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Focus on Jobs; Market Opportunity
Aired August 4, 2012 - 13:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
ALI VELSHI, CNN ANCHOR: You need to hear the truth about the economic storm that's approaching our shores. But your politicians refuse to level with you.
I'm Ali Velshi and this is YOUR MONEY.
You've heard me criticize President Obama and Mitt Romney. You've heard me say the president gets too much blame and too much credit for what goes on in the economy. But both men are smart and capable and economically speaking they're not all that different. If I were running a company rather than choose between them, I'd hire both of them to help things turn around.
But we're in a campaign and rather than helping to build the shelter we all need for the coming economic storm, these two men and their henchmen are dancing around the real problem of what's affecting America. The lack of jobs. They attack each over taxes and deficits when they should be singularly focused on how to create the best environment for job creation.
Job creation is the single most important matter facing America right now. Not taxes, not deficits, not debt, and not health care.
In July the unemployment rate ticked up to 8.3 percent. Don't worry too much about that. Look at the right side of your screen, 163,000 jobs were added to the economy. But 12.8 million Americans are still without a job and looking for work, and close to a third of those who are employed hold lower-paying jobs with little hope of wage increases any time soon.
In a real storm the worst thing that can happen is that you lose your home. In an economic storm, the worst thing that can happen is you lose your job. Lose your job and you lose the tool that helps you prosper. If others lose their job, that keeps your wages low. Without real job creation, America cannot prosper.
Here's why jobs are more important than debt and deficit and tax reform. When you have a job, you spend money. When you spend money, you create demand. When demand increases, more jobs are created to meet that demand. More workers means more people paying taxes that pay for the services that we all use. In short, if you boost job creation economic growth will follow. It always works that way. It doesn't always work that way when you lower taxes or cut debt.
Joining me now are Stephen Moore, editorial writer at the "Wall Street Journal" who thinks cutting taxes cures all ills. Mohamed El-Erian, CEO at PIMCO Investment Management, the world's biggest bond investor.
Steve, I'm poking the bear this morning. With three jobs reports to go, President Obama needs to add an average of 105,000 jobs per month in order to say that he won back all the jobs lost during his presidency despite inheriting the worst recession since the Great Depression.
That is very doable. And I'm reading a lot of reaction to Friday's 163,000 jobs added from Republicans that is negative and flat-out wrong. More jobs are needed. This is a positive report any way you slice it. You agree with me, right?
STEPHEN MOORE, EDITOR WRITER, WALL STREET JOURNAL: I agree partially. I mean there were -- this is the tale of two surveys. And I don't want to get too much into the weeds. But you know the survey that showed the increase in unemployment rate, that's a survey of households. That actually found that employment fell. So all I'm saying is that we're not out of the weeds yet at all.
And the only thing I agree with almost everything that you said. Look, I'm a growth guy. I agree with you that growth solves almost all problems. It brings the deficit down. It puts people back to work. It hopefully leads to higher wages. But when you went through that -- how the chain of how jobs help the economy, you left out an important part, Ali. It starts with the employer.
MOORE: And my problem is that what we've done under Obama over the last 3 1/2 years is really punished employers with taxes, regulations, and if you don't have an employer, you don't have the job that gets the chain started in the first place.
VELSHI: All right. I want to bring in Christine Romans, host of "YOUR BOTTOM LINE."
Christine, tell us what we're talking about. Break down Friday's jobs numbers for us starting with private sector hiring, the thing we count on, the thing that Stephen is talking about, we need employers to hire people.
CHRISTINE ROMANS, HOST, YOUR BOTTOM LINE: Yes, and if you didn't have the government hold me you back, you would have done a little bit better in that jobs report on Friday. Nine thousand public sector jobs lost but 172,000 private sector jobs created.
So you've had private sector job growth, Ali, now for more than two years. Something the White House keeps pointing out and millions of jobs, quite frankly, created in the private sector over the past couple of years. This is the trend. This is the trajectory. That people are still fighting about. How we've come out of this horrible period of job loss and how robust or how not robust this recovery has been. Here is the last month. You showed that earlier in the program. And it's a lot better than what we've seen in the past three months. One of the things that was interesting also, Ali, in this report, manufacturing. Manufacturing jobs up 25,000. Caught some people by surprise quite frankly because of the headwinds from Europe and there's been a lot of talk about a nascent manufacturing recovery in this country, at least in the last month. Manufacturing jobs held in there -- Ali.
VELSHI: That's interesting. Because if you look back in, you know, the last 75 or 80 years, there are a number of things that have driven this economy, Christine, manufacturing, that cheap credit, housing, technology.
Let's bring Mohamed El-Erian in.
Mohamed, I think we're all agreed and I think everybody across the political spectrum has agreed we need growth and that job creation would create growth in America. What is the thing that's going to do that?
Let me put just this in context because Mitt Romney claims that under his presidency, he can gain 250,000 jobs a month for four years straight. You need a driver to do that. That's not just general growth.
MOHAMED EL-ERIAN, CEO, PIMCO: Correct. Ali, and the important thing to realize is there is no killer act. There is no single thing that will create these jobs. What we need is simultaneous movement on a number of fronts. The functioning of the labor market, the functioning of the housing market, the credit market, infrastructure, fiscal reform.
So it's a long list and there are two realities. And these realities are as true for President Obama as they would be for anybody else in the oval house -- in the oval office. First and foremost, a political system is not allowing us to converge to a common analysis let alone a solution. And secondly, the international environment is tough. Europe is having a major crisis.
So unfortunately, it's going to be rough going to create the source of jobs that Mr. Romney is indicating.
VELSHI: Let me ask you this, Stephen. And this is the part that frustrates me because the last time we created 250,000 jobs or more for four straight years was 1996 to 1999. It is largely an impossibility. You hear it all the time. You hear economists saying, well, what we need is 250,000 and 300,000 jobs a month to get back to where we were.
That's just not something that typically happens in our economy. And it's not something that most economists are predicting will happen in our economy. It strikes me that this takes this discussion into a strangely political and misleading place.
MOORE: Yes. I disagree. Look, I think we can accomplish 250,000, 300 -- even 400,000 jobs a month. I mean as you just mentioned, Ali, we're still, what -- we're something like 12 million unemployed and we're still about 4.5 million jobs short of where we were in 2007. So this is the pickup period where we should be seeing this kind of really robust increase in job creation. We saw those levels of job creation in the Reagan years.
And one of the things that you said about me was that I think that tax cuts solve all ills. I don't believe that. But I do think that we have a tax system, the way that we're taxing is very contrary to growth. We reward debt over equity. We reward consumption over investment. And those kinds of -- and I think the rates are too high. And we depend too much on the top 2 or 3 percent to pay too big a percentage of the taxes.
So what I'm saying is I think if we restructured our system in the way that I think Republicans and Democrats could agree on, I think you get more growth in this economy and you get the jobs that you and I want to see.
VELSHI: Again, no disagreement there. The issue is we see how long it takes to get anything done --
MOORE: That's true.
VELSHI: -- to the concept that we would reform our taxes and restructure our economy fast enough that we would get four years of growth at 250,000, I just think it's impractical. I don't disagree with your thinking on this.
Mohamed, Stephen, stay where you are.
Coming up, here come the storm and Congress is not doing enough. Here's a Congress which could help and it's becoming part of the problem. If they don't act, is there anyone else, anyone else who can save you from the storm? I've got an idea.
VELSHI: Job creation is the paramount issue for Americans this election season. But our partisan politics damages America's ability to implement a solution. This week is the first anniversary of the debt ceiling debacle between Democrats and Republicans in Congress. That colossal waste of time that sidelined the focus on creating jobs in favor of an ideological debate on government spending that didn't have to be had when it was had.
The intense partisan blackmail by both sides, and -- I know I'm going to get your tweets on this, by both sides that nearly shut down the government led to a downgrade of the United States credit rating.
Now a year on and Congress is ruining the compromise that it came up with. So-called sequester legislation that mandates a trillion dollars of automatic across-the-board spending cuts starting in January that could trigger millions of layoffs starting on November 2nd. Layoffs because of Congress when we actually need new jobs.
Mohamed, I have said that Congress has gone from being benign to threatening. Am I wrong?
El-ERIAN: No, you're right. You're absolutely right. Not only is Congress not able to take the measures that we need, but as you just pointed out, it actually pulls back the economy. If this fiscal cliff that you're talking about, and let's remember, it's not just on the expenditure side, but it is on the tax side, if this fiscal cliff materializes, we will go into recession.
VELSHI: Yes. Yes. And this is -- you've said this before. Increasingly people are saying this.
Stephen, let me ask you about this. I want to go back to that graphic where I indicated how one of the best ways to get economic growth and that is get people working. They're no longer recipients of government money. They pay taxes. They create demand. Demand creates jobs. It pays down -- you know, all of that kind of stuff.
Why don't we skip to that stage? Let's agree that we think that a better tax system will benefit employers and employees in this country. We believe that, you know, lowering our debt and deficit is necessary and important. But why don't we put all our energies into solving the job crisis.
You know, it's such a waste of time in Congress. They had ceremonial votes on things that are never going to happen.
VELSHI: Which wastes American's time.
MOORE: Because there's a big difference on -- the big disagreement, Ali, about how you create those jobs. And look, you know this is the one year anniversary of the debt ceiling debacle. But it's also another important anniversary, the 100th anniversary of Milton Friedman death, one of the great economists and the supply side free market hero of people like me.
MOORE: And what Milton Friedman is famous for saying is there is no such thing as a free lunch. That if government spends a dollar, it has to come out of the private sector.
MOORE: And where I disagree with the two of you is --
MOORE: -- I actually think government spending cuts right now are positive for the economy because it takes resources out of the government and it gives it to the private sector and that's what Milton Friedman was famous for.
VELSHI: But what if they don't spend it in a way that generates growth? Here's our problem. MOORE: Right.
VELSHI: Let's say you're right. And there is some chance that you are right. If you're wrong --
MOORE: A good chance.
VELSHI: -- we then go into a recession.
MOORE: Right. Well, look, we've been in a lousy economy for four years. And I would say, Ali, we've tried it your way for -- and Barack Obama's way for four years with this day looser spending and debt out of the government. And it just hasn't produced the results that you or I want to see. So what I guess I'm saying and what Mitt Romney and some of the Republicans are saying is let's try something different.
Let's not -- you know, what I love about the show is it's consumer finance oriented or it's individual in the household. A household --
MOORE: -- that has a massive amount of debt doesn't say you know what we should do right now is go out and incur more debt and spend more money. But that's what the federal government does.
VELSHI: Mohamed El-Erian, Stephen makes a brilliant point. That we sit here and look at all the ways in which we can increase demand and consumption and growth. And yet that is -- guys like you watch countries that do that and say that is kind of what got us into this pickle in the first place.
El-ERIAN: Yes. I think that this discussion risks going into corner solutions. That people get pushed into extremes. I suspect that the three of us sat together and if the issue was only about economic measures, there wouldn't be much difference.
Yes, we need to have a better spending and entitlement process. Yes, we need tax reform. Yes, we need to reform the labor market. Yes, yes, yes. The problem is a set of social judgment that's come along with this. What's our obligation towards the most vulnerable segments of society? What is the right contribution that the rich should make back to society?
This is where we get stuck. And then we end up suggesting that the economics is really different. I don't think it is. I think it's the social judgment --
El-ERIAN: -- that are different.
VELSHI: And actually that takes us full circle, Stephen, to where I started where I said if I were, if I were somebody looking to hire somebody and Mitt Romney and Barack Obama were applying for the job, I'd probably want them both in because I think they're smart, creative guys. But it is the politics that's different. It's also the politics that's ruining things and could send us into a recession.
So what is the solution from your side? Because I think we need solutions from both sides to say let's get out of our corners and come to the middle and find the thing that can allow us to move forward and create jobs and create growth?
MOORE: Well, I agree with you. I think right now that -- I have been in Washington for 25 years. I've never seen the differences between the two parties. It's like a Grand Canyon right now, Ali, and it's something that frustrates you and me that they can't get together and reach some kind of agreement about these big problems that we've known about for years and years.
Now, look, I fall on the side of I think some of the top priorities, our tax reform and getting these entitlements under control so we don't have this long-term debt. I do think -- I've said this before on your show. I think the economy is really prepped for a big expansion. There is a lot of money on the sidelines. We've got low interest rates. You know, the U.S. is still the hub of the world economy. So I just think that a recovery is possible. But politics is ruining things right now.
VELSHI: Yes. You're absolutely right on that. And I think that's the irony of this economy that there is a chance we can be in recession in six months and there's a chance we can be growing faster.
MOORE: Yes. Exactly.
VELSHI: And -- a lot of it, some of it lies with Europe but a lot of it lies with Congress and politics.
Mohamed, stay where you are. Stephen, always good to talk you to. Thanks very much.
MOORE: Thanks, Ali.
VELSHI: Stephen Moore, editorial writer with the "Wall Street Journal."
Hey, by the way, you've heard from these two guys. You've heard from me. I want to hear from you. I say economic growth comes down to creating jobs. So let's table the talks and talk of tax cuts and debt reduction for the time being and handle it later.
You want to debate with me? Tweet me, @Alivelshi. But you know, be ready because I'm reading every last one of them and I'm ready to do battle with you.
All right. Coming up next, your Congress refuses to act to protect you from the coming storm. But there are other options. The Federal Reserve is one of your best hopes to avert the storm. But they're not quite convinced that you need the help. I'll ask Mohamed El-Erian what they're waiting for next on YOUR MONEY. (COMMERCIAL BREAK)
VELSHI: You probably think I'm a broken record with this economic storm warning. There's an economic storm coming to our shores. I think I'm right. I could be wrong. You know what? If I'm wrong, nobody gets hurt. If I'm right, you get a chance to protect yourself from it.
Now Congress, which has to help you, isn't doing it. But they're about to take a summer vacation. So don't hold your breath for help from Congress in averting a possible recession. There are other entities that can shelter us from the storm. And one of them is the U.S. Federal Reserve, the central bank of the United States. I'll explain how.
Federal Reserve chairman Ben Bernanke and company can act independently of Congress and the president but this week they said they might not be willing or ready to do anything more until they are more certain that the storm is upon us. However, this group has been making big moves over the past years and that has helped the recovery. They lowered interest rates. That's been the Fed's traditional method of boosting the economy.
When you lower interest rates, it makes money cheaper. It attracts people to borrowing that money. They build factories, employ people or they just borrow it and spend it. That creates demand. It creates jobs. But after dropping interest rates to historic lows, near zero percent in 2008, well then the Fed doesn't have any more tools. It has to get more creative.
So they started an unconventional program known as quantitative easing. The point is to put cash into the economy without just printing more money. And to keep interest rates very low to encourage lending and eventually, as I explained, spending. So the Fed bought hundreds of billions of dollars worth of risky mortgage bundles from banks and treasury bills.
The economic recovery eventually lost some steam. That's when so- called quantitative easing 2, QE-2 began. QE-2 was another huge round of buying with the hopes of putting more money into the economy, which consumers and businesses would then spend.
Well, investors like the move. It didn't have the desired impact on the economy, however, so in September of last year the Fed unveiled a new plan called Operation Twist. By the way, Operation Twist got its name in the 1960s when the Fed did something similar and the twist was a popular dance.
Same idea here but a different execution. The Fed -- stay with me here -- would sell short-term bonds and buy long-term ones. The idea is that while short-term interest rates were very low, this would make long-term interest rates low. That operation twist is still going on.
Mohamed El-Erian is back. He understands all of this far better than I do. He's the CEO of PIMCO, the company that trades more bonds than any other. Mohamed, does the Fed have anything left to help shelter us from this impending economic storm?
El-ERIAN: The best the Fed can do, Ali, is postpone the storm a little. Why? Three reasons. First, it doesn't have the tools to promote growth and to deal with our other structural issues. Second, it is hesitant to move too early. And you saw that in the last meeting. They have every reason to move. But they didn't. Why are they hesitant? Because they are worried about what's happening away from us. In -- in Europe in particular.
And third, every time the Fed does what you said they have done, they create collateral damage. They create a problem somewhere else. That's why the Fed is hesitant because the best it can do is delay the storm. But it can't completely avert the storm for us.
VELSHI: Talk to me about the collateral damage. What, other than the fact that if you're a saver, this is a horrible environment for you. What is the collateral damage that the Fed can impose by creating more liquidity and by more liquidity, I mean somehow putting more money into circulation, giving that to banks so that they are able to lend it out more easily?
El-ERIAN: So you mentioned what the Fed is trying to do. It's trying to take interest rates on safe assets like treasuries and mortgages as low as possible in order to push all of us into taking on more risk. And if we take on more risk, animals (INAUDIBLE), confidence goes up, and guess what, you could get a good outcome. But it doesn't work.
Now what is the collateral damage? When you take interest to artificially low levels, you start breaking things. The pension industry, the insurance industry, these provide services to people like you and me and they're having tremendous difficulty. Also, the Fed is intervening in markets directly and they're changing the functioning of markets. So as Chairman Bernanke -- and he's been incredibly honest about this, Ali.
Back in August 2010, he first introduced this phrase and has been repeating it nonstop. He says, you know what, when we intervene unconventionally, there are benefits but there are costs and risks. And what everybody is recognizing is that the expected benefits are coming down and the expected costs and risks are going up.
VELSHI: OK. So -- two things you pointed out which are very interesting. Insurance companies and pensions depend on investing in order to be able to provide the money that they promise their beneficiaries. Some of that investing has to be very secure. And this affects their ability to do things. And if the Fed keeps rates unnaturally low, it could mean that assets are not priced in a way that they would be priced if it was just -- if they were just market prices. So it puts things out of whack.
So explain this to me. The Fed said this week after they met, quote, "We will provide additional accommodation as needed to promote a stronger economic recovery and sustain improvement in labor market conditions." What does that mean to somebody like you? They said we will provide additional accommodation. Doesn't mean they're providing hotel rooms. What is it that they might do if they feel they need to act?
El-ERIAN: They will continue to experiment. That's what they're going to do. So they have a range of measures, four in particular, that they can take. And it takes -- it becomes very detailed. But what they want to do is try to assure people that things are going to be OK so that we spend more, so that we take more risk. So they're trying to assure this by either keeping interest rates artificially low or by telling us that rates will stay low for a very long time which they've done that already.
So what they're trying to do is basically encourage us to spend. But Americans aren't stupid. They know our political system is dysfunctional. They know our labor market is having problems. They know Europe is in crisis. So people aren't spending. There is a certain segment of the population that has the wallet to spend but the not the wealth.
VELSHI: Yes, and they got caught. A lot of Americans got caught in the last recession without any savings. So I think they're a little bit more cautious than they were then.
Mohamed, always a pleasure to talk you to. Thanks so much for joining us.
All right, you've heard it. The economic storm headed our way. But I want to be fair. There are rays of hope. The market is up for the year. Way up. What does that mean? How do you invest your way to personal protection from the storm? I'll tell you on the other side.
VELSHI: All right. You've been listening to me rail on and on about this coming economic storm and the fact that your elected officials are doing nothing to protect you from it. You've heard me talk about political partisanship blocking your paths to prosperity and affecting everything from your job to your mortgage and your investment.
Let's face it, the U.S. economy is barely crawling along right now. But even I can't ignore what has been going on in the stock market. Could the market protect you from the storm? I know, I know it's pretty tough week for stocks outside of Friday. And investors were clearly disappointed by the central banks of the United States and the Eurozone not doing what they hoped they would do.
But take a few steps back and realize that the S&P 500, the broad market is up nearly 7 percent. This is all happening in the midst of a pretty pronounced economic slowdown in this country, not to mention the crisis happening across the Atlantic. One thing is pretty clear. The economy and the stock market are heading in opposite directions or at least not heading together in the same way.
Recent data, economic data from this week tells us this. Your income has finally started to rise. But as Mohamed said, you are filled with uncertainty about your job and the global economy. You're not stupid. So you're not spending. You are saving more. That's not bad. Not fantastic for the economy. And basically, if you're saving, you're barely earning anything on your money anyway.
The more you save, the less you spend. Nearly 13 million of you are out of work and that is not likely to change much no matter who is elected president at least not in the immediate future. Economic growth continues to slow which means companies are going to be less likely to expand, to hire and open new plants. So, yes, the market, the stock market is rising. But it's not retail investors like you who are driving it.
Instead, the market is being driven by hedge funds and big institutional investors who are loading up on big blue chip dividend paying stocks because that is the only place they can generate yield. You heard Mohamed talking about this. Insurance companies, pension funds. They have to get a return.
Corporate earnings have been lukewarm at best. Companies like Caterpillar which are tied to global construction and manufacturing are showing some signs of life. But those businesses that are tied to consumer spending around the world are feeling the pain.
Look at Starbucks, McDonald's, and Procter & Gamble. All of them reporting lower sales, lower demand, lower stock prices. But there is money to be made in the market. And I want to talk to two men who make their living making money for investors.
David Kelly is the chief global strategist for JPMorgan funds and Josh "Downtown" Brown is the head of equity trading for Fusion Analytics.
Gentlemen, good to see you.
David, you compare the economy right now to your recent experience sitting on a plane on the tarmac waiting for takeoff with 35 other planes in front of you. In other words, economic growth is taking a long time. You expect it to happen. But it's taking a long time. So should my viewer be investing in this weird, hard-to-calibrate sluggish environment?
DAVID KELLY, CHIEF GLOBAL STRATEGIST, JPMORGAN FUNDS: Yes, your investors should. I mean the analogy about a plane on a taxi way, it works two-ways. We're only moving forward slowly but we're not in any danger of stalling out and crashing. And I know this goes against your theme, Ali, but if you look at the cyclical sectors of the economy, orders, home building, equipment spending, inventories, they're all so low that they're under very little risk of collapsing.
They're much more likely to build slowly. And if the build sectors build, I don't think we're going to see another recession. And I think that's what institutional investors realize that the economy is going to grow slowly. But if you look at the (INAUDIBLE) pricing of stocks and bonds, stocks are cheap. And also on earnings, actually companies are earning pretty good money. This quarter, the second quarter will see the strongest operating earnings of the S&P in history. So I think earnings are doing pretty well in this relatively sluggish economy. People think that we will muddle through it with metal force. I think that's why institutional investors are putting some money in equities.
VELSHI: OK. So you're muddling forward. It could be a bit of a -- I don't disagree with you on the housing start. But I identify housing and for that mat autos much of which tied to housing, particularly on the sale of light trucks, as this bright spot in our otherwise sluggish economy. So we may not be in disagreement.
Let me bring Josh in for a second. Because you've also got an interesting analogy about why the market is -- parts of the market are performing well and the economy feels sluggish. You say they're like second cousins who may be related but don't particularly get along and they see each other at family reunions every once in a while.
JOSHUA BROWN, VICE PRESIDENT, FUSION ANALYTICS: Well, so I think, you know, to extrapolate that the stock market is for 7 percent year-to- date and that -- and that's somehow going to save us, I think it's a little bit of a stretch. I wish it were true, unfortunately, and even the Fed is operating based on this misunderstanding.
The wealth effect from the stock market is very overrated. It's the thing that Alan Greenspan got wrong consistently and unfortunately it's being continued by Bernanke. The wealth effect from housing is significantly more important.
And I think the way to think about this, any kind of short-term stimulus that the Fed tries to hit us with, unfortunately people don't spend based on temporary help. They only spend when things appear to have permanently improved. And we have not been able to manufacture that in the mindset. So let's look at that 7 percent very quickly and how it really relates to the economy.
I think it makes perfect sense. Most of that strength is apple in the -- in the first quarter and then you've got leadership that you don't want.
BROWN: You don't want the utilities at a premium multiple to the market 15.5 times earnings.
VELSHI: But -- OK. So David and Josh, when -- when my viewers are looking at their -- if they have a well-diversified portfolio, they'll see some of it going up and they'll see some of it really, really struggling. So I need to explain to my viewers how it is that you use the market to protect you if your Congress won't protect you, if there is a coming storm, how do you use the market.
Stay exactly where you are because I'm going to come back.
Now if you're thinking of using the market to protect yourself from the storm, how do you do it? Well, tweet me @Alivelshi. Managing your money can be scary for anyone. So I want to hear from you and get an idea of what you are doing with any money you may be investing right now or whether or not you're interested in investing it. I mean you have every good reason not to trust the markets right now. But you may need them.
When we come back, we're going to see where else these two guys might be seeing upside in the stock market and how you can avoid those bear traps.
You're watching YOUR MONEY on CNN.
VELSHI: It is a fact that many of you watching me right now are not willing investors in the stock market. Many of you might be because you have a 401(k) or an IRA or a pension fund or an insurance policy that depends on the stock market for return. But many of you don't choose to invest in the stock market. And for every reason I give you to invest you probably have nine reasons why not to including the fact that the deck is stacked against you, and the households all the cards.
So I want to bring in Christine back. Christine Romans, my pal, the co-author of "How to Speak Money."
Christine, we spent three chapters of our book talking about diversification, balancing your portfolio with an aim to getting people into the stock market because it is hard to make -- to create wealth without it. But in this uncertain economy, mom and pop investors watching us right now are bailing out of stocks. They are losing. They are losing money on this. I'm worried that they're losing their long-term perspective. Tell me about this.
ROMANS: Ali, some might be losing their long-term perspective. Others might just be seeing the gathering storm and they want to minimize their exposure to the stock market.
Remember, the market isn't just stocks, right? You know this. It's -- it's a stock market. It's a much bigger market, this is the credit market, the bond market. There's cash and there are alternative investments so the important thing for individual investors who watch all of the data, an election year, everything you're hearing about what's going on in the economy and the rest of the world better know what your risk tolerance is, what your objectives are for your money and you have to be calm and rational.
I know that sounds counterintuitive. But if you -- if you know how you're supposed to be diversified and you continue to, you know, allocate your money properly and to rebalance, you should be fine.
VELSHI: David, I've been warning my viewers about the potentially disastrous consequences if lawmakers don't stop playing politics and steer us away from the fiscal cliff. I've even said we could, we could. I don't really hope this happens but it could be pushed into a recession.
Do you think I'm wrong? And do you think your investment strategy should change if that's the case?
KELLY: I don't think we're pushing into a recession. I mean what we need obviously is a fiscal ladder, not a fiscal cliff. We need to bring the deficit down by 1 percent of GDP per year over the next few years. I wish both candidates would agree on that. This is something both sides can agree on. I'd like to hear them say that, something that -- a huge gift that both candidates can give to the American people is tell people that they will gradually bring the deficit down in a rational adult way.
But having said that, I think that eventually we're not going to -- we're not going to fall off the fiscal cliff because lawmakers will not impose the biggest tax increase in modern history upon the American population in early January. I just don't think that's going to happen.
But whether we're heading for a storm or not, I agree with Christine's basic idea, be diversified. I don't agree that you should overweight the sectors that have done well so far necessarily. Things like health care and utilities. Those are very defensive areas. But when we look at the cheapest thing in markets is generally the things that people have been scared of. Things like automakers. I mean auto sales right now -- we haven't seen a month of average auto sales in over four years.
And so from this point, very likely auto sales will go up and I think automakers will do quite well out of that so --
VELSHI: Josh, let me ask you this. Let me just ask you this point that stood from what David said. And he said the cheapest sectors right now are those that people are scared of.
BROWN: You could have said the same thing --
VELSHI: I mean the bottom line is isn't some of this an opportunity?
BROWN: You could have said the same thing six months ago. You could have said the same thing six months ago. And they've gotten cheaper, coal, heavy industrials. They're not working. And there's a reason why they're not working. Two reasons, in fact. Number one, earnings growth is not there. And in fact, last quarter was horrendous for economically sensitive sectors.
Number two, there's P.E. multiple compression. What does that mean in English? P.E. multiple compression is even if earnings stay the same, or grow, if people are willing to pay less because they're uncertain about the future potential of those earnings, those stocks are not going higher. I'll give you a fantastic case in point.
Wal-Mart tripled its earnings over the last 10 years but just now broke out of the 10 point range it's been trapped in. So truthfully, when you have P.E. multiple compression, to be in coal and automakers because they're, quote-unquote. cheap, really if the earnings keep going down and the multiple keeps compressing, you're going to lose money. So I think being tactical and selective makes more sense.
VELSHI: David, let's -- let me ask you --
KELLY: Let me just say something --
VELSHI: Let's respond to that, yes, because some of these things might be cheap. But what == what do you do if Josh's scenario is correct, that might be cheap but still nobody wants to buy it?
KELLY: This is very important. Statistically we don't have enough secular bear markets in history to be able to make any concrete statement about the -- what the low point for P.E. ratios ought to be. That's the first point.
Second point id if you have a very low interest rate and a low inflation environment, you ought to have a lower low point for P.E. ratios. P.E. ratios should not ne independent of inflation interest rates. And we do have a lower inflation interest rate environment. So that tells me that you can't use what -- you know, where, for example, at the end of the 1970s and the early 1980s as the target for the P.E. ratio.
I'd rather just look at the overall economy, look at the gradual movement forward in earnings. Look at the fact that interest rates are so low and the relative evaluations of stocks and bonds are so far apart. I'd rather not make a bet on how low P.E. ratios will go. I'd rather bet that in the long run the global economy and the U.S. economy will move forward. And if diversified and disciplined, I'll be able to benefit from that rather than getting victimized by being overweight the wrong sector.
VELSHI: Well, I -- my viewers win because two of you have entirely different opinions about what's going on with the economy and the stock market. So you guys get to choose and for all of this explanation, particularly the explanation on valuation of a stock, P.E. and whether cheap or expensive, so why I appointed you to the book, "How to Speak Money" because we spent a deal of time explaining that in plain English. It is central to your decision to invest in the stock market.
David Kelly is a chief global strategist at JPMorgan Funds. Josh Brown is the vice president at Fusion Analytics.
Excellent, excellent discussion, gentlemen. We'll do this again soon.
All right, lots of talk from the central banks in the United States and Europe. But where is the action? Will either of these guys step up before the economic storm is upon us? I'll tell you on the other side.
VELSHI: There are two looming storm clouds threatening your prosperity. Europe's debt crisis and the fiscal cliff that we're headed over if Congress doesn't act. Last week central bankers in the United States and Europe held separate meetings. The guy on the right is the European one. The guy on the left is the American one. Neither announced new monetary action to confront the storm that is upon us, those headwinds. Not yet, anyway.
So did the U.S. Federal Reserve and the European Central Bank meet for more idle talk or might they be preparing to take new, concrete, decisive action to address the economic storms?
Joining me now for some cross-Atlantic debate from London is Richard Quest, the host of "QUEST MEANS BUSINESS" on CNN International.
Richard, the question is, did the central banks fail us last week by giving us more idle talk? And I'm going to answer first, Richard. Why don't you start by giving me 60 seconds on the clock.
RICHARD QUEST, HOST, QUEST MEANS BUSINESS: You have 60 seconds starting -- now.
VELSHI: All right. The Fed did exactly what I expected them to do, nothing. They could have decided to print more money, to inject it into the economy by buying back bonds. QE-3, the third round of quantitative easing will have to wait. How long? My guess is that the Fed may decide to take stronger action in September if the U.S. economy hasn't improved by then. July's job numbers show that there are signs of life in the U.S. economy and central bank intervention might not be necessary.
So I'll withhold my judgment on the Fed for now, but Richard, the European Central Bank is acting like the U.S. Congress. They're being time wasters. The U.S. recession -- the U.S. may go into recession, but Europe's already there, and a two-year long series of missteps and half measures have not helped.
Last month the European Central Bank's president, Mario Draghi, insisted that the ECB was ready to do, quote, "anything to preserve the euro." Well, with the storm's destruction threading across the continent and making its way to these shores now is the time to act, Richard.
QUEST: Whoa. What a lot of hot air from the city of dreams of Las Vegas. Give me one minute on the clock starting now.
Two central banks, so little action, especially from the ECB, the European Central Bank. How could Mario Draghi have said only last week he would do whatever it takes and then, if you please, tell us it will be enough. Then, of course, at the meeting, nothing. The phrase they use again and again, they say over coming weeks we will put together plans that are appropriate. Coming weeks.
As for the Fed, they're talking about providing this accommodation as needed. The ship is sinking. They're hulled beneath the water line. The markets are looking for confidence and on both sides of the Atlantic the central banks still have their heads in the sand or perhaps somewhere more appropriate. It's time for action.
VELSHI: All right. We are -- we are joined on that, Richard. We'll get that message to the heads of the central bank.
Richard Quest, host of "QUEST MEANS BUSINESS" on CNN International.
All right. Q and A and you. You heard Richard and me, now it's your turn. Get on Twitter and let me know if you think it's time for the Fed to step up and protect us from this storm before it's too late, @Alivelshi. I read them all and I'm ready for you.
Coming up, with Congress refusing to act, it's time for the boss to step in and handle the situation. I'll tell you what Congress was busy with this week when they should have been protecting you and I'll reveal who I expect to do something about it.
VELSHI: Your Congress refuses to act to save you from the potential economic storm that may be headed your way. Instead, House Republicans spent the week voting to extend the Bush tax cuts for all while Senate minority leader Mitch McConnell pushed to attach an amendment to repeal Obamacare to a bill about cyber security.
Congressional Democrats are at fault here as well, at a time when we needed our leaders to think big about creating jobs, they instead resort to sending cheap, political messages to each other at your expense.
If I told my boss I was going to send them a message instead of doing my job. He'd send me a message, too. He'd probably fire me, and he should. That's something for you, the voter, to consider because you are the boss. So as the boss of a Congress who refuses to work for you, what do you plan to do it?
Tweet me right now. I read them all and I love the debate with you, you, @alivelshi or find me on Facebook.com/Alivelshi.
Thanks for joining the conversation this week and every week on YOUR MONEY. We are here every Saturday at 1:00 p.m. Eastern and Sunday at 3:00 p.m.
Have a great weekend.