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Three Red Flags for U.S. Economy; Only 54,000 Jobs Added in May; Inside the Eurozone; Innovation in America
Aired June 4, 2011 - 13:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
ALI VELSHI, HOST: The economic recovery may be losing steam but is it the time to hit the panic button?
I'm Ali Velshi welcome to YOUR MONEY.
Three red flags for our economy this week, jobs, only 54,000 of them added in May. That is simply not enough. Housing, it's the fear of that double dip for home prices. The S&P Case-Schiller Index showed housing prices hitting another new low in the first quarter of this year, down more than 5 percent over the same period last year. And these two are weighing heavily on Wall Street. Your investment, your 401(k), your IRA. The Dow had worst day of the year this week after losing all of the month of May.
Diane Swonk is an economist at Mesirow Financial. Diane, the question on everyone's mind, is this economy moving backward?
DIANE SWONK, CHIEF ECONOMIST, MESIROW FINANCIAL: Clearly, I'm wearing red today, so I got your memo on the red flags, Ali. The economy clearly has hit a soft patch. Some of its transitory related to the production interruptions from the Japanese earthquake. But oil prices also weighed heavily on unemployment. We saw losses in retail, a lot of discretionary-type spending, leisure. Those areas we really saw the spillover of higher energy prices taking a toll on unemployment. Where many retailers had to cut employment because they were unable to pass along higher price increases.
You notice that when you go to the store, I'm waiting in longer lines with fewer people in the stores because there are fewer people to wait on you. All of that, not good some of it coming back. We'll see that automakers are pleased with how fast Japan is picking up on their supply chain and they think they are going to be able to recoup a lot of this production in the second half of the year that is the good news.
The bad news is the headwinds persist. A lot of pink slips for teachers also came through in the month of May.
VELSHI: Diane, you hear this in the media a lot, that you need 150,000 jobs created a month just to keep up with population growth, to get back to where we were before the recession. We need more than 250,000. Here's a chart of what's happened over the last year. A year ago, we were losing jobs. The census jobs disappeared. There was no extra emphasis from the stimulus. But then by about October, we started gaining jobs. For the last six months, we had averaged better than 100,000 jobs created a month. And for the last three months, prior to this new jobs number, we were doing better than 200,000 a month.
Is it even realistic I mean when you look back at history, is it realistic that we can even create that 250,000, 300,000-plus a month that we need to get back to the 5 percent unemployment before the recession or is that just pie in the sky?
SWONK: That's a really good question Ali. I think the headwinds that we face will keep us more in the 200,000 range as we rebound. That will be as we get into the later part of the year. So this is going to be tough soft stop that we have to go though. But in an economy that comes out of a financial crisis, we subpar growth is the reality. The problem is actually living the reality which is what we're doing now. It's going to be a very long slog ahead.
And remember even Chairman Bernanke said he expected it to take years and years for us to get back to those lower unemployment rates. Also disturbing in today's employment data was the number of people on long term unemployment increased. And that is something we really worry about. Those construction workers who lost their jobs from the peak of the housing market problem were not building any homes out there right now and it doesn't look like construction is going to come back real strong any time soon to absorb those workers back into the labor force. I really worry about that because the longer they're unemployed, the harder it is to get employment later on.
VELSHI: That is right.
Will Cain is a CNN contributor; he is a conservative thinker and writer. Will let's talk about this. When things were moving in this economy, it became very fashionable for conservatives to say that the administration had spent too much money, with the bailout, with TARP and things like that.
Now that we are looking at a possible setback in this economy, we're actually discussing more government money. We're talking about more stimulus. Diane just talked about Ben Bernanke. You're going to be hearing more from Ben Bernanke. What does this do to the Republican argument that we need to ease up on spending?
WILL CAIN, CNN CONTRIBUTOR: It hurts it, Ali. Let me say this first of all. I'm not an economist - so I would say to Diane very respectfully that I think she's guilty of a massive understatement. The economy is in more than a soft spot. All the signs we are talking about, the red flags, unemployment, housing prices, investments, I would suggest you are a symptom of a much greater problem. You can boil this crisis down to one number Ali. That number is 350. That's the percentage of debt we have above and beyond GDP.
That is household, business and you have government debt. What does that mean specifically? That means basically every neighbor you have is sitting on a pile of debt and they can't go spend. That means most financial institutions are sitting on debt and can't lend money out. It means most companies therefore can't invest and hire. What do you do? How do you grow out of this debt? Everyone is talking as those this is just your normal recession. But this is not your father's recession. This looks more like 1930 than any other time in history.
VELSHI: Very interesting. Go ahead, Diane.
SWONK: I want to add, in defense of myself, I guess, a little bit. I'm not saying there's anything great about this economy, I do think it's important to point out the cash on corporate balance sheets, profit margins are at record highs and the cash is very strong. That money could be redeployed with more certainty going forward.
We have not seen really corporations put their money where their mouth is. They've been hoarding that cash and they don't need to borrow to be able to move forward. That's something that's been the rebound in profits is nothing like the 1930s. That's one of the distinguishing characteristics between today and Japan as well in the 1990s. So as much as I agree, this is subpar. Subpar is painful. And we should not expect robust growth. I do not have a robust growth outlook.
VELSHI: You brought up Japan in the 1990s. I didn't want to go there but let's talk about it. Let's bring in Roland Martin is a CNN contributor. Roland two polls, one president, very different stories. Take a look at these with me. According to a CNN Opinion Research Poll, 54 percent of Americans approve of how President Obama is handling his job as president.
His total job as president. It's not his job Americans seem to have a problem with. It's the lack of jobs for everybody else. Because when you ask Americans how President Obama is handling the economy, it looks like the numbers switch, 58 percent disapprove; only 41 percent approve. Roland your analysis.
ROLAND MARTIN, CNN CONTRIBUTOR: Let me get to the heart of this. Americans continue to be delusional when it comes to our economy. We are so used to this microwave attitude of, hey, next month and then next month. We wait every month for this jobs report. We somehow think that all of a sudden it's going to magically reappear where we're having 300,000 jobs a month. We have to accept that the new normal, it's going to take time. When Ben Bernanke says it's going to be years, accept the fact that it's going to be years.
How is it that we expect our sports teams will take four and five years to rebuild themselves to win a championship? We somehow think it's going to be a few months. To Will's point, this is very interesting. I travel all across this country, I'm in Minneapolis, I've been to Hartford, Connecticut, and I've been to Houston and Dallas. What also is happening is Americans have listened to our advice, Ali, and that is, they've stopped the crazy spending.
Our economy is so driven by people buying things. I think what is happening is Americans also have said, you know what I don't need to keep buying more stuff. Let me hold off on that and let me actually save money. That's causing us to not be able to add more jobs. VELSHI: Roland, you somehow -- all three of you have come around to the same discussion. I want you to stay where you are because the discussion you're having is that if we are frugal, if we are holding back and if we are cutting spending on every level, ourselves, our governments and our businesses, that could mean years and years of stagnation like Diane was talking about in Japan. I want to ask you about that and then I want to talk about Will.
He brought up the depression. Which one is better, letting everything adjust and reset to a new level or years of stagnation and slow growth? Let's talk about that.
We're going to talk about Mitt Romney making it official. Is this tried-and-true businessman going to make a good president if he wins? We'll check it out next. Stay with us.
VELSHI: I've been asked several times this week if I think the economy is taking a step backwards. So I want to continue that discussion with my guests. Diane Swonk is the chief economist with Mesirow Financial joining us from Chicago. Will Cain is a CNN contributor and so is Roland Martin.
Roland, you just gave us a real good outlook about the fact that we are driven by instant numbers and we want high growth and we want solutions. Will I want to ask you about this. We are acknowledging in this conversation that there might be two alternate realities for America going forward. One is a long time of either stagnation or very slow growth, or something more drastic. Your thoughts.
CAIN: You know Ali, sooner or later this gets back to politics. You actually put that question to me earlier so we ask our self, now that we've diagnosed the problem, what do we do? What are our tools? I would suggest there's about three. One and I'm very honest about my ideology here, I'm a conservative. One is fiscal stimulus. That's a stimulus plan coming out of Congress. I don't believe in the effectiveness of those programs. I believe they become political boondoggles. The second is monetary things; it is literally printing money out of the Fed. We've seen that, I would suggest you expect QE3 and maybe beyond. And the last is take our medicines, take the depression, reset the economy, hit the button. The question becomes Ali what you just said.
If two or three years of depression better than perhaps ten to 15 years of medaling along in stagnation with the Fed funding the whole --
VELSHI: Let's take this opportunity to explain a couple of those terms Diane. Will has drawn a distinction between fiscal stimulus and monetary stimulus. And what a lot of Americans don't know as we concentrate on that stimulus bill that we talk about that happened a couple of years ago is that the monetary stimulus, the amount of money that the Federal Reserve injected into the economy is many, many, many times higher than the fiscal stimulus. Are we going to need more money from the Fed? You mentioned Ben Bernanke is that what's going to have to happen?
SWONK: I think the threshold for the Fed to act is much higher than most people are giving them credit for right now. The risk of acting further on what we call QE3, further stimulus for the U.S. economy, is greater than the marginal benefits at this stage of the game. We really need to see a fairly sharp contraction in the economy for the Fed to get involved again. They feel that QE2 in their own view was a success although there is a lot of debate about the ethicasy of it. And I don't think they're ready to jump back in. We're clearly not going to see fiscal stimulus because we're talking about moving in the other direction on fiscal policy.
VELSHI: In other words we are talking about tightening our belts, not having more stimulus.
MARTIN: You know what Ali, Diane made an excellent point earlier when she talked about the balance sheets of corporate America. This is- we're also living through the reality that our political leaders and the officials in the Treasury Department and the Federal Reserve did not put any stipulations on these banks when it came to lending them the billions of dollars to say, you need to begin to extend credit.
Let's just be honest. Robert Rice talked about this. We made a mistake in shoring them up. But they turned around and held on to the money and did no lending. So they're looking great. But the problem is, we're living with the result of them holding the money and not being able to lend it out because no restrictions, no conditions were put on any of it.
VELSHI: It's a good popular thought but I'm not sure that's the whole story. Diane.
SWONK: No. In the banking industry, first of all, we lost the shadow banking industry which was the major provider of credit to consumers. That's gone. Secondly, the new regulations are causing banks to raise their capital ratio and tighten up. The regulations have forced them to tighten up on a lot of their credit because they were too easy. So there is a lot of factors, it's a very complicated thing and it is very easy to use this populous argument. But I think the situation is much more complicated than that.
And one of the things I will agree with though is the Fed printed a lot of money. It all landed in the trees, still out of our reach, it has yet to fall on the ground. We need to shake the tree that is exactly right.
VELSHI: All right. Here's a potential solution, Will. If America's top problem is the economy, why not turn to a successful businessman to run the country? That's the argument of a couple of contenders for the Republican presidential nomination are making. Most notably on the right Mitt Romney, he is the former CEO of the giant consulting firm Bane & Company. But there's also Herman Cain on the left, doesn't get as much attention. He's a Tea Party favorite. He used to head up Godfather's Pizza.
Will, I want to start with you; you are a conservative, that doesn't necessarily mean you think business people are going to solve everything. But do you think this is good? Is that the direction the Republican Party should head in? Put a former chief executive at the helm?
CAIN: Well, I don't think it could hurt. I mean I think that's a pretty desirable quality, somebody that has had to run a successful business because in the end, we're going to have to grow out of this debt that's hanging over the economy. Would a conservative business- minded leader know how to do that? I don't know. But I think he might have a better idea than some of his alternatives out there.
MARTIN: Let me remind Ali of something.
MARTIN: I remember when we got our first MBA president. Everybody talked about --
VELSHI: Don't talk about --
MARTIN: No, no. President George W. Bush, people said hey, he is an MBA from Harvard. How did that go? The problem for the president is not, do I have a corporate background? You have to have the political instincts to be able to negotiate with Democrats and Republicans. The problem with the president is that Congress, the House and the Senate, they have to pass these measures. If you don't understand how to negotiate with political folks, even in your own party, I don't care how great of a CEO you are, you will fail.
VELSHI: Diane, what's the economist view on this? Would it help you? Would it be better for the economy if we had a businessperson as president?
SWONK: I don't care if they're business or not. I just want some pragmatism; I want some legislative ability in Washington. I'm tired of the impotence that we've seen in Washington on both sides of the parties. Both sides of the parties, we have to roll up our sleeves as Americans and work together and get ourselves out of it. We all got ourselves into that. We need to take responsibility for that and move forward. That means talking to each other, not demonizing each other across the table, which is happening on both sides of the aisle.
MARTIN: Any time you have an election, you're going to have folks demonizing and the 2012 election is driving this entire conversation. As long as you have people who run for reelection, you see it with Congressmen Paul Ryan, and his Medicare proposal how they demonize him. The Republicans demonize President Obama with his health care plan. This is what happens, unfortunately, when you have politics and folks run for reelection.
VELSHI: Will, last word to you.
CAIN: I would just say I think a lot of our economic problems extend way beyond politics. Politics sometimes are the side show. Are there things politicians, Congress, the president can do to help? Yes. But our problems exist much deeper than on a political level.
SWONK: You are right, I do agree with that.
VELSHI: Thank you so much, Diane. Good to see you as always, Diane Swonk is the chief economist at Mesirow Financial. Will Cain and Roland Martin, two great CNN contributors.
Well home prices hit a new post-bust low across much of the nation. But there are a few regions that are doing better. I'll tell you where they are and why next.
VELSHI: You'll have heard people talking smack about the housing industry this last week. A lot of people talking about a double dip in housing, an official double dip. There's no such thing, there is no measure of a double dip in housing but there's definitely something wrong in the housing market. I want to show you what's going on.
Let's go back to 2006. This is the S&P Case-Schiller National Home Price Index. It's basically an index of home prices. Look where they were back in 2006. Then take a look at this. This bottom here was in 2009. That was when really we bottomed out because of the inability to get mortgages, a whole bunch of foreclosures. And there's been almost an imperceptible slight increase between then and the end of 2010.
But look at what just happened. Look at the tail end of that. It's started to decline and that has got some people talking about this double dip. It certainly has been a decline in housing prices.
I want to bring in Richard Florida; he is the senior editor at "The Atlantic." He's the author of a great book called "The Great Reset, How new ways of living and working drive post crash prosperity." That is something we want to know the answer to.
Richard, across America, there have been declines in home prices in the first quarter of this year, the first three months. By the way there's one bright spot in this otherwise dismal housing picture -- the Washington, D.C. metro area, Maryland, northern Virginia. Why?
RICHARD FLORIDA, AUTHOR, "THE GREAT RESET:" Well, I mean it's up 4 percent when the nation is down year over year 5 percent. It's a big place. It's the eighth largest metro in the country. When you add in Baltimore, it's an enormous place. It's one of the top three or four. It's been attracting talented and creative and innovative people. It's not just a government town anymore. And it has great neighborhoods.
You know one of the things that's driven housing staying stable is those houses far out in the suburbs and excerpts have declined. But now only did D.C. itself have great neighborhoods even the far away neighborhoods in Maryland and Virginia have become more walk able. They're adding transit. But I will tell you there's a lot we can learn -- other metros in cities can learn from looking at D.C. because it is really and a few college towns, it's a big bright spot in a somewhat gloomy picture.
VELSHI: You said college towns, you said trends. We know that medical and technology drives jobs. When you say there are the things that build infrastructure for cities of the future, are those the key points?
FLORIDA: Well, I think D.C. is a big -- everyone thinks it's a government town. It's not. It's a major center, as you know, for CNN and AOL and Discovery. It's also government spending and biotech and in homeland security's help. But it is just a place and you know this is a really interesting statistic for folks listening in today, watching today. When they did a recent analysis "U.S. News & World Report" did this, they compared all the metros in the country on their income levels but divided that by cost of living.
New York was near the bottom of the list, only McAllen, Texas was lower. L.A. was low; Miami, D.C. was second for the top. So one of the things that D.C. offers is a high income. It has one of the highest income levels, $85,000 household income. But when you add in cost of living, it gives you great value for the dollar. Because you can get a lot of house for the income you make. It was the second best place to live conditioned by cost of living. I think all of those factors make it a very interesting place and why people are moving there in droves.
VELSHI: Well one of the place that a lot of people would like to live is an Miami Beach. That's a place that's taken a big hit in housing prices. But you pointed out in your blog, that it's made some great headway digging itself out of that mess. What have they done to stimulate the economy and improve things?
FLORIDA: One of the things we found is that places that have a little bit more rental, you know the U.S. has about a 65 percent rate of homeownership. When it gets down to about 55 percent, as it is in New York, in the city of D.C., in San Francisco, you get a little more flexibility. What's happened in Miami is they've taken all of those vacant blackened condos, you can see it if you watch NBA final, they turned them into rentals.
Here's what Miami Beach did. Which I think other cities can do. The City Community Development Corporation went in there and bought two or three of these vacant condos, not the high end one s but nice ones. And they turned it into affordable housing for the people who work in the hotels and the restaurants and the service business. You know we have 14.3 million vacant homes in this country. That is an awful lot of vacant homes and condos. We can begin through public policy but not national policy, cities and suburbs can begin to try to help transfer them from bank ownership or from foreclosures into more rentals and make more affordable rental available to people who need it.
VELSHI: Richard you're talking to me from one of my favorite cities in the entire continent. In fact I have started describing Toronto as possibly one of the most ascendant big cities in North America. What's working there?
FLORIDA: Toronto is the example, even more than D.C. Cranes are everywhere. My street is filled with renovation projects. Houses sell still in three days, two a week. Housing values are up that is because the mortgage market was regulated here. You have to put 20 percent down. You can't have a long term mortgage; you have to turn your mortgage over in seven years. You can't refinance your darn loan, only if you have a variable, you have to hold that loan and the bank holds it.
So supply and demand are matched. We don't have buyers that can't buy, but there is one other thing I wanted to say for folks watching today.
FLORIDA: Believe it or not, I think now might be the time to think about buying a house. I'm a big proponent of renting. I think for many people who can't make the down payment and I know financing is hard --
VELSHI: But if you can get the financing and if you can put the down payment down and you need a house --
FLORIDA: I think it's about time. Because housing values have not only come down as you showed, hosing values have come down more now than in the great depression. And so there's got to be a bottom. Now maybe it's going to go another 3, 4 percent. But there's a lot of wonderful inventory. If you're looking for a home, you couldn't do better to find the kind of dream house that you want. Already we see in Washington, D.C. in the good neighborhoods, in Manhattan, even in L.A., some of the best inventory is starting to fly out of the market. So I don't think it's for everyone. But if you know you're going to stay in a place and you don't have to switch jobs, if you want to buy a house and interest rates are still darn good, I think it's time at least to consider.
VELSHI: You may never see the combination of these low prices and low interest rates in our lifetime. At least I certainly hope not. Because if we do, something's really wrong. Richard, always a pleasure to see you, thanks very much, give my regards to Toronto. Richard Florida is the author of "The Great Reset, how new ways of living and working drive post crash prosperity."
Hey listen you've heard the term Eurozone. Why do you care? You should care because what happens with the economies of the Euro-based nations does affect you directly. I could even tell you how to make money out of it. I will explain next.
VELSHI: All right, you're looking at the Eurozone, 17 countries that over various times turned over their currencies and adopted the euro at certain points within the last decade, many of them at the same time.
Today in the wake of the global economic crisis, countries like Greece, Ireland and Portugal are dealing with the type of debt disasters that many feared could one day hit America. They're all individual countries when it comes to their debt, even though they share a currency.
Peter Morici is a professor at the University of Maryland School of Business. Peter, this Eurozone debt problem, you can't simply transfer that over to the American situation. It's a different story, but their own debt problems there in Europe. Can they threaten a U.S. recovery?
PROF. PETER MORICI, UNIVERSITY OF MARYLAND SCHOOL OF BUSINESS: Absolutely. Banks hold a great deal of the Portuguese, Greek, Belgian, what have you, debt, including some American banks, but the European banks are quite vulnerable.
You know, they could handle a Greek restructuring. Basically, you know, the Greeks saying they're only going to pay back 60 cents on a dollar. But if it spreads to other country, the viability of those banks becomes threatened and the Europeans don't have the kinds of institutions that we have to back up their banks. You know, the Federal Reserve --
VELSHI: Why? Why can the European Central Bank not do what the fed would do in that situation?
MORICI: Well, the fed could essentially use the bond-selling capacity of the treasury to recapitalize our banks. The European Union can't tax so it can't issue euro bonds. It doesn't have the ability to back up the banks quite the way -- see, the fed doesn't act alone, the fed acts in concert with the treasury.
VELSHI: Right, all right, hold on to that thought for a second. Christine Romans joining me right now host of "YOUR BOTTOM LINE." Christine, I get it.
If I'm an investor in one of those banks, I'm worried about what Greece might do. If I'm not, if I'm the average American, why do I care about what happens in Greece?
CHRISTINE ROMANS, CNN BUSINESS CORRESPONDENT: Well, you care because if you have a break-up or a breakdown of the Eurozone, that's a huge instability and uncertainty that goes into a fragile economic system already.
If you've got European banks that are in trouble because of their exposure to Greece, then you have an international banking system that has another weak spot, at a time when you're going get the banks to be healthy again.
Also because, look, even this week, we saw a couple of days when they were worried about Greece and Greek debt, you had U.S. stocks going down. That's your 401(k). That's your retirement. It's not uncertainty out there.
I know people will say the U.S. is not Greece. Greece is not the U.S. Of course, that's true. Michigan, the size of the economy of Michigan is basically the size of the economy of Greece, I think. You know, yes, but it is one of these important, I guess, pegs or stepping-stones in the global economic system. VELSHI: Peter, two years ago -- 2 1/2 years ago, most Americans wouldn't have been able to describe to you how an international credit freeze or crisis affects them. We then subsequently learned that in affect your ability to get a car loan, a mortgage, a business loan. Are we in any danger of that?
MORICI: Absolutely. Greece has the potential to be Europe's Lehman Brothers. Who would have thought that Lehman Brothers, a single investment bank, could start the domino effect that started credit to dry up in the United States?
If Greece went down in holy disrupted European banking, there would be a lot of nervousness about state debt in the United States and U.S. debt in the United States and about U.S. debt. But more over our banks would be affected. They have a lot of cross relations with the European banks. So we're going to have a credit problem in the United States of our own.
VELSHI: I'm going to ask Christine a question about Peter's recent column that he wrote. Peter wrote recently and I know you both know this topic very well.
Peter wrote recently that Americans should be prepared for a time to come when Americans may turn to China for the type of aid that Greece is turning to Germany for. Do you think that's reasonable, Christine?
ROMANS: I think that's really far down the road. I hope the people in Washington would be able to get their acts together before you're ever in a situation like that. I mean, I know Peter is a little shall we say, hawkish on that than some of the rest of us out there are. But we are in a position here where you've got us talking about the U.S. running out of time.
Moody's says it, S&P says it. The credit rating agency saying the U.S. is running out of time to address its fiscal problems. At the same time, economists are saying, don't repeat 1937, don't make a mistake.
And pull back too quickly on the money that's flooding through the system that could cause another letdown in the U.S. economy. So we are talking about a fine line policymakers have to walk.
I think we've proven a number of times have had to raise the debt ceiling and not ever act together. That the people who are making these decisions are not good financial managers.
VELSHI: Peter, I'll let you have the last word and defend yourself.
MORICI: Well, quite simply, the Greeks are having the shots called by the Germans because the Germans are their principal creditors. If the U.S. starts to lose its bond rating and borrowing costs go up, we might not be able to run the kinds of deficits we are now. And in the process of trying to restructure our debt, it's the Chinese who are the logical people to make demands because they hold the most U.S. bonds.
VELSHI: All right, Peter, good to see you as always. Thanks very much. Peter Morici is a professor of business at the University of Maryland School of Business and an economist. Christine Romans, my colleague and friend, you can watch her on "YOUR BOTTOM LINE." Saturday's 9:30 a.m. Eastern, are with me every morning on AMERICAN MORNING" Monday through Friday.
All right, don't let Europe's debt crisis keep you from investing in international companies. There are countries and marketing and industries and companies out there that are growing and there's no reason why you shouldn't be able to take advantage of them. But I'm going to tell you how to do it safely and properly next.
VELSHI: We've been hearing a lot about the debt crisis in Europe. If that's got you hesitant about investing internationally, think again. There are simple ways to invest in countries and markets that are growing and reap those benefits.
Our good friend, Jim Awad, is managing director at Zephyr LP. Jim, good to see you. This is interesting. You've always said and many people say you should invest internationally. It does seem there's more uncertainty about that today than ever before. Is it still a good thing to do?
JIM AWAD, MANAGING DIRECTOR, ZEPHYR MANAGEMENT: Yes, absolutely. You really accomplish several things. First, you diversify your portfolio. Second, you can position yourself for areas that are growing faster than the United States. Third, you get balance with a global footprint. I would make the case that those characteristics actually lower your risk.
VELSHI: Hard for people to understand, but when you spread your risk, you lower it. Let me ask you this, very often you talk about ways for the average investors who invest using exchange traded funds, which are basket of stocks.
Now you and I share a view as when it comes to more specific areas including international investing, you may actual want a mutual fund with an active manager.
AWAD: Yes, absolutely. In this case, you should pay a little bit more so that the managers can pick good geographies to invest in and good companies within those geographies because to say international.
There are places where there's a lot of corruption. There are places where there's no growth. There's a places whether or not liquid capital markets or the industries are dominated by commodity prices which are volatile. In this case, you should pay more, you get more. VELSHI: All right, you are recommending one fund called "The Tweety Brown Global Fund." What do you like about this?
AWAD: OK, so that's the way to invest in the developed world. In the developed world, there are some economies doing better than the United States. We know that Europe has a lot of problems, but we also know that Germany is doing great.
We know that the Swiss are doing great. They're growing father than the United States. They don't have the debt problems. So this is a fund, for instances, where those are the two biggest geographies --
VELSHI: Right, and that's because there's an active manager who can pick. They say, I'm not going to be big on Greek banks, but I'll be big on German industrials or something?
AWAD: Right, which are growing and exporting and the Germans are really in to terrific shape.
VELSHI: OK, great division that you've made twee between the developed world and the emerging world. For the emerging categories, you like Lazard's emerging market portfolio, tell me about this.
AWAD: OK, so the emerging markets are the best long term growth story if you look at the growing middle class, the growing population, the savings rates of government individuals. There's a huge transfer of wealth going from the developed world to the emerging world.
You want to be invested there, but again, you want an active manager who can take you out of the bad geographies and get you into the good growth companies. Lazard has a very good record of doing this - has a good diversification and a fair price.
VELSHI: All right, that's one had one-year increase of 30 percent. The one you talked about "The Tweety Brown" 23 percent. Let's talk about Groupon for a second. We saw LinkedIn's IPO really shoot through the roof. We've got Groupon that says that they're filing an initial public offering. What do you think of these?
AWAD: OK, so there's tremendous momentum in the group. There's a lot of demand for the stock, but I'm hearing serious questions about the valuation that they're coming at and about the sustainability of their business model.
They're losing a lot of money. So on this one, they're now going to have to go to investors and talk. I think there's a lot of work to be done before we make a decision. You don't have to make that decision right now, stock momentum, yes but questions about valuation and the business model.
VELSHI: Very good, Jim, always a pleasure. Jim Awad is a managing director of Zephyr Management. Thanks for stopping by.
AWAD: My pleasure. VELSHI: All right, the U.S. is associated with great innovation, the Internet, the ford model "T." But is that all in the past or can this country once again rise to the top? Fareed Zakaria up next.
VELSHI: The U.S. is used to being at the fore front of innovation. At least that's how we feel, but our best days, some say, could be behind us. Take a look at this chart of the innovation race.
Singapore, South Korea, Switzerland, Iceland, Ireland, Hong Kong, Finland all reported to be ahead of the United States in innovation. That is according to two notable consulting groups.
Fareed Zakaria is the host of CNN's "FAREED ZAKARIA GPS." He's the author of "The Post-American World, 2.0." He's hosting a special program on Sunday 8:00 p.m. Eastern called "American Dream, How to Innovate." He joins me now.
Fareed, always a pleasure to have you here. Is this true? Do you believe that sort of ranking? Is that a fair evaluation of where the U.S. is in terms of innovation?
FAREED ZAKARIA, HOST, "FAREED ZAKARIA GPS": Ali, it's a fair evaluation of where the trend lines are moving. These are all per capita numbers, per individual. So of course, if you were to look at the big number, the U.S. is still quite far ahead. But that lead is shrinking every day and the reason this is crucial, Ali, is the jobs of the future are going to come in the United States out of innovation and innovation-based industries. We don't have a steel industry anymore.
We don't have -- the auto parts business is all going to China, India, Indonesia so we are not going to be able to compete in the low- wage manufacture and even low-wage services. The place where we're going to find new jobs is going to be the high-tech, the innovative business processes.
So if we lose this race, we're basically losing the only hope we have to raise the average American standard of living to make our viewers and their kids' lives better.
VELSHI: Let's talk about how you innovate. There's a piece of innovation and there are some people, particularly some conservative economists who say the best way to innovate is lower taxes, make it easy and cheap for people to invest.
But you take a view that suggests that you need some government intervention in this in the form of incentives to conduct research and development.
ZAKARIA: If you look historically, Ali, from the development of the steam engine, which may have been the original innovation of the industrial revolution, the steam engine comes from cannon designs. Who funded all those cannon designs? The military. If you look at the computer chip, Texas Instruments invented the computer chip, but NASA and the military bought every computer chip that was produced for ten years, which is what reduced the cost.
Look at this list we're looking at. Singapore, South Korea, Switzerland, Iceland, Ireland, Hong Kong -- most of these countries have high taxes, a lot of regulation, but they spend that money efficiently.
I'm not in favor of high taxes and high regulation, all I'm saying is directed government policy. South Korea 30 years ago decided they would become a world leader in steel and ship building, government decision.
China is doing the same thing in solar panels, wind turbines. We're doing nothing so we're having this debate about the free market. Now industry after industry is moving away from the United States.
VELSHI: We've seen a decline in research and development spending. Is it spending -- do you actually have to spend that money or can you provide incentive for companies to spend that money on their own?
ZAKARIA: Look, the most important thing you can do is to do this efficiently, smartly. In some cases it's tax credits. In some cases there's no question you need government to do basic research and development. Because when industry spends money on research, they're spending money figuring out how to make the next product a little better.
VELSHI: Some will argue -- it's something America is uncomfortable with -- it picks winners within an industry, picks winners by industry.
If we decide we want more wind power or we want more solar energy, by government putting in tax credits, the government is saying it's not a free market. Not a level playing field. How do you counter that?
ZAKARIA: Look, it's true. But the government does all kinds of things to alter the free market. They give an enormous deduction on interest for mortgages that produces the housing bubble. We don't say the government shouldn't be involved in housing.
The key here is think of Silicon Valley and Venture Capitalists, nine investments that every Venture Capital firm makes fail, right, but one succeeds. So when you talk about government spending and people say, won't they pick winners?
Yes. You can call it a waste of money or call it misses. There will be hits and misses. DARPA, the Defense Department's venture capital arm funded the funding for the Internet, GPS technology, stealth. There are a bunch of misses, too.
VELSHI: The ones we never hear of. ZAKARIA: Right, you can look at those and say it's wasted money. People don't look at Silicon Valley, Venture Capital and say they wasted money. There's a lot of trial and error in innovation, whether government funded or private.
VELSHI: Now some will tell you it's the tax credits and the direction the government can send it in. Others will say it's a matter of education and how we're doing and how government supports that. Take a look.
Take a look at this, this is per capita investment in research and development in different areas. We're definitely, 34 cents of every dollar going to universities and colleges, 31 cents coming from industry and 26 cents the federal government.
ZAKARIA: You know, the most important piece here is the federal piece because it's basic research. Nobody else does that kind of blue skies research. So pharmaceutical companies, as you said, spend a lot on research, but they're tinkering with the drugs.
It's the money that goes to the NIH, the government money that is for basic research that ends up producing the big bangs, the enormous leaps forward. In all these cases it's not that I'm arguing a private sector is not amaze -- much of the innovation is going to come from the private sector. Historically, at least, the shadow behind that private sector has been government policy.
VELSHI: Basic research. You mean not something that necessarily has a commercial end result. It's research to discover.
ZAKARIA: Precisely. It's research to think big. If you think about energy policy, right now we need a lot of basic research in energy. Tinkering on the margins, getting a slightly better wind turbine, getting a slightly better solar panel is not the key.
The key here is we've got to figure out what's going to allow us to consume massive amounts of energy at incredibly low prices. No one has come up with that yet. That's what basic research can do.
VELSHI: Fareed, you're a big thinker and we like that and we need that. Fareed Zakaria is the host of "FAREED ZAKARIA GPS," a special this Sunday at 8:00 p.m. Eastern. It's called "American Dream: How to Innovate." Definitely worth watching. Fareed, thank you.
All right, if you know me or watch me on TV, you know I'm a big cell phone and Blackberry guy. Can't get away from my device? So imagine how happy I was to hear about a new study that cell phones could cause cancer. I have very pointed hard on that. I want everyone in the cell phone industry to listen closely. It's all in my "XYZ" next.
VELSHI: Time now for "The XYZ of It." As you probably heard, the world health organization has added cell phones to the list of substances that are possibly carcinogenic, meaning they might cause cancer.
The wireless association, which represents the cell phone industry is dismissing the report saying the classification is based on, quote, "limited evidence and no research." OK, cell phone companies, if you know enough to dismiss the finding, what evidence do you have about the long-term effect of cell phone use?
Because if you're sitting on a report that proves conclusively that cell phones don't cause brain cancer, release it. Save us all a lot of worrying. If you aren't, as I suspect, why don't you get out in front of this issue. It may be good business to do independent research and put this pesky question to rest. Some people are already comparing cell phone companies to tobacco companies.
You know, the very first study linking smoking and lung cancer was down back in 1939. Other reports followed, but it wasn't until the late 1990s that tobacco companies actually began admitting that smoking causes cancer.
Here is the difference. Unlike smoking, nobody is actually calling for us to quit our cell phones. It's just the opposite. It's a growth opportunity. A whole new industry could spring up around technology designed to keep our phones a safe distance from our heads or our hearts or our reproductive organs. Imagine the headsets that can be sold.
If it's liability you're worried about, sitting on critical information for decades didn't save the tobacco companies any money in the end. Get out in front of this now. That's my appeal to you. If you won't step up, maybe it's time for the government to step in.
We need a fresh look at current radiation standards for our phones and we need, maybe, a federal research program to study the effects of cell phone radiation on humans, especially on children. We can't afford to 30 years or 40 years for the answer to become obvious.
That is too high a price to pay. Thanks for joining the conversation this week on YOUR MONEY. We're here every Saturday at 1:00 p.m. Eastern, Sunday at 3:00 p.m. Catch Christine Romans on "YOUR BOTTOM LINE," Saturday mornings at 9:30 a.m. Easter.
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