With Meghna Chakrabarti
More and more economic indicators are pointing in the wrong direction and fears are growing that we are heading into a global recession. One economist calls this the "summer of fear."
Rana Foroohar, global business columnist and an associate editor at the Financial Times. Global economic analyst for CNN. Author of "Makers and Takers: How Wall Street Destroyed Main Street" and the forthcoming "Don't Be Evil: How Big Tech Betrayed Its Founding Principles — and All of Us." (@RanaForoohar)
Why Rana Foroohar is taking her money out of the stock market
"Shortly before I wrote my last column, this past Sunday, predicting that we were going to see a downturn very soon, I actually moved most of my retirement portfolio into cash, short-term fixed incomes and cash equivalents. So most of my net worth is now in that or real estate."
"It's interesting, because, as you probably know, whenever people like me come on programs like yours, we tend to tell people, 'Stick your money in an index fund and forget about it. S&P 500, it'll always go up. Worry about it in five years. Play the long game.' I actually think that we are at a paradigm shift, so I'm going to go out on a limb and say — we have been in a bull market for, certainly, the last 8 or 9 years, but, depending on where you put the marker, the last 40 years, with certain corrections, but pretty much an upward trajectory in stocks over that period. Stocks in America are at, roughly, the most expensive point in the last 150 years. So, if you believe in trend lines, if you believe in cycles, you have to think that prices are going to fall.
"Not only have I been willing to do that, but I'm saying it, which is also interesting. A lot of the smartest investors, and some of my peers have done it. Few will say it. I think that there is a good chance that we are in for a long-term slide, and I'll tell you why I think that. My last book, Makers and Takers, was really all about the shifts in our economy over the last 40 years where we became incredibly financial-ized. If you look out now — markets used to be supporters of other businesses. You went to the stock market to get money to run your business, or you went to the bank to get a loan to invest. Now, markets are an end in and of themselves. They are three times the size of the global economy that we actually live in. That, to me, is a cycle that has an end.
"We tend to tell people, 'Stick your money in an index fund and forget about it. S&P 500, it'll always go up. Worry about it in five years. Play the long game.' I actually think that we are at a paradigm shift."Rana Foroohar
"If you just look in the last couple of weeks, when the Fed did their most recent rate cut, which was a big shift. The Fed had actually been getting ready to hike rates, was starting to do some tightening and hiking. The idea was, 'OK, we've had 10 years of money dumps and low interest rates. The economy is now back on track.' Almost immediately, they had to do a U-turn and start cutting. That's a very worrisome sign. That says the Fed is behind the economic curve."
How economic signals from the Trump Administration are affecting business
Jay Foreman: "We're not getting much sleep because the incoherent and irrational trade policy, or lack thereof, and gyrations, are just making us crazy. Every morning, we sit in a meeting to try to figure out whether we should be planning for tariffs or not planning for tariffs, whether we should be planning for an economic slowdown or not. And it affects every part of our business, from planning overhead, to purchasing, to long-term profitability. And it's just a nightmare.
"I believe there’s a correlation between imposition of tariffs and staffing and overhead. The bottom line is a tariff is paid by the business, not by China or anybody else. And, if it's 10 percent off the top, or your sale value, and your overall profit margin is 10 or 15 percent, the tariffs are basically taking your entire profit margin. And if they're gonna take your profit margin, the only way to make a profit or break even is to lower your overhead, and the first place you go to lower your overhead is you have to do staff reductions. So, this tariff policy has a direct effect on employment. Certainly it would in my company, we would absolutely have to be looking to reduce headcount."
More on Trump’s governing style
JF: "Think about this president. He takes the baby, shows it off. He puts it underwater and drowns it, screams 'the baby's drowning,' and then he lifts it out of the water and says 'I saved the baby.' So how do I plan even for what’s going to happen in December? There’s no way to plan for this administration. It’s like the characters of Sesame Street have taken over."
On the difficulty of making decisions in the current economic environment
Win Cramer: "It’s very difficult to plan when business is being disrupted by our president's tweets, and they change daily, in my view. If you look at the past, call it, 60 days or so, we were we were told that tariffs were coming in June. Then we were told they're not coming. Then we were told they were coming again. And then we had two separate lists of when they started, and we were trying to dig through this and figure out what products are on what lists, and where about 80 percent of our business, 90 percent of our businesses, is now on a Sept. 1 list. The balance is on the Dec. 15 list. So trying to plan and make long-term, even medium- term, investments in the business is not just challenging. It's impossible at this point."
Why unresolved issues from the 2007-2008 financial crisis could lead to another recession
Rana Foroohar: "If you look at the numbers, all the indicators of where we are right now in the markets, they most resemble the periods around 1929 and 1999. So, times when we had big market corrections. You may say, 'Why not 2008?' Well, in 2008, the central bankers came in so quickly and fixed things which, you know, there was a big debate about that at the time. A lot of economists said, 'You've got to throw a lot of money at this problem because otherwise we're going to end up not just in a recession, but a great depression.' Others took a more kind of Darwinian view and said, 'Look, we're going to have to take some pain.' And ideally, you would have had a fiscal program, almost like kind of a public works program from the 1930s, that sort of thing, to give people jobs. And in a very ideal world, it would have been targeted around things that were going to be high-growth areas in the future. Digital technologies, building broadband in rural areas, a Green New Deal. Something. You can argue about what it should be, but there's plenty of options. But we didn't get that. So, we're here."
From The Reading List
Financial Times: "Opinion: Braced for the global downturn" — "It’s the calm before the storm. Last week’s market volatility was ostensibly triggered by the US-China trade conflict turning into a full-blown currency war. But at heart, it’s about the inability of the Federal Reserve to convince us that its July rate cut was merely 'insurance' to protect against a future downturn. As any number of indicators now show — from weak purchasing managers' indices in the US, Spain, Italy, France and Germany, to rising corporate bankruptcies and a spike in US lay-offs — the global downturn has already begun.
"Asset prices will undoubtedly begin to reflect this, and possibly quite soon. China may have temporarily calmed markets by stabilising the renminbi. But we are in for what Ulf Lindahl, chief executive of AG Bisset Associates currency research, calls 'a summer of fear.' He expects the mean-reversion in the Dow that started in January 2018 to turn into a bear market that lasts a decade.
"It’s an opinion based on data, not on emotion. There have been only 20 months since 1906 when the Dow’s deviation from its trend line has been 130 per cent or more, as it is today. Those periods cluster rather frighteningly around the years 1929, 1999 and 2018. 'US equities are at the second most expensive period in 150 years,' says Mr Lindahl. 'Prices must fall.' "
Financial Times: "Opinion: The age of wealth accumulation is over" — "Roughly four decades ago, America kicked off the developed world’s last major economic paradigm shift — the supply side revolution.
"Capital gains taxes were slashed. President Ronald Reagan and UK prime minister Margaret Thatcher took on air traffic controllers and coal miners. The power of unions faded and that of corporations grew. Some people got very rich. But inequality rose, and eventually, overall trend growth slowed.
"Watching the Democratic presidential primary debates last week, I couldn’t help but think that we may be witnessing the next great shift, from an era of wealth accumulation to one of wealth distribution. Moderates like Joe Biden and John Delaney tried to argue for middle of the road answers on issues like healthcare and trade.
"But the pole positions were set by Bernie Sanders and Elizabeth Warren, who hold similar views on everything from shifting Americans on to a national healthcare system and relief for indebted students. Both also seek higher taxes for the wealthy and tougher rules for corporations."
Washington Post: "U.S. businesses are taking down job listings as Trump’s trade war grows" — "Win Cramer had big plans to hire several new employees this summer for his company, including a chief operating officer, but he took the job listings down after President Trump tweeted that more tariffs would hit Chinese goods in September.
"Trump’s escalating trade war has spooked business executives. There’s already been a noticeable decline in business investment as corporate leaders say Trump’s tariffs and unpredictability are creating too much uncertainty, dissuading them from spending large sums on new buildings or equipment. Now there are early signs that business leaders are beginning to pull back on hiring, too.
"'It’s the most frustrating time I’ve ever had running a business, and I’ve been doing this for 20 years,' said Cramer, chief executive of JLab Audio, which makes wireless ear buds and headphones that are sold at Best Buy, Target and elsewhere.
"The United States had 7.3 million job openings in June, down from a peak of 7.6 million in November, according to the latest Labor Department data. While the decline is modest, economists are concerned hiring could dry up quickly as companies see no end in sight to Trump’s trade war and they look to cut costs. The reduction in job openings is also widespread across many industries, signaling how cautious companies are becoming."
CNN: "Dow tumbles 600 points after bond market flashes a recession warning" — "The Dow fell more than 600 points Wednesday after the bond market, for the first time in over a decade, flashed a warning signal that has an eerily accurate track record for predicting recessions.
"Here's what happened: The 10-year Treasury bond yield fell below 1.6% Wednesday morning, dropping just below the yield of the 2-year Treasury bond. It marked the first time since 2007 that 10-year bond yields fell below 2-year yields.
"US stocks fell as investors sold stock in companies and moved it into bonds. The Dow (INDU) was about 2.4% lower. The broader S&P 500 (SPX) was down 2.4% and the Nasdaq (COMP) sank 2.6% Wednesday."
Reuters: "Goldman Sachs economists say fears rise that U.S.-China trade war leading to recession" — "Goldman Sachs Group Inc (GS.N) said on Sunday that fears of the U.S.-China trade war leading to a recession are increasing and that Goldman no longer expects a trade deal between the world’s two largest economies before the 2020 U.S. presidential election.
"'We expect tariffs targeting the remaining $300bn of US imports from China to go into effect,' the bank said in a note sent to clients.
"U.S. President Donald Trump announced on Aug. 1 that he would impose a 10% tariff on a final $300 billion worth of Chinese imports on Sept. 1, prompting China to halt purchases of U.S. agricultural products."
Stefano Kotsonis produced this hour for broadcast.
This article was originally published on August 15, 2019.
This program aired on August 15, 2019.