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GDP Grows, But Slower Than Expected; What Will the Economy Mean For Midterm Elections?
Aired August 28, 2010 - 13:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
ALI VELSHI, CNN HOST: The Obama administration touted recovery summer. But as August draws to a close is it working?
Welcome to YOUR $$$$$, I'm Ali Velshi. Christine Romans is off this week.
A look at the second quarter GDP, the Gross Domestic Product, the biggest measure of our economy shows that in the second three months of this year the economy did grow, but it grew slower than we expected that it did. Both businesses and consumers are hoarding cash and unemployment remains stubbornly high.
CNN's chief national correspondent John King is the host of "JOHN KING, USA" which appears every week night 7:00 pm Eastern Time.
It is pretty clear as we head into midterm elections that races are going to be won and lost based on this economy. Is the Obama administration or the Democrats prepared to stay the course or is it time for some major policy shifts heading into the election?
JOHN KING, CNN CHIEF NATIONAL CORRESPONDENT: What a great question, because Ali when you mention those growth numbers it is pretty clear the economy is in intensive care and with that the Democratic Party is in intensive care for the final two months before the election and there is a debate within the party about whether the president needs to be more bold between now and election day. Whether he needs to answer the anxiety of the American people and say we need to do more. But what can he do?
As you know the Federal Reserve is debating what it should do, if there is an internal struggle within the Fed. There is also an internal struggle at the White House. Many Democrats now say a lot of them under their breath, because they don't like the politics of this that the initial stimulus bill nearly $800 billion dollars was probably too small.
So what can the White House do now? Yes, they can ask for stimulus spending, they are asking for a modest small business bill but most think that is a very modest effort, won't bring anything in the mediate term, in terms of jobs and growth. And that is the biggest problem for the White House.
No matter what this president does, does he change his position on letting the Bush tax cuts expire? Does he call for more stimulus spending? There are few things he can do in the short-term especially things he can do and get the Congress to go along with him that would have any immediate impact that is the dilemma.
VELSHI: OK. John, stand by.
Ken Rogoff is a professor at Harvard University, former chief economist with the International Monetary Fund.
Ken, I need your take on whether this is a glass, a quarter full or a glass three quarters empty. GDP came in for the second quarter; this was a revision of the Gross Domestic Product. We had thought that the second quarter GDP and that is at the right of your screen hard to see when you have a graphic that is blue on a blue background, we thought it was 2.4 percent growth, it is actually 1.6 percent growth.
Which isn't a recession, it is forward looking and we just heard from Ben Bernanke on Friday who said that the hand off from government spending to consumers and business spending is underway, so he sort of painted a -- I would say a glass a quarter full rather than three quarters empty what do you think?
KEN ROGOFF, PROFESSOR, HARVARD UNIVERSITY: Well I think the quarter full half full is probably the right way to think about it. With the economies had a heart attack and sort of the debate here is should we put some adrenalin into it so the patient can get up and sprint around the track a couple times before collapsing or do you just have to wait for it to heal and I think we have to be patient.
It is very, tough politically and the political options are really not attractive. I'm worried about protectionism. I think they can do more with the Federal Reserve. I think they can be much more aggressive, I don't think there is too much more we can do with stimulus. Although we may need a smaller stimulus bill to decompress from this first one.
VELSHI: That will be a hard sell for anybody who has to deal with a few months coming up to an election.
Chrystia Freeland is the global editor at large at Reuters.
Chrystia, I want to talk a little bit more because we had a week full of dodgy unclear economic numbers. We had some home sales numbers that showed great losses and we had jobless claims that were bad but better than we thought they were going to be and we had a GDP for the second quarter that we just talked about that was again better than the bad that we thought it was going to be.
So let me ask you this, Ben Bernanke again in that speech at Jackson Hall, Wyoming, said that credit for consumers remains tight but is loosening. Household savings is up to 6 percent and that those savings rates are going to drive spending in 2011. He said that credit is still tough for people who want to buy homes but on the other side interest rates remain low. He seems to be pushing this recovery off into 2011 and suggesting that let's not get crazy about this, it is just taking longer than it should be.
CHRYSTIA FREELAND, EDITOR AT LARGE, REUTERS: Well, I think we have to realize that when Ben Bernanke speaks in public he is very aware of the weight and impact of his words. So he obviously wants to call them as he sees them, but also he wants us to have a glass quarter full or half full kind of feeling. This Fed is very aware of the animal spirits in the economy; he doesn't want to get us too depressed.
I would though like to pick up on something that the Professor Rogoff said about the economy having a heart attack. I think that is absolutely right but I think those consumer numbers that you are talking about how he points to something else which is going on, which is we have just had the financial crisis and the economy is trying to recover from that, but at the same time the U.S. economy is going through an incredibly retching structural adjustment. It is like the industrial revolution what the economy is going through with the impact of globalization and technological change and that is really painful and really difficult.
And I think that accounts for some of the unemployment that we are seeing and some of the jobs are just going away and they will never come back. And the readjustment of populations to that is really, really tough. A lot of that would mask by this surge of consumer credit in the past decade people didn't realize how bad things were because they could always borrow money in the ATM which was their house.
VELSHI: You see that is a good and useful discussion to be having. Unfortunately we work on a news and political cycle, John King, that doesn't really allow from that, what it does allow for is quicker evaluations of how people are doing on their jobs such as the one offered by Republican Minority Leader John Boehner this week to the president.
Let's listen to this.
(BEGIN VIDEO CLIP)
REP. JOHN BOEHNER (R-OH), MINORITY LEADER: President Obama should ask for and accept the resignations of the remaining members of his economic team starting with Secretary Geithner and Larry Summers, the head of the National Economic Council.
(END VIDEO CLIP)
VELSHI: John, when you have this kind of momentum in an economy and this is such a dynamic economy that we are in right now that I almost tire of discussing second quarter GDP because what does it matter to today's economy? Is that politics that you specialize in or is he capturing the mood of the public right now?
KING: Well it is a stunt, plain and simple. What the Republican leader did there is a stunt. But it is a calculated stunt, Ali, because it reminds people of their overall anxiety about the economy. It reminds them of the overall failure frankly of the Obama administration to sell its stimulus plan to the American people and Mr. Geithner and Larry Summers are unpopular on the left. And Mr. Boehner would love nothing more than for liberals to stay home this November in the election. A lot of people foresee and perception is reality in politics and the Obama team could be pro Wall Street, not so worried about Main Street.
So you look across the country, unemployment was stagnant all summer long, the administration said when it released the stimulus plan it would never go above 8 percent, it is above 8 percent just about everywhere in America.
You mentioned those housing numbers. Look at Nevada, 14 percent unemployment and a lousy housing market and a Senate majority leader who is in trouble. A new poll out this weekend, 47 percent of the people in Nevada think the president's economic policies have hurt the economy not helped the economy.
So the perception out there in a lot of America is despite everything the president has tried to do it isn't working, a lot of Democrats are frustrated with the messaging of this administration and what that translates into politically is that people thought they were getting change in 2008, they thought the economy was going to get better and their president promised them Washington would be different. They don't see a lot of change and they feel a lot of hurt and so they want more change and that could benefit the Republicans.
VELSHI: All right. So in you we have one of the finest political journalists around. And in Chrystia we got one of the finest business journalists around and we have one of the finest economic minds around. We have talked about whether this economy is recovery.
Let's take a break. When we come back, I'm going to talk about what we have to do to get it to recovery. Let's take advice from this group about what the president has to do. Whether or not that involves firing these economic teams as we approach midterm elections. We'll talk again in a minute.
VELSHI: All right. Next Friday we're going to get unemployment numbers, that is the big unemployment-that is the big report that we all look for. But every week we get jobless claims to give us some sense of the trend.
Let's take a look at this past week's number was still pretty bad, it just wasn't as bad as we thought it was going to be, 473,000 people went to the unemployment office or went on online or called them and said they need unemployment insurance because they had lost their job.
Look at the chart over the last year, not as high as it has been. We were at 500,000 a couple of weeks ago. So the bottom line is we are not where we should be, not quite sure where we should be it is just that we have been higher than that for a very long time.
Ken Rogoff, Ben Bernanke in his speech on Friday said that, firms because they are unsure of when demand is going to come back, companies are using temporary and part-time workers, they are having people work longer hours, they are not making that big plunge into hiring more people, that would be more people with more money with jobs to be able to spend money that would cause more demand.
That is the root of all of this is it not? As much as there is a lot of economic theory involved, it is jobs.
ROGOFF: It is jobs. It is very painful and it is going to be painful for a long time. I want to make one point about President Obama's policies that I think is going to be very difficult for him to make in the campaign. I want to say I was actually at least had a small role as an economic adviser to John McCain in the campaign. This problem was not created in the last year. This problem was created over eight or ten years any administration, any administration was going to be looking at huge unemployment.
There were no easy things to do; there are no easy things to do now. Really, we are having to shift jobs to where they are things like health care; we are probably never going to have a huge auto sector. That is a long term trend, there are things we can do, but you know we were consuming like crazy. You said the savings rate was 6 percent. You know it had been 0 percent that is not normal, 6 percent is normal.
VELSHI: It is not terrible that people are saving money and paying down debt. It is just very hard for a recovery for people to be doing that.
FREELAND: Yes, it is terrible that people don't have jobs.
VELSHI: Yes, let's carry this a little further, Chrystia, if what Ken is saying, is portionally to blame is not idea, but the bottom line is we have a situation politically where we are portionally blame, we have a situation where people are talking about the perspective-the prospects of a double dip recession, do you see out there, any reasons for optimism?
FREELAND: Well, I'm going to offer a suggestion which is actually the opposite of optimism but I think really the only thing the president can do. And if Rham Emanuel or David Axelrod are watching right now I think they will throw their shoes at the TV set. Because what I am going to suggest is they should be listening to Ken Rogoff and I think the president has to make a blood, sweat and tears speech.
And I think he has to say these are really serious problems. That whole notion of recovery summer that was a quick fix. And this isn't a quick fix problem, this is a problem that has been growing for a decade maybe two decades and it is going to be really hard to turn around the ship of the U.S. economy.
I think, actually, Americans understand that, people are smart, they see where the jobs are going and I think that people don't want a snake oil salesman in the White House.
VELSHI: John, the White House has lost control of that message. It might be a good message to put through.
FREELAND: But it is not true.
VELSHI: They did things like talk about recovery summer; they did things like say a year from now we are going to see lower unemployment rates a year ago. Maybe they just need to have a more honest discussion and say you know it is not getting better in the near term that is kind of how it goes. How do they balance that? How do they come into this election and actually taught some successes in a world that most people see three quarters empty not a quarter full?
KING: Well across the spectrum, even Republicans say they have completely mismanaged the messaging on the stimulus program that they can make the case that it helped maybe not as much as they had hoped but it helped and it did keep the economy from getting worse. But Ali, you have to think of the broader dynamic here, what can the president do?
Number one they tried to have it both ways. They tried to say you know Joe Biden goes out and says look we are weatherizing these homes and we are building this high speed rail, the stimulus plan is working. And then the president comes out and often says it is a very deep ditch and it is going to take a very long time to get out. But they only have 60 days to an election day and in our fast food society we have fast food politics and people are looking for results.
I think we can talk about the stimulus and we can talk about the tax cuts debate. There is a bigger dynamic in the country though that is taking hold and the Republicans are taking advantage of this. Every state has had to make tough choices and every city and school committee has had to make tough choices and just about every American family in the past two years has had to make some very, very tough choices and the Republican message is what tough choices has Washington made?
Have they cut spending in anyway? Have we had any big fundamental changes in any way or are we still spending deficit spending? It is a tough argument because that deficit spending is part of the stimulus and some say by god it was necessary. But the Republicans are taking advantage of this mood of all this belt tightening that every American sees around them and they are saying what is happening in Washington?
VELSHI: What a great conversation with all of you, thank you so much.
John King, the host of "JOHN KING, USA" every night at 3:7:00 p.m. Eastern, every week night. Ken Rogoff, Harvard University professor economist, former chief of the International Monetary Fund. And Chrystia Freeland global editor at large at Reuter's. This is the kind of conversation that actually could help change things in this economy. I just hope more people will have it. Thank you to you all.
When you enter that voting booth in November the economy is likely to be at the top of the mind. At least our polling indicates that. So we have the Democratic plan, we have the Republican plan to turn things around -- we'll lay it out for you when we come back.
ALI VELSHI, CNN, ANCHOR, YOUR MONEY: One of those puzzling economic numbers we got this week, the number of homes that were sold plunged in July compared to the previous year. Let me show you the numbers and you can get some since of it for yourself.
This is important because interest rates are so low why are people not buying houses? That's a good question. Part of it might be that there was this (INAUDIBLE) tax credit this $8000 First Time Home Buyers tax credit which expired at the end of April. You had to finish that sell by the end of June maybe that explains it.
Ed Henry is the Senior White House Correspondent and he has had a conversation with the Secretary of Housing that might shed some light on this Ed?
(BEGIN VIDEO CLIP)
ED HENRY, CNN, SENIOR WHITE HOUSE CORRESPONDENT: That's right Shaun Donovan, he's going to our exclusive guest on the STATE OF UNION this week and Candy Crowley has the day off and so I'm going to be filling in. I just sat down with him for a pre-tape.
He's down in New Orleans because he's going to be there with the President this week in talking about reconstruction there on the fifth anniversary of Hurricane Katrina. But I also asked him about the big picture here. And very interesting.
He made some news he acknowledged there's deep worry inside the administration numbers but also said that a big policy proposal is now on the table because of these bad numbers take a listen.
(BEGIN VIDEO CLIP)
HENRY: The $8000 First Time Home Buyer credit expired a couple of months ago. Many people believe that's why some of the housing numbers were so bad this past week. It's that housing credit now dead or does the administration think you should try to revive it to try to prop this industry up?
SHAUN DONOVAN, HUD SECRETARY: Look Ed I think it's too early to say after one month of numbers whether the tax credit will be revised or not. All I can tell you is that we are watching very carefully. I talked earlier about new tools that we will be launching in the coming weeks and we are going to be focused like a laser on where the housing market is moving going forward.
And we're going to do everything we can to make sure that this market stabilizes and recover.
(END VIDEO CLIP)
HENRY: So basically saying they're not ready to fully embrace it but saying look we're going to look at all the tools we have. That could be one that we put on the table. Because they realize they're running out of options to try to sort of prop this up.
VELSHI: Yes, I mean it is a little puzzling that that $8,000 coupon drove housing sales as much as they did. The issue here is that if interest rates are as low as they are for the long term of 15 years, 20 years why is that not goosing people to get in. Let's bring Roland to this conversation. Roland Martin our good friend is here.
Roland, poll after poll after poll has said since the end of 2007 that the economy is issue number one for American. Take a look at the new CNN opinion research polling on this 56 percent say this is the most important thing to them in this midterm election. Number two is unemployment, which in my book is still the economy. Number three, 48 percent say the deficit that is also the economy. Then terrorism and then ethics in government, then health care which is an economic issue, 45 percent and Social Security an economic issue 42 percent. It is very, very clear Roland that voters are looking for solutions against a negative economic background. What are they going to do about it? What can Democrats do about it and what can Republicans do about it?
ROLAND MARTIN, CNN CONTRIBUTOR: Well first of all, here is the fundamental problem that Democrats face. We were in such a dire situation that it has taken all of this to get out of it, and you have had incremental growth if you will in the private sector job creation. The problem though is how do you explain that? How do you explain to somebody yes, I know it is tough but you know what you are going to have to wait at least two years?
VELSHI: Chrystia Freeland said the same thing earlier in the show.
How do you? Because clearly they have failed to do that and what is happening is voters are now not clear, who they are suppose to hold responsible for this economy. What would you do?
MARTIN: Again, I think from the president's standpoint, John King said it; the narrative has been absolutely horrible. The communications team should be all fired. Because frankly they have failed miserably. What I don't understand and first of all it is a shock that here you have Ed Henry talking to Sean Donovan who runs HUD. You have had for the last year and a half pretty much a hand full of people talking about the economy, you have got to have the labor secretary out and you have to have Donovan out, you have got to have your commerce secretary and you have to have your energy secretary, you have got to have all of these people laying out the things that are being done to be able to drive this whole conversation.
The second thing, you can't keep sending the president out with the same message. What people have to say is here is the project. You have to see signs all across the country this project is a result of stimulus dollars. What they did was they tried to appeal to Republicans by making one third of the stimulus project tax cuts. Well first of all we saw what happened with the Bush tax cuts how that simply ruled the deficit. It was about seeing things happen. VELSHI: Let me just pick up on a point that you just made with Ed. Because Ed is out with the president on those economic tours that he does and Ed, to the point it does sound like the same message and it does not sound like a message that is in touch with our own polling which says oh my god this is a problem. What are you guys specifically do? How do they deal with this? Are they getting the message that the American people are not really relating to the same conversation?
HENRY: They heard the message but I think Roland is right; it is unclear whether or not they are really listening and are implementing a new sort of strategy to show that they get it. I think he also makes a good point about the president being the sole messenger out there that went on for too long especially in the first year. But we've seen it continue and that is in part because treasury secretary Geithner for example hasn't had a lot of credibility with the markets.
So you have had the president pounding the same message over and over not all of it has sold. Then when Secretary Geithner did come out a couple of weeks ago with an op-ed piece in the "New York Times" the head line was welcome to the recovery. This was supposed to be recovery summer. That set expectations pretty high and the American people were thinking OK maybe I am going to start to feel it and they are still not feeling it.
VELSHI: As Roland said they --
MARTIN: Ali, I want to throw this in. OK, historically the commerce secretary has really been the first person who was the point person when it comes to business. When have you seen Gary Locke really talk about small businesses and job creation? You talk about housing African-Americans stand to lose 50 percent of wealth as a result of the foreclosure crisis. The president's foreclosure program has not been successful.
Where has Sean Donovan really been when it comes to saying here is what we are doing when it comes to housing? Where have all of these cabinet secretaries been when it comes to driving these conversations? I think that alleviates the job of the president when it comes to actually being out there and he tells people this is what we're doing.
VELSHI: I think there is a point there and Ed has got Shaun Donovan on "STATE OF THE UNION" this weekend. I am going to put out an invitation to Secretary Solese (ph). We have the big unemployment number coming out next week so we will talk to her about that.
You make a good point Roland. Thanks very much. Roland, stick around you are going to be here.
Ed, you are a busy guy this week. Ed, I will see you several times this weekend on television. Ed is with "The Stakeout" every day on my show at 2:40 Eastern every day and he has "STATE OF THE UNION" sitting in for Candy Crowley this weekend. Thanks guys.
Which states are holding up? Which ones are in crisis mode? I'm going to give you the state of the states when we come back.
VELSHI: Well you probably got the economy on your mind; our polling shows that leading up to the midterm elections. We want to take a look at the economic climate across 50 states and not just how people are feeling but some specifics.
Michelle Jones is the senior vice president of Counseling and Credibility, a nonprofit credit counseling agency. Michelle thanks for being with us.
Credibility is consumer stress index, the new index that is out measures the financial stability of households across the country based on things like, employment, housing, credit, budgets, and net worth. The stuff that makes you feel preposterous or economically secure. Take a look at the whole country here; we've got a map to show you. If you look at the key, red is a state of emergency, orange means distressed, yellow is weakening or at risk, green is doing better.
Is there any green on that map? I don't see any green on that map, I see Nevada in red and I see most of the country is distressed in orange. Am I reading that right, Michelle?
MICHELLE JONES, SVP OF COUNSELING CREDITABILITY: That is right. You are looking at that absolutely correctly, Ali. I'm sorry very tough economic conditions that households out there are facing across the nation right now.
VELSHI: What trend can we make out of this? Like I said I'm not seeing any excellent, I saw one good or two states that are good. We are seeing the healthiest states are where we have seen them for a long time, North Dakota, South Dakota, Nebraska, Wyoming, these are places by the way where unemployment is very, very low. The most distressed states here, Nevada, Michigan, Florida, places like that where industry has left and foreclosures are high. That seems to be the correlation I'm making.
JONES: You are absolutely right. Those are the two key factors when you are looking at the stress people are facing today. It has to do around housing and it has to do with job rates. So where you see those areas of strength that you mentioned earlier what you see there are people who have maybe a little more net worth or a little better management of credit. For some of those other things which you also have to keep in mind in those states that aren't as distressed there is also no boon there so consequently you didn't see a bust either.
VELSHI: Right and something I want to point out. We are showing you maps but you guys have done real studying on this. There has been improvement over the last five quarters which is a year and three months.
JONES: That is right. So on the distress measure over all we are seeing a gradual increase, it is slight but we are seeing things start to move in the right direction. VELSHI: OK. Let's take a look at some of the constitutional parts of this. Because the two things that we always talk about as contributing to your feeling economically secure or prosperous even, employment and housing.
Let's look at your index for employment and how that breaks down across the country. We have a map we can show you here. Tell me -- wow, there are a lot of places that are in emergency again. The good states are Vermont and a few down the middle there which are the same states with that we were just talking about, the low overall distress rating.
JONES: That is right. Still a great deal of unemployment. When we look at our measure we not only look at unemployment but also at under employment, so we are taking both of those factors into account. So what you are seeing is that there are still quite a large area that still has a lot of employment problems across the nation.
VELSHI: Can one take from that map that if you are unemployed and you are looking for work and you are able to move that is a good starting point for places you might move?
JONES: Well some of the places where you really see the stronger scores are the places that are less populated. So they have historically had very low levels of unemployment. So even as their unemployment rates have crept up as well, but you could have a two- fold increase say in North Dakota or South Dakota and that will still only take you to 5 or 6 or maybe 7 percent unemployment as compared to what you are seeing in Nevada at 14 percent.
VELSHI: Michelle, great conversation. Thank you for being with us.
Michelle Jones is senior vice president of Counseling at Creditability.
Listen, you need to take a stand and protect your money but still think ahead to your future. Defensive investing bring your pen out I'm going to give you some names.
VELSHI: Well, fears about the health of this economy have many people out there wondering exactly what to do with their own money and that is where our next guest come in.
Liz Ann Sonders, chief investment strategist for Charles Schwab joins us from Stanford, Connecticut. Liz Ann Sonders, this has gotten people confused and driven a lot of people out of stocks, even funds, mutual funds into government bonds because they are perceived as a safer option.
Is this a smart thing that people are doing and should more people be doing it?
LIZ ANN SONDERS, CHIEF INVESTMENT STRATEGIST, CHARLES SCHWAB: Well, I think it really depends on who the people are we are talking about, I think too often prescriptions are given for investors as if they are all one in the same. I think it depends on where you are on the risk spectrum, what your tolerance is for risk, what your time horizon is all of those things, tax brackets.
So there is no one right answer to say yes you should be moving out of equities, we know that outflows out of equities have been huge. In fact bigger this year than in 2009 believe it or not. And there has been a bias towards the fixed income side. I think there are things you have to be very wary of and mindful of if you are plowing a tremendous amount of money into the fixed income side of the ledger and it is not without risk.
VELSHI: Doug Flynn, I think has a similar opinion, he is certified financial planner and the founder of Flynn, Zito Capital Management.
Doug, you help people come up with their portfolios and you think that there should always be fixed income or bonds in people's portfolio but there is a common belief that owning bonds is less risky then bond funds is that true?
DOUG FLYNN, FOUNDER, FLYNN, ZITO CAPITAL MANAGEMENT: Not necessarily. The problem with individual bonds are that most people buy them to try to hold them to maturity. And you don't really get as much out of them as you would is you look for the optimum time to sell them. They sort of peak and then they go down in value. A professional money manager will often do is they will take some profits along the way. Most people don't think of that when they are buying their bonds. So sometimes a professional money manager in a fund will provide that for you.
VELSHI: All right. Liz Ann, I think what you are both saying here is that these are not necessarily, there aren't large prescriptions but back in 2008, it seemed like a large prescription would have worked for most people to get out of stocks, you aren't thinking that sort of market now even if we have some rough months ahead of us?
SONDERS: Of course in looking back, we are all brilliant armchair quarterbacks after the fact. There is probably is at least in the short term probably a little more momentum on the fixed income side but I think investors ought to be considering taking some profits along the way as much as Doug said, active managers do of bond funds. I think individual investors can do the same thing, take some profits, and maybe shorten maturities a little bit at least in the treasury portion so that they can react a little bit more quickly, but also there is always the importance that should be emphasized on diversification.
VELSHI: Do you think you can build a defensive portfolio out of stocks today, and when I say defensive I mean one in which you prevent big losses but you actually might get some gains because even in tough economies, even in recessions with very few exceptions you can gain somewhere?
SONDERS: Well you know prevention if you mean eliminating all losses that is not very easy to do unless you are talking about hedging with options. But certainly you can build a defensive equity portfolio and some defensive names right now are offering descent dividend yields. I wouldn't invest in the stock surely for a dividend yield, in fact sometimes a high yield can signal problems with a company. But you do have that opportunity to bank the yield which in many cases is higher than on the fixed income side while also having the benefit of potential capital appreciation.
VELSHI: Doug, do you agree with that philosophy and if so are there places geographically or by industry that you think people should be considering increasing their allocations of rather than decreasing?
FLYNN: On the equity side, Ali?
FLYNN: Absolutely. I mean if you look at technology versus utilities for a second, everyone still thinks utilities is a very safe place, but actually technology is undervalued relative to utilities. You have to know your own risk tolerance as Liz Ann said, you have to know individually what works for you, adding technology may or may not work for you. But if you are already well diversified, that might be a space if you are over weighted and you know the area where you can trim some profits and move to another area. So there are certainly opportunities out there.
VELSHI: What about Liz Ann should we be diversifying more into those types of things that we think of as defensive or as hedges like precious metals or investments in other countries?
SONDERS: Look, I think Doug made a good point. Which is defensive characteristics can mean a lot of different things, and I think one of the mistakes investors make, is they invest based on the label of things. So they think deep ends and they think well there for I need to be in utilities or consumer stable stocks. But defense can be given by looking at low valuation, where the greatest opportunities are. So I think you have to go beyond the labels and judge defense in terms of things like diversification, where the opportunities are and where valuation is reasonable and that can come in sectors. I would agree technology being one of them where you may get some defense because growth is high and evaluations are low that maybe comes in an area that would not be classically defined as defensive.
VELSHI: All right in other words, you can't be lazy about this and just sort of say I'm throwing my money into x -- x part of the world, x industry; you actually have to do some work. That work can be done, Doug, how much of it needs to be done by people right now? Are there ways to put your money into certainly types of funds or do really just have to sit down and have this conversation or learn what you are investing in? FLYNN: I think it is more important now people need to do a little bit more homework so you can make the argument that individual bonds are a little bit less of an opportunity. Because most people are not going to do the work necessary there.
So a manager that is doing this every day should be bringing you value. But you have to look staying away from treasuries right now, so many people have flocked to it, the yields are so low, you are going to get more opportunity right now by taking a little bit more risk and being a little more diversified even in the fixed income space. We talk about diversification, a lot on the equity side, but not a lot on the fixed income side.
FLYNN: So flexible income funds that is a category you can look up. That is where you are giving the manager the opportunity to go to different things, like floating rates and other types of opportunities that is where you want to look.
VELSHI: And strategic income funds as well?
FLYNN: Strategic incomes, those are the same category. They are interchangeable. But those are the ones where you can go to global bonds, you can go to they can stay in treasuries to some degree.
In 2007, it was 25 percent because of the changes to Fannie Mae. So you if you buy a fund, you are getting three quarters government bonds in there that is probably not where you are going to get the next opportunity.
That is yesterday. So flexible income gives you, it is a little bit more risky, but it gives you more of an opportunity where the yields are much higher.
VELSHI: OK. I get from both of you that we are just going to have to keep on doing work and people are going to have to do a little research into what they invest. But do it, it might pay off for you.
Doug Flynn, of Flynn, Zito Capital Management. And Liz Ann Sonders chief investment strategist of Charles Schwab. Thank you to both of you, we will be talking to you both again I'm sure quite regularly.
The city of Philadelphia, telling bloggers pay up or shut down we'll explain why after the break.
VELSHI: This is the ticker, the part of the show when we break down some of the most intriguing headlines of the week.
Joining me to do that CNN contributor Roland Martin in Chicago, CNNI Richard Quest, host of "QUEST MEANS BUSINESS " in London Listen to this one guys, ever heard someone say turning your passion into a business is a good idea. Well if your passion is blogging and you live in Philadelphia, the government isn't giving you much of an option. Bloggers were informed this week that anyone who runs ads on their sites based in Philadelphia will now be required to pay a $300 licensing fee allowing them to operate a local business. Basically a business license. That seems strange when the cost of a license seems more than the revenue for most bloggers.
Richard what do you make of it?
RICHARD QUEST, CNN INTERNATIONAL ANCHOR: The devil is in the details here. Ali, first of all it is a fee up to $300 is my understanding. Secondly as the Philadelphia authorities themselves say, a lot of these bloggers are running effective businesses and they sometimes don't realize when their hobby has become their profession. There is no difference here between a blogger who is making money and somebody running a small store. Keep it in perspective. I think this is blown out of proportion.
VELSHI: What do you think Roland?
MARTIN: Well first of all I mean we certainly should be encouraging folks for more information but I do believe that we have to recognize that these are indeed businesses. And that is if you are soliciting dollars, if you are out raising revenue, and you are operating that business you might have employees and you might be taking taxes as well. So it certainly makes sense especially in these times when frankly, cities are looking for revenue themselves and also to spur economic growth. So again if it is a sliding scale it makes a lot of sense.
QUEST: Ali, I guarantee you this; the 18-year-old who has a couple of ads on his blog is not going to have to buy the $300 license. That is not what this is about. What this is about, is a person who are making serious money or income style money and that is who they are going for and you can't have it both ways. There is my favorite phrase on this show, you can't on one hand complain about deficits about cuts in public spending but at the next time the moment somebody finds a way of raising revenue say --
VELSHI: And the mayor of Philly is very good of trying to squeeze money out of where ever he can to try and balance that cities pretty dire financial situation. Let's talk about this, talk about somebody making money.
Facebook, now being given a value, are you sitting down for this? $34 billion, that is five times the value it was given about a year ago, why is Facebook worth so much more than many of its tech counterparts. I have to tell you when you look at the world of social media Facebook has been the big advancer on this one Roland.
MARTIN: I'll never forget when Michael Eisner was interviewed by Charlie Rolls (ph) a few years ago. And Rolls (ph) said hey, Yahoo! Buy you guys? And Eisner said wait a minute. Do you know how much money we actually make compared to what they make? All of these Internet evaluations continue to be stupid, OK? I don't care about a valuation. What I care about how much money do you make? Are you generating any dollars? That is what it boils down to; this goes to the pie in the sky nonsense we keep seeing with these tech companies. Go make some money, then talk to me.
VELSHI: Richard what do you think?
QUEST: You know Roland's got a good point except Google when it came to the market and look at Google's share price now. Google does have real revenues. Look at Hp and Dell battling over a company that none of us have ever heard of, that even has no profits and they are paying up to $2 billion for it. No, Facebook has eyeballs, it has eyeballs by the gazillion and that's what you're paying for. But Roland is right. Let's wait and see if you can convert that that inflated valuation into real money.
VELSHI: Into a way to make money. All right. Guys stick around. Yet another way to make, Richard mentioned Google. Another way to make free calls on the Internet. At what point is the actual telephone going to become like the typewriter? We're going to check it out. But first take one part of chili powder, one part of teamwork and one part of green energy; you come up with this week's "Turn Around." Here is Stephanie Elam.
(BEGIN VIDEO CLIP)
STEPHANIE ELAM, CNN CORRESPONDENT (voice over): Ben's Chili Bowl is famous in Washington for its chili cheese fries and half smoked sausages. But this D.C. land mark is also making sure not to leave its mark on the environment.
NIZAM ALI, BEN'S CHILI BOWL: We switched to 100 percent wind power in 2007 about three years ago and just renewed for another three years.
ELAM: By going green, the restaurant's savings is minimal now but they will save big over the long haul.
GARY SKILNIK, PRESIDENT, CLEAN CURRENTS: You can make money by doing the right thing, fighting climate change, supporting clean energy, growing a business.
ELAM: But Ben's isn't going green alone, the owner's joined up with nine local small businesses to buy wind credits together at a reduced rate.
ALI: So we faxed clean currents earned power bill. They looked and said, OK, this is the rate we can get if you all sign up together. It's a pretty good rate.
ELAM: The group buys nearly two million kilowatt hours of renewable energy a year.
SKILNIK: For every kilowatt they are taking from the grid they are putting a kilowatt hour of grid back into the grid. Doesn't mean that that electron went from the wind farms to their house or their business, not necessarily but it has the same exact environmental impact as if it did.
ELAM: No new equipment needed and billing stays the same.
SKILNIK: The rate that they are paying right now is 8.926 cents per kilowatt hour. That's what they are getting for 100 percent wind power. The current Pepco rate if they did switch over to wind power would be over $0.09.
ALI: Whether the motivation is purely money related of this is going to be a new marketing campaign or if it is because you just feel in your heart it's a right thing to do, it's beneficial in all ways for your business.
ELAM: Stephanie Elam, CNN, New York.
(END VIDEO CLIP)
VELSHI: We are back with Roland and Richard. Hey Richard Quest and I have a segment that airs every Thursday's on my other show at 2:20 Eastern and also airs on his show which is on at the same time on CNN International it is called "Q&A." All you have to do is send us a treat @Ali Velshi or @Richard QuestCNN or use the hash tag CNNq&a. Send us your question, we'll answer it. We'll compete to get your attention.
But while you guys are here, listen to this. Google now allows folks in the U.S. and Canada to make calls online for no charge and you can get incoming calls as well. The only catch is that you have to have a Gmail account, which is not much of a case because it's free. Richard, it's become increasingly clear that the internet is at some point going to take over traditional phone and even cellular communications. How far are we from that?
QUEST: Ali, I found this the most interesting story of the week. Because Skype is now, the biggest rival to this new one, Skype is the largest international phone network in the world. More people are not only skyping, but Skype to Skype, Skype in, Skype out all those sort of gone out. Google with vast resources is going straight for the Skype jugular. Whether or not it can actually take over the loyalty that most Skype users have to the Skype account will of course be fascinating. But Google doesn't do anything by halves. I've used both systems now and I can honestly tell you that Google is in this for the long-term and is going to give Skype a run for its money.
VELSHI: All right. They are in the game for the long-term. Roland, what do you think of this?
MARTIN: Obviously when you look at how with the iPad, Samsung coming up with device, other kind of devices where they are getting smaller, allows for you to really have these portable computers. But also, think about these large companies we're used to AT&T, phone service for decades but they are doing gang busters when it comes to selling broadband, when it comes to cellular service as well. I've got to say, I appreciate the internet. You know what, Ali, when the power shuts off, the old reliable phone still works.
VELSHI: Doesn't happen all that often, the power shutting down.
MARTIN: Actually it does. I live in an apartment complex building, this huge high-rise in Chicago, it goes up and down. What happens is when your whole life is based upon broadband and it goes down, you go nuts if you're getting phone service, television, radio, everything. You may want to go back to the traditional way, which is very helpful.
VELSHI: Richard doesn't even know what to say about that. OK guys thank you very much, Roland and Richard. I hear some kind of tone, means we're done, we are out of time guys. Good to see you. Roland Martin and Richard Quest listen tweet early and tweet often. We all read our tweets. Ali Velshi @ Ali Velshi, @Christine Romans. Make sure you join us every week for YOUR $$$$$, Saturdays at 1:00 pm Eastern and Sundays at 3:00 pm Eastern, log on 24/7 to CNNMONEY.com. Have a great weekend.