The Interview Issue

Eight Market Gurus Fill in the Blanks


Robert Shiller, economist and professor, Yale University

Photograph by Andrew Harrer/Bloomberg

Robert Shiller, economist and professor, Yale University

Robert Shiller, Economist and Professor, Yale University, Co-Creator of the S&P/Case-Shiller Home Price Index
What do you make of the good news coming out of housing?
Well, it’s very hard to say. The problem is, I think that we’ve entered a new regime. We don’t have that much history. We had the biggest bubble in U.S. history, and we don’t know what to think about the aftermath of bubbles like that. We’ve come back down. People don’t know what real home prices have done. They think that they’ve trended upward all the time, but actually we’re kind of back at 1890 levels. So we haven’t had any up. … I’d have to look, whether it’s up a little bit from 1890. But if it’s up, the return is only a 0.1 percent per year or less, I think.

If you have been on your best behavior over the past 10 years, and you’re now eligible to take out a 30-year mortgage at under 4 percent, why wouldn’t you do that?
My advice to home buyers would be, yeah, if you want a home, I would do that. But I wouldn’t think it’s riskless, and I’m worried about the downtrend that we’ve seen. It could overshoot and go continuing down. You could also see it going back up. I’m sorry I can’t be more definite.

Market Mad Libs Time: With the aftermath of historic bubbles in the housing market and stock market, the economy and markets will likely continue to generate surprises. For most investors, the worst thing to do is pin hopes on another bubble soon. My best advice would be diversify around the entire world and across major asset classes.
 
James Paulsen, Chief Investment Strategist, Wells Capital Management
Europe is coming unglued again and again.
Oh, man, that story’s so old.

How old is it until it actually happens? They haven’t fully cordoned it off yet.
Europe’s been moved, in my view, rather from a crisis, which I don’t know how we can keep this thing in a crisis for two and a half years, to a chronic problem. The central element of a crisis is surprise, where you haven’t had time to think and consider the possible, probable, and improbable outcomes. And we certainly have had more than ample time to do that. I think this thing is certainly going to be a weight on growth around the globe, because Europe is in recession. But to me, it’s not a global financial calamity any longer.

You see it more as chronic …
We’re going to be writing off Portugal bonds 10 years from now. It’s just that no one’s going to care. So the Latin America crisis in the U.S. started in 1980. Twelve years later, in 1992, we were writing off Brady bonds. Who cared? Nobody.

Market Mad Libs Time: With slowly improving confidence and cheap valuations, the economy and markets will likely rise. For most investors, the worst thing to do is follow the crowd. My best advice would be stay invested.
 
Liz Ann Sonders, Chief Investment Strategist, Charles Schwab (SCHW)
There’s been a tremendous amount of stimulus. Is the stock market chiefly telling you that QE1 and QE2 have propped it up?
And there’s diminishing returns. I hope the Fed does not do QE3. … I don’t think that is what the stock market needs right now. I very clearly do not think it’s what the economy needs right now, not just because we have the law of diminishing returns. The problem in our economy is not that rates are too high.

When we have the benefit of 20/20 hindsight—say, in the year 2020—how will we look back at zero interest rate policy, unintended consequences and all?
I happen to be a pretty big optimist long-term on our economy. I’m by no means a perma-bull, but I think there are so many things that the U.S. economy has going for it that much of the rest of the world doesn’t, including labor flexibility and incredible innovation. So I still believe in that. I still think you want to bank on that. Whether it’s 2020, or maybe even in a shorter time span, we’re going to look back at this, I think, and say, “Well, what do you know? We’ve pulled ourselves out of this thing again.”

Market Mad Libs Time: With the fiscal cliff and China’s slowdown, the economy and markets will likely meander. For most investors, the worst thing to do is panic or speculate. My best advice would be remain calm.
 
Tobias Levkovich, Chief U.S. Equity Strategist, Citigroup (C)
What is it about investors that they just keep pouring into bond funds and refuse to give the market the time of day?
I think it’s [that] they lost a fortune twice in the past decade and change, in 2000 through 2002 as well as the ’07 through ’09 market corrections. You saw declines of greater than 50 percent, and that kind of volatility has really frightened them. Bonds have not done that for them. They’ve made money, and they haven’t lost money, hence they continue to chase. The problem is that in order to anticipate that your bonds are going to get you significant positive returns, you almost now have to expect just a calamitous economic environment.

In your research, you have plotted this bond bubble, as you’ve called it, against the flow into tech and growth stocks in 2000. Does that continue unabated?
It does. But things that we don’t believe are necessarily reasonable investments can continue for longer periods than they should, and then they kind of back up and really hurt investors.

Market Mad Libs Time: With supportive credit conditions and depressed investor sentiment, the economy and markets will likely be somewhat better by yearend. For most investors, the worst thing to do is react emotionally to headlines by buying every allegedly defensive asset that may be overpriced. My best advice would be to buy large-cap, higher-quality securities with respectable dividend yields and some cyclical exposure.
 
David Rosenberg, Chief Economist and Investment Strategist, Gluskin Sheff + Associates (GS:CN)
It gets unrelentingly gloomy when you see, for example, job creation vs. people putting in disability claims. Is there any end in sight?
One thing that we do know with certainty is that this is not your father’s cycle, nor is it your grandfather’s cycle, but it probably is your great-grandfather’s cycle. When you have a situation where new applicants for disability benefits begin to outstrip new job creation, you know that you’re in some sort of a modern-day Depression.

Is there anything the Fed can do at this point?
In the previous cycles, what we get is late-stage inflation pressures as demand exceeds supply. The Fed cranks up interest rates, inverts the yield curve all of a sudden. Demand starts to retreat with that. Inflation pressures subside. And then the Fed starts to cut interest rates, and we go into a new business expansion. So usually, you know, inflation is the enemy, and the Fed fights inflation. And once inflation is nipped in the bud, interest rates come down. So usually the Fed is the cause of the recession, and then the Fed is the cause of the recovery. But the Fed was not the cause of this recession, right?

You barely had an inversion of the yield curve, and yet it touched off the worst recession since the 1930s. Think about that for a second. Usually, the deeper the inversion, like you had in the early ’80s, the deeper the recession. So the reality is that once the funds rate goes to zero, as it did in late 2008, then you’re really left with unconventional weaponry, and you’re into the experimental—you’re into the chemistry kit.

Market Mad Libs Time: With weakness and volatility, the economy and markets will likely disappoint. For most investors, the worst thing to do is take on risk. My best advice would be be patient.
 
Joan Lappin, Chairman and Chief Investment Officer, Gramercy Capital Management
The past three decades have been an epically good time to own bonds over stocks.
There have been brief intervals when it was not good to own bonds, but on balance, if I had just stopped being an equity investor and bought 30-year bonds—it was easy to do in 1982: You had yields in the mid-teens.

Now you can’t pay people to get enthused about the market, about dividends.
I know, but that’s why [investing in the market] is the right thing. I have no doubt that’s the right thing. What’s going to happen is, you know, I believe the definition of a generation is 30 to 35 years—at least it used to be. Maybe now that everybody is having babies at 45, that’s not so. If you have behavior that goes on for a generation and rewards people, it’s hard to convince them that that behavior is going to become suicidal. When this goes the other way, people who have come to believe that the stock market is going to kill them and that bonds are going to be their friend are going to get decimated beyond belief.

Market Mad Libs Time: With people so frightened about life and the future and afraid to spend money on anything other than necessities, the economy and markets will likely remain sideways until after the election. For most investors, the worst thing to do is think bonds represent a safe refuge when they are the most dangerous investment of all. My best advice would be to be patient and invest in stocks paying dividends higher than Treasuries—stocks with something special going on that will allow them to do OK in a slow economy.
 
Jeremy Siegel, Professor of Finance, the Wharton School, University of Pennsylvania
Talk about outflows from the market, distaste for the market. What makes this kind of outflow environment different from others?
You know, after the Great Depression, people undervalued stocks for 20 years. It wasn’t until basically the late 1950s that people began to say, “Well, maybe the stock market is good again.” You had very cheap prices, somewhat like today, which are also very cheap, and yet people clung to their Treasury bonds at 2 percent because of the fear of a market crash, the memory of the Great Depression. I think what we’re seeing is quite a bit of a repeat of that behavior.

Did I see earlier in the year that you broached the possibility of Dow 15,000 by next year?
Oh yeah, I’m sticking with that—now, this is important: by the end of 2013, not the end of this year. I still think it’s over 50-50 that we’ll be above 15,000 by the end of next year. I would not at all be shocked if we got to 17,000.

Market Mad Libs Time: With the European problems and the fiscal cliff, the economy and markets will likely not be robust through this year. For most investors, the worst thing to do is sell stocks. My best advice would be to continue to accumulate dividend-paying stocks.
 
Joshua Brown, blogs as The Reformed Broker, Vice President, Fusion Analytics Investment Partners
I saw your blog piece today. There were two words: “F-‍-‍- Europe.”
Yeah. That should be the cover of your magazine. … Euro Fatigue. Euro fatigue, enough already. If you’re going to implode, just do it, and let’s see what happens on the other side.

Didn’t we say that about Lehman Brothers, too? Just let it implode and see what happens.
Yeah. And you know what? Anyone die?

No one died, but we had a near-death experience.
So what? So what? Let me tell you something. Because counterfactual to the way we handled all this bailout s— is: What if we nationalized all the banks in the middle of ’08 prior to Lehman but after Bear [Stearns]? If we said, “No more Bears. All these banks are now property of the U.S. until such time as we can separate the good from the bad and spin them back out.” We probably would have gone down to Dow 5,000 instead of 6,500, but we would have already been through a lot of this s—. And so instead of doing that, we opted for incrementalism.

So we kind of amortized the pain over the past four years?
Yeah, so if the euro is done, then f—ing let it be done. Let’s see how much damage we can do, and let’s all wake up the next morning and rebuild.

Market Mad Libs Time: With subpar growth and an anemic employment situation, the economy and markets will likely shuffle along like half-blind hobos feeling for an open door on the next freight car out of the Slumpsville depot. For most investors, the worst thing to do is over-trade or think that snippet of noise you heard is actually new, unprocessed information. My best advice would be do push-ups before bedtime and watch the gluten intake. You have no control over anything else right now, and you’re at the mercy of larger forces.

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Farzad is a Bloomberg Businessweek contributor. Follow him on Twitter @robenfarzad.

Steve Ballmer, Power Forward
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  • C
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