolio in gold. Now, when everything else is doing well, realize that gold is going to do terribly; but owning some gold provides you with a little bit of an insurance policy, so I’m a believer in owning a small amount of gold.
As far as owning a precious metals and mining fund, well, that’s a whole other issue because then you’re dealing with investing in mining companies, which are usually located in troubled parts of the world. And owning precious metals and mining stocks or funds takes you in another direction in terms of risk and other considerations.
What advice do you have for the typical American?
I know it sounds like such a cliché, but my advice is to think longer term, to stick with your investment plan, and to look beyond the current crisis and to recognize that the U.S. economy is resilient. The world economy is resilient. We will grow again and there are tremendous opportunities to be had when businesses start growing again. And you wouldn’t want to miss out on that upswing.