Interview: Putnam Investments---Kelly, David--Economist
>> welcome back to “after the bell.” the cost of crude oil fell in november, according to an economic report released this morning. the companies imported more oil and brought production back on line after disruptions caused by hurricanes. prices paid to factories, farmers and other producers declined .7%, the most since april 2003. that followed a rise of the same measure in october. if you back out food and energy costs, prices rose .1% after falling in october. u.s. housing starts ungndly -- unexpectedly rose in november as producer prices fell by the most since april 2003. all of this reinforces growth and tame inflation in the u.s. economy. you might think from looking at those numbers. david david kelly is economic adviser at putnum investment and joins us from his offices in boston for a closer look at the economy. would you say the economic reports today add more evidence that we’re seeing solid growth with tame inflation?
>> exactly. we’ve got an underappreciated goldie locks economy here. it is strong in terms of growth and the inflation numbers, both the producer price index this morning and the consumer price index last week. those are very reassuring so it’s a good-looking economy.
>> if you were really going through the producer price index, excluding food and energy, what is the key takeaway?
>> i think the key here is that we are not seeing a flow-through effect from higher energy prices to the rest of inflation. i think it’s important to look at that core inflation rate, only up .1%, a similar result from what we saw in the consumer price index. for months, the higher energy prices have got to seep through to inflation.
>> we have historically high energy prices along with a strong job market , fueling demand for industrial capacity. do you see inflationary pressures creeping into the marketplace some time next year?
>> no, no, i don’t. i don’t think you could characterize american industry as running at full tilt at all. i think there’s plenty of spare capacity in the industry and the labor market . i am more worried about a slowdown in growth later on next year than i am about a breakout in inflation.
>> why doesn’t rising inflation create the slowdown in growth that you say you’re concerned about?
>> i think, first of all, we’re seeing higher energy prices temporarily and higher energy inflation but that will back out of the data over the course of the next year unless energy prices vault even higher still. when all that is said and done, the underlying inflation rate in the united states is relatively low. the problem is, you know, this is an aging economic expansion and we don’t need to see higher interest rates slowing the economy down too much.
>> want to ask you about the housing data today. maybe a mixed message. some are expecting a softening but the data suggesting growth. november housing starts, building permits also rose more than expected. what is your outlook for the housing market ?
>> well, i think it could be one of the last hoorahs in housing. i do think that housing starts will slow down next year. i think the numbers will be distorted a bit because of rebuilding from the hurricanes. so i do think housing will slow down next year despite this surprising strength this morning.
>> the fed today warns of the -- urging tightening loan standards, warning that exotic loan mortgages could create havoc. do you think the fed is on course?
>> i think they’re right but they’re late.
>> they’re late?
>> yes, i’m afraid much of the damage has been done in the bubble market , particularly in california, up and down areas of the east coast. we’ve been using the exotic mortgages. i think people have gotten themselves into commitments they’ll find very hard to live up to going forward and i think we will see problems down the road because of this. better late than never and i think it’s important to have stricter underwriting standards for mortgages in general but i’m afraid damage has been done.
>> bonds fell in reaction to today’s economic reports on expectation the federal reserve, of course, will have to continue to raise rates. you said that is a concern of yours. what do you think the fed outlook should be?
>> i think it’s all right for the federal reserve to go to 4.5% on january 31. i think they said pretty much that’s what they’re going to do. i hope that’s where they stop. i regard that as neutral and i think one of the worst things that could happen next year is that when mr. bernanke gets in, he feels it incumbent upon himself to prove he’s tough on inflation by pushing interest rates up too high. i think that would be a disaster for the economy in 2007.
>> let me get your economic forecast for 2006 and if you will even into 2007.
>> i think it looks like provided the federal reserve doesn’t overtight’en next year, we should have a good year. economic growth between 3.5% and 4% and for 2007, about 3% growth, just about average. and inflation, i think the inflation story will be very good both next year and the year after, about 2% inflation more or less in 2006, maybe a touch higher in 2001 but really nothing to worry about.
>> if you break down the united states into regions, where are you seeing strength and maybe some weakness?
>> the u.s. economy today is a little bit like a cake, when you open the oven too early, sinking in the middle although doing very well around the sides and i think that’s probably where we’ll see things going forward. i think u.s. manufacturing in the middle of the country will be suffering.
>> thanks for joining us
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Listen Market briefing --- Lori (slow)
Greenberg --- Allan (slow)
>> welcome back to “after the bell.” i’m lori rothman. maurice hank greenberg, former chairman and c.e.o. of a.i.g., has been under investigation by new york attorney general eliot spitzer and federal investigators for months. today, greenberg sat down with bloomberg’s allan dodds frank who joins us now.
>> greenberg and his lawyer, david boies, invited me to their offices to talk about spitzer’s accusation that the foundation has been managed improperly.
>> are you feeling persecuted rather than prosecuted?
>> i’ve made that statement, yes.
>> why?
>> you have to ask the person persecuting. >> and that’s eliot spitzer?
>> that’s exactly right.
>> do you have any feeling about why he would be doing that to you?
>> i haven’t got any knowledge at all.
>> what bothers you the most about all the things he said about you?
>> obviously it affects my reputation which i think i’ve earned over the last 35 to 40 years running a.i.g., became the greatest insurance company in the world, biggest in market cap in history, as a matter of fact. to have this happen by somebody who goes to the press and persecutes you in the press instead of prosecuting you in a courtroom is not the american way. we go around the world preaching rules of law. i don’t think that’s the rule of law that i have been confronting here.
>> the latest salvo from the new york attorney general includes a charge about charitable foundation that you run, the star foundation and two companies, including star international. tell me what it is about his accusations that you have irreparable conflicts of interest with regard to those companies that upsets you?
>> i have no conflict of interest at all because everything we’ve done in the last 37 years since he’s dug back was done with mr. starr’s not only approval, it was approved by the court and by the attorney general, by the surrogate. mr. starr wanted the directors of c.v. starr and company, at the time, in 1968, to be the executors of his will and many of the same people to be trustees of his foundation. the company was very tiny at the time. we were a small family. he decided all of those things. he decided what the certificate of the incorporation should include in c.v. starr and company, how you bought people out and how they came in and the same thing with all the other subsidiaries. he was the author of all that so to have somebody now come in 37 years later, probably wasn’t even in knickers at the time, to say it was all wrong. i if i understand that strange and if he believes there’s something wrong, the place to determine it is in the court of law, not the press.
>> would you expect to settle with the attorney general?
>> i have no idea what he expects and since i don’t feel i’ve done anything wrong, i have no idea what he expects. >> do you have plans to settle?
>> i have no plans to settle. we are in litigation and let it take its course.
>> before you said you’re not settling no matter what but that’s not really your feeling, is it?
>> that’s a question that’s very difficult to answer. settle for what?
>> do you feel any comfort that the attorney general of new york has said he’s not going after you with criminal charges?
>> look, you know, i’m glad he said that but i didn’t think i did anything to be indicted for a criminal act to begin with.
>> the u.s. attorney in the southern district of new york has supposedly been looking at whether you made some phone calls to influence the a.i.g. stock price. have you heard anything from his office about whether he’s going to decline to prosecute?
>> i don’t think i should be talking about that.
>> i think that’s probably something that is not appropriate to get into. i think that as he said at the beginning, with respect to the stuff that’s public and not in litigation, he’s happy to talk about it but with respect to what’s going on at the u.s. attorney’s office to the extent he has any information about that, he probably shouldn’t be talking about it. >> let me ask a general question i’m fairly certain i know what the answer will be. you don’t feel you’ve done anything wrong there, either, do you?
>> absolutely, did nothing wrong. absolutely.
>> what do you think of a.i.g. now?
>> it’s a great company. i think the franchise is one of a kind. i’m very proud of my contributions making it a great company.
>> how differently do you feel it runs now?
>> i can’t tell you how it’s running now.
>> surely you must get a phone call or two from former colleagues.
>> they’ve been told they can’t call me. the lawyers, the outside lawyers and the outside board are really managing the company, from what i can tell.
>> the outside board, the a.i.g. board was essentially hand picked by you originally. how do you feel about them now?
>> no comment.
>> why no comment?
>> well, look, i don’t want to say anything that really is not appropriate. do i think of them the same as i did before? absolutely not.
>> would you say that they surprised you by their lack of intestinal fortitude?
>> that’s a good term. i would agree with that.
>> our thanks to maurice hank greenberg, c.e.o. of c.v. starr and starr international and his lawyer.
>> thank you very much. stay with us, we’ll look at the economy with our next guest.
