Special edition
>> this is a special edition of television. we’ll be discussing some of the key elements driving or hindering the financial markets , speaking about the jobs, earnings, investment strategies and global unrest. joining me are chip dickson, chief u.s. strategist for lehman brothers, also michael vogelzang, chief investment officer with boston advisers and brett gallagher, head of u.s. equities at julius baer investment management. thank you for being with us. a lot going on this year and here we are, it’s september. is this where you expected us to be in terms of financial markets , michael?
>> we’ve been talking for a while about 2004 being a lot like 1994 with strong earnings growth, slowing down a little bit. a little bit of deceleration. but not a big surprise in the stock market in terms of interest rates, probably a little surprised rates aren’t higher.
>> chip, are you surprised at all?
>> a little surprised. we expected a bumpy year initially. it is a presidential election year. usually the first half is relatively flat. we did expect rates to be a bit higher coming into the year and we didn’t expect oil prices to be as high as they are so putting it altogether, it’s not entirely a surprise.
>> brett, in terms of oil prices and the markets , surprise here? >> maybe the current spot level, but our view has been that over the long run, oil prices are going to go higher and be sustainably higher for years to come so the fact that it’s happening a little bit sooner than we thought really is a mild surprise.
>> and i do want to talk more about oil. but one of the key focal points certainly for the markets last week was the jobs report. i want to bring that up because certainly many investors are watching it. it came in weaker than expected but there was a sigh of relief in the markets . chip, what was your take on the jobs report?
>> well, the markets looking for reenforcement from the macro data to feel like the economic recovery is sustainable so it’s a positive for the market . it give it more conviction that it can sustain this kind of modest level of g.d.p. growth. so it was a positive.
>> mike?
>> couple the somewhat better jobs number than expected, at least from the month prior, with weak retail data and it shows we’ve hit that soft patch, that oil prices have hit the consumer and demand is off a bit and yet corporate america seems to be going along ok.
>> brett, would you stripe it as a―describe it as a soft patch?
>> yeah, we’re not getting blowout reports or terrible reports, but more of the same and i suspect we’ll see that through the rest of the year.
>> we have a chart to bring to your attention to bring perspective in terms of the job market . may 2000, market peak there. you can see the red line indicating all of the job losses we saw, specifically in non-farm payrolls. february 2002, bottoming out there. and of course we’ve seen job creation move up from that point. so, in terms of giving us perspective, we’re certainly not back up to the levels we saw in 2000 but would you say we’re in a better situation than we were?
>> yeah, i’d say absolutely. look at that chart and ask people to remember that that decline in job was coincidence with the tech bubble bursting and also remember there were a tremendous amount of jobs created because of y2k and these jobs went away so we’re dealing with excesses going away and we’re coming back and getting on sounder footing.
>> do you think we should see more strength at this point in terms of the economic cycle and certainly the fed keeping rates as they did and all the stimulus in the economy, should we be further along at this point?
>> if you look at the overall growth rates, we’re probably right about where we should be in a normal economic recovery. what has lagged has been job growth. there are a lot of reasons for that and i think they have to do with more than just the economic stimulus that’s put into place. i think there are a lot more structural reasons. we have the excesses of the bubble, we believe, still to work off. i don’t think we’ve fully gotten through that.
>> yeah, but i think one of the issues with the jobless recovery is, if you look back five or six years ago, frankly, the unemployment rate hovering around 5% would look like nirvana, right? so we’ve really come down a a long way. one of our thesis that has been that the bubble in 2000 really pulled in almost every marginal worker in the u.s., right? really pulled in everybody who needed to work and that’s sort of working off and still dealing with the effects of the bung bubble.
>> does that mean you expect we could still see weakness in job reports to come?
>> it wouldn’t surprise us. we think productivity is the key to what’s going on in the economy. the job rate is effectively a byproduct.
>> you bring up a good point, are we seeing significant productivity gains here?
>> we are seeing good productivity gains, less less less than recently but good historically.
>> brett?
>> i’m just always suspect about when we get about to measuring productivity so --
>> why?
>> i don’t think it’s something that really can be as precisely measured as many of these other things that we usually do and you have alan greenspan harping and focusing on productivity as a justification for the policies he’s followed over the last couple of years. i think? some of these policies will come back to bite us. i think there’s been too much accommodation for too long and we’ll feel the effects a year out.
>> i do think one of the things wore seeing in terms of productivity and other numbers is a harsh reality of a post bubble environment. this recovery is different from most recoveries because it is a post-bubble recovery, making it more fragile, more dependent on the macro reenforcement and things like that and as a result what are corporations doing? they’re holding back in terms of hiring and investment decisions longer than they would and that may be coming through in the productivity numbers.
>> the perfect example of that was the c.e.o. of 3m, probably six months ago, came out with a famous quote “we’re not going to hire until we see the whites of the recovery’s eyes.” these guys have been burned so much in that fall on that chart that it’s really, it’s not a surprise they’re being more cautious now.
>> and we’ve been talking to c.e.o.’s who say their hiring plans are on hold at this point. how problematic being that be for the economy at this point?
>> i don’t know that it’s problematic but it certainly has implications for the rate of growth going forward. we’re also seeing, not just on the hiring side, but on the capital spending side, there are a number of industries―cash flows right now in corporate america are tremendous. the investment rates have not kept up with the cash flows so the capacity to invest is there, we just haven’t necessarily seen the followthrough in relation to the size of the cash flows.
>> what do you think it will take to get the companies to start spending here.
>> in i think it’s just time. i think part of it’s reenforcement, a lot of it’s expectation and confidence. if we get more good numbers, that will help. there will be other issues. it depends on what the executives feel the future environment will look like, right? are they going to be rewarded for making investments or will it be marreder, will there be more economic friction or less? i think we’re past the point of peak stimulus and they’re thinking about that.
>> mike?
>> i think they’re trying but there’s a huge wall of worry, the cliche wall of worry with interest rates and iraq and the election and on and on and on. so i think we’re seeing a fair amount of investment given the fairly uncertain environment.
>> we’ll take a break and be back in a moment.
