Friday, March 6, 1:30 p.m.ET
Economic Plunge Continues as Unemployment Rises, Stocks Drop Again
Friday, March 6, 2009; 1:30 PM
The nation's unemployment climbed above 8 percent last month and the economy shed 651,000 jobs, according to government data released this morning, further evidence of the deepening recession that has devastated the stock market and home prices and triggered the largest government recovery effort since the Great Depression.
The government is seeking to resuscitate the nation's crippled financial system by forging an alliance with the very outfits that most benefited from the bonanza preceding the collapse of the credit markets: hedge funds and private-equity firms.
The truisms have been familiar to generations of Americans: As General Motors goes, so goes the nation; Citigroup is too big to fail; General Electric, one of the 12 original companies in the Dow Jones industrial average in 1896, brings good things to life. But the giants that only recently seemed like the unshakable foundations of the economy are faltering one after another. The girth that once seemed a source of strength now appears to be undermining them.
Joe Brusuelas, senior economist with Moody'sEconomy.com, an independent provider of economic analysis, data, and forecasting and credit risk management, was online Friday, March 6, at 1:30 p.m. ET to take questions and comments about the continuing economic downturn.
A transcript follows.
Joe Brusuelas: Hi. I am here to discuss today's economic events.
McLean, Va.: With the recession heating up, how many more major retailers can we expect to go out of business? Who would be top of the list? Thanks.
Joe Brusuelas: Well, I cannot name, names so to speak. What I can tell you is that the decline in equity values is having a real impact. For every one dollar decline in equity wealth, I expect to see a two cent decline in spending. This will disproportionately hit wealthier households. Since 5% of the population owns half of all the assets in the country, the negative wealth effect will hit luxury retailers quite hard.
Central Virginia: So how much further down the toilet do you think things are going to go? Is it time to start buying cheap stocks or should we wait a bit for even better bargains?
Joe Brusuelas: I think that 2009 will be a very mean year for the financial community and investors. I would not feel comfortable suggesting to individuals that now is a great time to purchase equities
Oviedo, Fla.: So, like, Mark Zandi is having a day off? Kidding. Um, I just lost $275k in the stock market. It was good mutual funds from T Rowe and Vanguard, one third foreign and two-thirds large cap U.S. It is money I need in 20 years, when I turn 70. I can leave it alone till then. Should I just chill? Hate to walk out at a low. By standing pat, am I throwing good money after bad? Thanks for not using the phrase "crystal ball" in your answer.
Joe Brusuelas: Condolences on your setback in the market. Given recent upsets in equity markets it is not the worst idea to reset our own investment objectives. One caveat. I think too much emphasis is being place on the purchase of equities at this time. Warren Buffet can get in and sustain outsized losses in the near term....I am fairly certain most of us are not Warren Buffet
Annapolis, Md.: Isn't Wall Street giving President Obama's radical program a thumbs down?
Joe Brusuelas: Let me say this....the market has not responded well to the budget proposal. I do think that the negative move in the market is at lest partially a response to the proposed increase in taxes and the expansive vision put forward by the President. However, the primary cause for recent upsets in equity markets has far more to do with the toxic sludge on the balance sheets of troubled financials and corporates than the political theatre in D.C.
Fairfax, Va.: What about annuities? I have most of my 401k in Prudential annuities. Is my money safe?
Joe Brusuelas: Capital preservation is on the tip of everyone's tongue these days isn't it. Two things. First, you should consider your own tolerance for risk. Second, you should speak to your broker about the composition of your portfolio.
Chicago, Ill.: About a third of my friends (professional careers) are now out of work, and seem to be unable to even land an interview.
Are any businesses hiring? When will employers start re-hiring?
Do you have a strategy for those out of work?
Joe Brusuelas: Employment is going to be a major problem going forward. To be blunt, the worst of the downturn with respect to employment is in front of us. The only thing I can advise get up everyday and look for a job in the same way you would execute tasks at work. The economy will bounce back...but it will take time.
Chicago, Ill.: Joe,
When the unemployment numbers were on target this morning the market rallied out of the opening bell. Just as the bulls were starting to run the bears came and crashed the party. The market continues to slip as we head into the afternoon. Is there anything other then a technical bounce that can save the market from falling more then 100 points today?
Joe Brusuelas: At this point there is little support from fundamental economic data to provide support for the market at this time. Trades I speak to do believe that there may be technical bounce coming...but that is a very risky proposition a this time in my opinion.
Metuchen, N.J.: What is your forecast for the unemployment rate? When will it peak?
Joe Brusuelas: We expect the unemployment rate to peak at 9.8 percent in 2010. It is probable that we will see double digit rates of unemployment before too long.
Orange County, Calif.: GM and Citibank stocks are in the tank. From what I've been reading and hearing these companies are too huge to let fail. I'm very, very tempted to go out and drop a couple grand on these stocks as it seems like they have no where to go but up at this point. (Citi went below a buck yesterday) Do you agree that the gov't won't let these companies fail? Is this the bottom for these giants or can they still fall further?
Joe Brusuelas: Well, we do not speak on specific companies, but let me say this. The risk associated with a play on penny stocks at this time is enormous. Proceed with extreme caution.
Washington, D.C.: I'm amazed there isn't a Cabinet level department of optimism, are we just going to let the Dow sink to 0? It seems Bush's philosophy of the crisis happening to him as opposed to his being able to do anything about it is now toppling Obama's forces. Cheer up, dudes, all we have to fear is...well, you know the rest but really, there's no amount of money that can be printed that will replace confidence.
Joe Brusuelas: You would want to create more bureaucracy? Just kidding...it is true that consumer confidence is quite low. But it looks to be bottoming out. I think it is important to remember for a good portion of the population this is the first real recession that they have experienced. It is of little surprise that a severe case of bearish sentiment has broken out among the public in general and the financial community in particular.
Stamford, Conn.: What do you think about the president's health care reform plan? Will it help or hurt the economy?
Joe Brusuelas: I am a bit dubious of the proposal. I do wonder about the wisdom of going after Medicare Advantage. If I recall roughly half of the profit stream of the big health insurance companies are a function of demand for Medicare advantage. I wonder if the administration is perhaps rethinking the wisdom of going after the only sector of the economy creating jobs at this point.
Forest Hills, N.Y.: There appears to be a vicious deflationary cycle taking place which the administration (and worldwide governments) is trying to break by moving to a fiscal policy approach since monetary stimulus is out as interest rates are almost down to 0 percent, (goodbye tax cuts!). The question is who, is benefiting from the credit default swaps that are hurting such giants as GE and why won't the administration nationalize BoA, Citi, Wells Fargo and JP Morgan Chase which combined own 64 percent of all financial assets in the country and begin the clean up instead of producing "zombie" institutions??
Joe Brusuelas: At this time the Federal Reserve's credit easing policy does appear poised to be well positioned to ward off any deflationary impulse. Should slack in labor markets and the economy increase, it may be necessary to expand the Fed's balance sheet further. Monetary policy has been put in place to support the expansionary fiscal policy out of the administration. With the federal funds rate constrained by the zero bound, this is the appropriate policy response.
Hudson Valley, N.Y.: In November I entered the stock market for the first time, reasoning that things could only get better. So far I'm down over $3,000 -- on the $22K I invested. Should I hang in there or cut my losses and run? I'm 55 years old.
Joe Brusuelas: First, talk to your financial advisor. Second, your portfolio mix should change as you age. You should have a health quantity of US Treasuries in the portfolio to decrease risk. Be sure to ask very demanding questions of the financial professional that is advising you.
Silver Spring, Md.: My question is: How were AIG and these other large companies allowed to get to be "too big to fail"? It seems to me like we need far more scrutiny of future mergers and acquisitions, no?
Joe Brusuelas: it is quite clear that the U.S. economy has a problem with companies that are too big to fail. It is equally clear that the corporate sector will see an increase in regulation. I am 95 percent sure that the Congress will go a 110 percent too far in the endeavor. But that is the unfortunate price that the financial, insurance and overall corporate sector must pay for years of unwise risk taking.
Unemployment: Could you clarify? You stated that you expected unemployment to peak at 9.8 percent next year, but to be at double digits before too long. By double digits, I assume you mean 10 percent or higher. That can't be the case if you are accurate and we peak at 9.8 percent.
Joe Brusuelas: Well, our forecast right now is for the rate of unemployment to reach 9.8 percent, but there is risk to the upside on that forecast.
Washington, D.C.: Do you think GM will declare bankruptcy? Network reports I saw last night on the news said it wouldn't necessarily be a bad thing for them do to but it would be sort of a PR nightmare. What do you think?
Joe Brusuelas: One would hope that any potential bankruptcy of any of the big three auto companies would be orderly. However, should any of the big three move into bankruptcy it may quite difficult for the firm to resurface whole on the other side.
Arlington, Va.: How does one get a good financial advisor that is not partial, who is neutral and who can give you an honest appraisal of your money and what you should invest in? Everyone seems to have something to sell and I find it hard to make a decision.
Joe Brusuelas: The best thing to do is to speak to your those in your social network that invest. There are good men and women in the financial service industry who will look out for your financial well-being. But, it is ultimately up to each individual to decide his or her own risk tolerance.
Arlington, Va.: I'm 35 and don't expect to retire for at least 30 years. I haven't been sweating the market too much because time is on my side, but I am starting to feel like I'm throwing good money after bad and should tailor back my investing. Do you think many people my age share this feeling?
Joe Brusuelas: To be truthful, I share those same concerns. I do wonder if we are going to lose a generation of investors who will come to look at the markets as a lost cause. That would be a tragedy.
Washington, D.C.: Any comments on the destruction of the professional class? Thousands of attorneys have been laid of in the last two months. I was unemployed for 13 months post bar exam. Law firms are pairing back their summer programs and one firm announced today it was cutting new attorney salaries by 10 percent. With increases in law school applications, this just bodes poorly for any hope of recovery (fewer jobs, more applicants)...where's the fix?
Joe Brusuelas: On a structural basis the economy will see movement of talented individuals away from the financial industry into other areas of the workforce. I would not be too surprised to see other professional areas of work to experience the same sort of movement. Perhaps over the long run it is better that we have talented engineers working on creating better roads and bridges rather than constructing complex derivative products. Do we really need any more lawyers?
Washington, D.C.: Hi Joe,
Finished reading a book by Paul Krugman. Left me very depressed. One of his ideas is that the traditional banks aren't the problem; the investment firms acting as banks are (hope I quoted that correctly).
So short of putting all my money in CDs for the rest of my life, what should I do?
Joe Brusuelas: Let me say this. We have a shadow banking system that left was left completely unregulated for far too long. It would be a wise policy move to consider bringing transparency back into the banking system.
Washington, D.C.: Do you think that the just House-passed mortgage cramdown bill, and other attempts by government to re-write contracts, helps to build confidence among investors?
Joe Brusuelas: I think that the cramdown provisions are a start. It is my opinion that the administration will have to move to address the question of principal writedowns before the problem in the housing sector will be sorted out.
Evanston, Ill.: How long until the stress tests are complete? If we keep propping up zombie banks it will greatly impair whatever benefits the stimulus package will bring. Unless we suspend mark to market the end will be temporary nationalization anyway so why not get started so we can be done with it sooner?
Joe Brusuelas: According to the U.S. Treasury the stress tests should be wrapped up by early April.
Joe Brusuelas: Hey everyone. It was fun. Got to get back to work. Have a good weekend. Bye.
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