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Straight Story: Gray skies ahead

Chris Farrell May 9, 2008

Straight Story: Gray skies ahead

Chris Farrell May 9, 2008


Tess Vigeland: Our economics editor Chris Farrell is here for the audio op-ed we call the Straight Story and Chris, I want to talk about the markets because it has been the most incredible roller coaster, but now this roller coaster seems to be going back up the track.

Chris Farrell: Well, let me go out on a limb here. Part of it is that I think the credit crunch is behind us. Steadying the credit crunch is the fear of financial collapse that the Fed has succeeded in this campaign to try to prevent the apocalypse from happening.

Vigeland: Yeah. So we talked earlier in the year about how people just needed to hold onto what they had in their retirement accounts and…

Farrell: Isn’t it nice when the advice turns out to be right?

Vigeland: Absolutely

Farrell: I mean, it really does.

Vigeland: You know, I have to say at one point this year, a lot of people like me would look at their 401(k) and 403(b) statements and they were down, you know, 12 percent on the year. Well, I just looked recently and I’m now only down 2 percent. Now still, I’m down, which is a bummer, but I held just like you said to do and there is a real lesson in that, isn’t there?

Farrell: Well, let me leap right on that because now that you’re back, what, 2 percent you said?

Vigeland: Yeah, I’m down 2 percent.

Farrell: Yeah, you’re down 2 percent. OK. What did you learn from the 11 percent decline? Were you too risky? As the market settles down, as the market improves, that’s when you want to make adjustments to your portfolio: when you get a decent price for making your adjustments. You’re not going to be realizing all these losses, but you know what? Markets fluctuate and here’s a forecast: we’re going to have another recession.

Vigeland: This is going to happen again.

Farrell: In another couple years. We’re going to get a real bear market because think about it: this stock market is only down 11 percent from its October peak of 2007.

Vigeland: And an official bear market is 20 percent, right?

Farrell: Is 20 percent and it’s a safe forecast over the next five, six, seven years, I bet we’ll have a bear market, a real bear market.

Vigeland: Do you think we actually could at this point?

Farrell: Oh, absolutely.

Vigeland: I mean maybe we’re just up a little bit and it’s going to crash?

Farrell: You know, I’m in the camp that thinks the recession is going to be short and shallow and what really convinced me of that is the loss of 20,000 jobs in the latest employment report and it’s terrible that anybody is losing their job, but that does suggest short, shallow recession and I think that we are in a recession. But let’s say real estate prices go down farther, so you could spin off a scenario of oil prices going up higher, real estate prices going lower and people all of the sudden going “This is going to be a bad recession.” I don’t think that’s the scenario, but the risk is there.

Vigeland: OK, so do you think the Fed is done with cutting interest rates at this point?

Farrell: I think the Fed is absolutely done with cutting interest rates. It’s always better when the economy is growing even if it’s growing slowly…

Vigeland: Sure.

Farrell: …because you do get some job creation. But here’s what I think we all need to be focusing on going forward: Let’s say the Fed is done with cutting its benchmark interest rate and let’s say the recession is short and shallow. What’s it going to be like looking ahead? My suspicion is that this economy is going to be dissatisfying; it’s going to be ugly for a long period of time even when we come out of recession.

Vigeland: All right, the Straight Story from our own Chris Farrell and we’ll check in with you again later in the show with Getting Personal.

Farrell: Thanks.

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