Fallout: The Financial Crisis

Tough week for the economy all around

Marketplace Staff Nov 21, 2008
Fallout: The Financial Crisis

Tough week for the economy all around

Marketplace Staff Nov 21, 2008


Kai Ryssdal: Today’s Geithner-bounce aside, this was not a week filled with joy in the markets or in the larger economy. Today on our Weekly Wrap of Wall Street and beyond we’ve called Felix Salmon of portfolio.com and Andy Brooks, he’s the chief trader at T. Rowe Price. Hello guys.

Felix Salmon: Hello.

Andy Brooks: Hi, Kai.

Ryssdal: Felix, is it just me, or did things get a whole lot worse this week?

Salmon: Things got a whole lot worse this week.

Ryssdal: All right, good. Well, now that we got that figured out, what happened?

Salmon: Citigroup is one of them and the automakers was the other. Put both of them together and it’s pretty gruesome. The government doesn’t seem to have any particular inclination to bail out the automakers — it will probably bail out Citigroup if it has to, but it clearly doesn’t want to because that would be enormously expensive — and the stock market is envisioning a very large number of very large companies going to zero.

Ryssdal: Andy, when we talked to you a couple of weeks ago, you said you were feeling not great but better. Um, Now?

Brooks: Yeah. Probably a touch premature Kai. And I think if you weren’t scared before, you’re sort of scared now.

Ryssdal: Let me ask you what’s driving this. Felix gave us Citigroup, he gave us the car makers — so that’s sort of the macro thing. But on the market day-to-day basis, what actually is happening here that’s driving the market down?

Brooks: Well, I think you’ve got all kinds of rumors that are working their way through the markets. There’s certainly concern that hedge funds are facing mass redemptions and huge selling pressure. The credit markets have gotten challenged again this week, the commercial mortgage-backed market really has taken some hits. And we don’t see any good news for a while. And the Bush administration probably isn’t going to do a lot here in the next few weeks, so that’s putting, sort of, things on hold. The flipside is to touch, that boy the markets a lot lower and evaluations, at some point, are going to matter again. So if you’ve been waiting to buy some good companies, you’re certainly getting your chance today.

Ryssdal: I don’t really hear you saying that this is a buying opportunity do I?

Brooks: Well, I think what I would say is it’s time to step out and I would be doing some buying. And, historically, we’ve got out of these bad markets with a pretty good bounce, whether it was the Cuban Missile Crisis or the ’73-’74 market or the crash in ’87. You know, people like to say they sold out of the market before the crash of ’87, but if you didn’t get in by the end of October, you severely underperformed.

Salmon: Over the long term though Andy, how long do you think a bear market could last? Because the bull market lasted all the way from ’82 to ’97. The bear market, do you really think it could be just a year or two?

Brooks: Well, that’s a great question Felix, and that’s maybe the $64,000 question. How long are we in this? How long do we tread water or go lower? I do think that all of us sense that this recession is going to last a lot longer than the normal recession.

Ryssdal: Felix pick up on that thing that Andy was saying about the government not being able to do anything. We’re in a spot here where it’s two more months until there’s change of administrations, what can be done?

Salmon: And even then, there’s not a whole lot they can do because we’ve already used up most of our monetary policy bullets. Our interest rate is at 1, it can maybe go down to 0.5, but then it basically has to stop. In terms of fiscal policy, you can have another stimulus plan that could throw in another $500 (billion), $600 (billion), $700 billion, but if you look at the stock market, we’ve lost $10 trillion in wealth. A small stimulus plan is going to be a small stimulus plan, and it will help over the course of a quarter. Anyone looking to Washington for help, whether it’s the present administration or it’s the next administration, is liable to be disappointed, as we saw this week with the hope for an automaker bailout. That didn’t happen.

Ryssdal: Let me get a gut check from both of you before I let you go. Are you feeling worse now than you did six weeks ago Felix?

Salmon: No. I think right now, as Andy says, evaluations are so low, there has to come a point where they can’t keep on dropping at this rate. So things are more likely to go up now than they were a few weeks ago.

Ryssdal: Andy, same question.

Brooks: You know I feel worse, but that makes me, in a perverse way, feel more bullish, so I hope that’s a good thing. But it’s been a tough week and I’m hard-pressed to remember a week where just the mood was so ugly and so broadly felt.

Ryssdal: Andy Brooks at T. Rowe Price in Baltimore. Felix Salmon at portfolio.com up in New York. Felix, thanks a lot. Andy, thank you.

Salmon: Thank you!

Brooks: My pleasure. Thanks, Kai.

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