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The bearish investment adviser is growing increasingly downbeat, seeing continued high unemployment and a a soft housing market
What is the biggest factor in the market's current slide?I think it is the disruption in Europe that's causing an overall de-risking. But the market's rise was really driven by expectations that earnings and unemployment would be far better than they've turned out to be. As we get into the second half of 2010, the hope for 2010 has diminished because the package of economic data has been disappointing. You've got challenges I don't think people fully thought through because they got market fatigue. For almost two years the market was going down. They wanted to be hopeful about something, and the fundamentals really didn't pull through for them.
Where would the U.S. economy be if we didn't have the debt problems in Europe and in Greece?A lot the problems in our economy are our problems. For the last 30 years you've had a real structural shift towards a consumer-based economy driven by leverage. With or without Europe, you have the unavoidable issue of the consumer delevering. That means homeownership going from 70 percent probably back to 64 or 65 percent. You've had $1.5 trillion cut from credit-card lines. Europe is an important sidebar, but it's not the core reason the markets are still upset.
How do the next six months look?I think there are massive structural problems underpinning the employment picture in the U.S. Small businesses, which employed about 50 million people and have been responsible for more than 60 percent of job creation over the last 15 years, have no way to fund themselves. So they're out of the game. You're left with the large corporate sector, which has shed only 3 million jobs. So it's mathematically impossible to get to a constructive job growth scenario.
Where is small business confidence today?According to the latest survey that came out yesterday, it's improving. But when you ask small businesses what's the main reason why they are not hiring, they say lack of access to credit. Small businesses fund themselves through credit-card and home equity lines.
Are you optimistic about the next six months if small business gets access to money and unemployment begins to improve?I don't believe there's going to be meaningful job creation, and I don't believe there's going to be a meaningful turnaround in spending. In fact, I am more bearish than I've been in a year. I have the strongest conviction that there's going to be a double dip in housing. I think you'll start to see that in July, August, September.
Wow.Then the issue of the municipal market is one that's very scary to me because you have so many states with underfunded budgets—underfunded by two and a half times the level they were underfunded after the dot-com bust. That hurts the economy in terms of higher taxes, which squeeze the high end, and cutting programs and jobs, which squeeze the low end. People talk about the federal deficit all the time, but there's no timetable on the federal deficit that is as urgent as the state deficits because 49 states are constitutionally required to be balanced.
We've been reading these stories, you and I both, in New York magazine and other places, about the conflict between Wall Street—whatever that is—and the President. Does that have any impact on the market?I think chaneling all the blame to Wall Street has a massive impact. The politicians and government officials were easily as responsible for the real estate bubble as Wall Street was. So to place all the blame and put regulatory changes in place at a time of so much economic fragility weighs enormously on Wall Street. There was a senator who bragged about what he had done to stock prices the day after his amendment was adopted into the financial reform bill. I mean, an example is [Arkansas Senator Blanche] Lincoln winning the primary last night. She was failing in the primary race, and derivatives legislation was what got her so much attention. So everyone is piling on.
What sectors do you like?There are companies within every sector that I like. I don't want to make too much of this comparison because it's not the Great Depression, but it's almost like a Joe Kennedy environment. He made all of his money during the Great Depression. If you have money, you can make a lot of money. And if you don't, it's going to be so much more expensive to be poor in this country.
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