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March Madness; Investing in Crazy

Aired March 2, 2013 - 09:30   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.


CHRISTINE ROMANS, HOST: All right. Hi, guys. See you at the top of the hour.

Good morning, everyone. I'm Christine Romans. And we are live for a special edition of the show this morning.

Did you notice anything different when you woke up? We didn't think so. But the forced spending cuts are here. Washington calls it the sequester. Should you be afraid?

(BEGIN VIDEOTAPE)

ROMANS (voice-over): It's not Armageddon, but it is the opening credits of a very scary movie.

Here's the horror story the White House is telling. A world more dangerous than it was yesterday.

BARACK OBAMA, PRESIDENT OF THE UNITED STATES: What the sequester does, it uses a meat cleaver approach to gut criminal investments.

ROMANS: The cuts are indiscriminate, some are frightening. Less oversight and fewer audits of some nuclear facilities, hampered counterterrorism around the world, fewer food inspections, higher risk of wildfires. fewer HIV tests, a more dangerous border.

But it's a horror story not everyone is buying tickets to see.

GOV. BOBBY JINDAL (R), LOUISIANA: I think that the president needs to stop trying to scare the American people, that absolutely you can cut less than 3 percent without all these awful consequences.

ROMANS: Maybe so, in which case, the scariest thing about all of this is that Washington is so inept. It's either scary or comical. Like the movie "Groundhog Day."

August 2011, a deal to raise the debt ceiling spawned a new crisis, the fiscal cliff, a deal to avert that pushed automatic spending cuts, the sequester, to March 1st.

Oh, and this cliff diving isn't done yet. President Obama has yet to release a budget for the next fiscal year. That could come in mid-March. Then, March 27th, the U.S. faces the threat of a government shutdown.

Basically, the Fed's run out of cash to operate. And Congress, scheduled to be on a two-week break when that deadline hits. So expect more political theater.

As for this act, when the House speaker has to be bleeped --

REP. JOHN BOEHNER (R-OH), SPEAKER OF THE HOUSE: We should not have to move a third bill before the Senate gets off their (EXPLETIVE DELETED) and begins to do something.

ROMANS: And the president says this --

OBAMA: If it's not a good way to run a business, it's sure not a good way to run a country.

ROMANS: -- you know Washington isn't working and this scary movie is far from a happy ending.

(END VIDEOTAPE)

ROMANS: No deal and more deadlines ahead, yay.

Ali Velshi is CNN's chief business correspondent. He's the host of "YOUR MONEY". He's joining us from Washington where he has a front row seat to this latest debacle.

Jeanne Sahadi has been writing about this debacle. She's senior writer at CNN Money. She's owned the sequester story like no one else.

And Greg Valliere is the chief political strategist at Potomac Research Group.

Nice to see all of you this morning.

The debt debate to nowhere continues. And they're still arguing this morning! Listen.

(BEGIN VIDEO CLIPS)

OBAMA: It's happening because Republicans in Congress chose this outcome over closing a single wasteful tax loophole that helps reduce the deficit.

REP. CATHY MCMORRIS RODGERS (R), WASHINGTON: The American people know full well that if they give this White House more tax revenue, it will be spent on new stimulus projects and government programs.

(END VIDEO CLIPS)

ROMANS: Well, that sounds an awful a lot like, say, August 2011, Ali.

There are three options here -- you can cut spending, you don't cut spending, or you cut spending wisely.

ALI VELSHI, CNN CHIEF BUSINESS CORRESPONDENT: Right.

ROMANS: The last choice is the best, so why is that the only thing they're not considering?

VELSHI: Because cutting spending wisely still cuts spending and we're addicted to the kinds of stuff that our government provides, particularly in the areas that are not really being cut, including entitlements -- the Social Security, Medicare, and Medicaid. There are some changes to Medicare, which you've talked about and you're going to talk about in the show.

But fundamentally, in order to effect the debt long-term -- this is something that Jeanne has really done a lot of work on, you have got to reform the entitlements and you have got to deal with our tax policy, which is not always pro-growth. Taxes are a politically difficult thing to do, so they're not dealing with that now, but entitlements are the third rail. They're just very hard to touch politically.

So this allows these cuts to take place, without any one having cast a vote on it. So everybody can wash their hands of the blame. That's why.

ROMANS: I think a lot of people in America this morning are waking up too, and they're tired of this story. They're tired of hearing about forced spending cuts, but mostly, they're tired about how Washington has behaved.

There's also a lot of misinformation about it. I want to bring in Jeanne here.

Jeanne, you identified four myths about the forced spending cuts.

First, that the world would be different on Saturday. It's Saturday, and from what we can tell, the sun rose and the sun will set.

Second, President Obama is to blame for the forced spending cuts. We know both sides played a role with creating this mess, so that one is busted too.

Jeanne, talk to me about those last two, that it's hard to cut $85 billion and that the cuts will be bad or no big deal.

JEANNE SAHADI, SENIOR WRITER, CNN MONEY: Yes, a lot of people are saying, $85 billion, a $3.5 trillion budget, what's the big deal?

That's true. That's a fair point to make. ]

But that's not what we're doing. We're cutting $85 billion out of seven months of funding for the smallest parts of the budget. So, it's really more like $85 billion out of $600 or $700 billion. So it's closer to a 10 percent cut overall.

And what was the fourth one? I'm sorry?

ROMANS: It either doesn't matter or it's good for the economy. It's somewhere in between. We don't know.

SAHADI: There are extremes. That's correct.

We know that the CBO has said, the Congressional Budget Office, look, this is going to slow growth. It's not going to put us into a recession. It's going to cost us 750,000 new full-time jobs that would have otherwise been created. We're going to have very tepid growth this year as a result.

Even if we didn't have a sequester, the growth would not have been write home to mom about.

ROMANS: Right.

SAHADI: But now it's going to be even less impressive.

ROMANS: Let's bring in Greg.

Has the president's tone, Greg, on these forced cuts, I mean, I think it has shifted over the course of these months. Let's listen to the president's rhetoric here.

(BEGIN VIDEO CLIPS)

OBAMA: First of all, the sequester is not something they propose, it's something that congress has proposed. It will not happen.

Now, if Congress allows this meat cleaver approach to take place, it will jeopardize our military readiness, it will eviscerate job-creating investments in education and energy and medical research.

We will get through this. This is not going to be an apocalypse, I think, as some people have said.

(END VIDEO CLIP)

ROMANS: I've been using the word Armageddon, personally. But it won't be Armageddon. But, look, the White House also for months, Greg, told the agencies, spend normally, don't plan for these cuts.

So, what do you make of the tone and leadership from the White House? And where do we do from here?

GREG VALLIERE, POTOMAC RESEARCH GROUP: Well, I think that the rhetoric was so apocalyptic, that it was hurting the administration's credibility. So he had to tone it down yesterday.

Going forward, I would add to Jeanne's list a fifth myth, that it is the myth that it won't affect the markets. It hasn't affected the stock market, because they're on Ben Bernanke happy pills. But it will affect interest rates.

And I think one of the more interesting stories in the last few days is the drop in yields and the rally in the bond market. This is still another head wind. The possibility, slim, but the possibility of a shutdown added to the payroll tax hike, added to the sequester, on and on and on, I think this economy will be weaker. I think interest rates will stay surprisingly low.

ROMANS: I mean, I think the markets at this point are giving some cover, if you will, to Washington ineptitude, Greg, don't you think? Because if you had markets move like -- remember TARP, the bank bailout, when markets fell dramatically, suddenly they got priorities in Washington.

Greg, yesterday we heard both the president and Speaker Boehner say they're already working to avoid a government shutdown at the end of the month. You don't sound like you have any real optimism that that's going to happen.

VALLIERE: Well, I could give you a scenario. It's below 50 percent, where you have two dueling C.R. bills, continuing resolution bills. One by the conservatives would restore funding for the Pentagon. Another from the Democrats would say, well, if the Pentagon can wiggle out, what about domestic spending.

Well, if you have these two dueling bills, and you get close to March 27th without a deal, we'll all be talking, all four of us will be talking in three weeks about the possibility of a shutdown.

ROMANS: So, Jeanne, bottom line, this hurts -- whether it's sequester that stays and isn't blunted by some of the legislation, or government shutdown, that hurts Americans?

SAHADI: It's not good. I mean, we're basically telling people who are going to a job every day, hey, you may get paid less because we might be furloughing if you if you work for the federal government. Or if you work for a federal contract -- well, we may have to shut this down because our contract wasn't renewed. It was gratuitous destruction for not a very good end.

ROMANS: And I know in education, there are a lot of people in education concerned. I did an education conference. I hosted an education conference this week, very concerned because of so much of the federal funding goes right to special ed and low-income students. That's where those cuts would be focused.

Everybody, thank you so much. Have a great weekend.

And, Greg, you're probably right, the four of us will be sitting here talking about this again very, very soon.

All right.

VALLIERE: Unfortunately. Yes.

ROMANS: All right. Call it investing in crazy. If you've checked out your 401(k) or your investments lately, you know what I am talking about. The market is nearing record highs, despite dysfunction in Washington. How should you handle it?

Ali and I are going to explain that, next.

(COMMERCIAL BREAK)

ROMANS: Call it investing in crazy. If the Dow and the S&P 500 flirting with record highs all week, despite the real or imagined threats to our economy, investors are not scared. Maybe they should be, though.

Ben Bernanke issued a warning earlier this week.

(BEGIN VIDEO CLIP)

BEN BERNANKE: Given the still moderate underling pace of economic growth, this additional near-term burden on the recovery is significant. Moreover, besides having adverse effects on jobs and incomes, a slower recovery would lead to less actual deficit reduction in the short run for any given set of fiscal actions.

(END VIDEO CLIP)

ROMANS: Translation, we're going in the wrong direction. 2012 was gangbusters for the market. 2013 is off to an even stronger start, though.

Mutual fund inflows in January were back with a vengeance, $81 billion moving into the market. Low interest rates with no end in sight, courtesy of Ben Bernanke there and the Federal Reserve. Consistently strong corporate profits, a weak dollar that have retail investors diving back into stocks.

Consumer confidence came back better than expected in February, but you have to wonder if that's based on reality. The fundamentals of our economy are still kind of weak. The latest estimate of GDP growth was anemic in the fourth quarter of last year. I mean, look at that chart, only 1/10 of 1 percent growth in the fourth quarter? That's not good.

Personal incomes saw their biggest one-month drop in 20 years. But because the housing market is recovering, people are probably feeling a little bit better. Consumers are spending more and saving less. We're nearing all-time highs for stocks.

But I have to ask the question, are we skating on thin ice here?

I want to bring back Ali Velshi.

Ali, here's Friday's close, here's the record. We're 108 points away from the record in the Dow. I want to pull up a chart on that. Is this rally real? Is it rational? Are we looking at a bubble before it pops?

Look at that, the all-time high is 14,2010, October 2007. Friday's close, really close to that.

VELSHI: Yes, 108 points to go.

All right. Remember when you and I used to work, we'd do our reporting from the New York Stock Exchange, years ago. I don't even know if cable was around then.

ROMANS: Oh, stop.

VELSHI: Back then, the Dow, which was 30 stocks, was a proxy for the whole market and the market was a proxy for the economy. That's all changed. The market is its own beast now. It looks forward, people make money by trading on the differences between stocks and, you know, it's not -- it's not an indication of the whole economy.

So, number one --

ROMANS: But, look, I'm a passive investor, right? If I'm a passive investor in a 401(k), I don't care if these people who are trading something, I don't care about all the stocks, about the kid pumping in.

VELSHI: Correct.

ROMANS: I'm just looking at my 401(k) and saying, hey, it's been a really good year. Why is my 401(k) statement so good when Washington is so bad?

VELSHI: Yes, you know, look, because there's no other game in town. You can buy a house or you can invest in the stock market.

If you want faster returns, you've got to invest in the stock market. You can't keep your money in the bank, you get no interest. Inflation actually beats that. People who are investing in bonds are finding that as the interest rate goes up, the value of those bonds and your bond fund is going down. So people are going into stocks because it's the only place you can make money.

I'd be cautious. We've had a good run up so far, we'll probably get somewhere between 5 percent and 9 percent. I mean, it's very early in the year to predict how the year is going to go.

But the advantages of those low interest rates that you just talked about, which are making people feel wealthy, gas prices have been gone up for a while are now starting to edge down.

ROMANS: Right.

VELSHI: You know, there are positive things going on in the economy right now. That's all adding up to a bullish stock market.

Remember, the economies that you're investing in, in the Dow, and the S&P is not performing as well as the Dow is, those companies generally get a lot of their revenue from outside the United States and they have a lot of cash. Unlike the rest of us who are sitting around, worrying about loans and debt, they've got cash.

ROMANS: And they've been making the their profits, but without hiring and with having money in the bank. And that's something that can be good for your 401(k), but not good for your neighbor.

VELSHI: Correct.

ROMANS: That's the interesting place we're in in the market right now.

VELSHI: It's a little bit of a disconnect, if you're not investing in this market, hold on for a pullback. Don't buy just as a record is being set. If you are invested, sell some of your gains and be ready for a pullback.

(CROSSTALK)

ROMANS: Rebalance -- always rebalance. Be always look to rebalance and you get every downdraft and updraft in the right direction.

VELSHI: Yes.

ROMANS: Ali Velshi -- thanks, Ali. Talk to you again at 1:00.

VELSHI: Good.

ROMANS: Coming up, let's get away from Washington and closer to your backyard, and your front yard, maybe inside your house, actually. If you're selling and haven't had any offers, could it be your paint color or the placement of that couch? Why home staging might help you sell your house.

(COMMERCIAL BREAK)

ROMANS: Congress is so preoccupied with the budget crises of its own making Washington probably hasn't noticed that the housing market is coming back. More strong evidence of that this week.

And even in the New York area, prices aren't rising as fast as the rest country, some sellers are feeling pretty optimistic. They're convinced, spending money on homes now means more money later.

(BEGIN VIDEOTAPE)

ROMANS (voice-over): This home has 30 seconds to make a first impression.

TORI TOTH, HOME STAGER: Car refill (ph) can make or break your deal. Clean up the beds. Cut back anything that should be cut back.

ROMANS: Tori Toth is a home stager. She's prepping this house for sale, outside and in.

TOTH: Home staging gets your home sold faster and usually for more money.

ROMANS: A study by the Real Estate Staging Association claims 73 percent faster. The idea, you've got to spend money to make money, usually 1 percent to 3 percent of the asking price.

Homeowner Marissa Torres is in.

MARISSA TORRES, HOMEOWNER: I'm hoping that when we're ready to sell, that this house will get top dollar and people are going to come in and have the wow factor.

ROMANS: Achieving that wow factor will cost her $7,000 if she acts on all of Tori's suggestions.

She has to declutter and repaint the kitchen.

TOTH: So, I'm really trying to either pull out the gray or a lighter gray so that the cabinets stand out. You want a minimum of three larger appliances on your countertops. Another great tip is to remove everything off of your refrigerator.

ROMANS: The living room furniture should be downsized and rearranged.

TOTH: This is a really spacious living room, except it's not looking like that now because there's large pieces of furniture in here. The rule of thumb is to remove more than keep it in here.

ROMANS: Same thing in the bedroom.

TOTH: If you have a master bedroom that has a sleigh backing on it it's eating up six to 12 inches of your square footage in your home.

ROMANS: New hardwood floors go in here, which will be staged as a second bedroom. But the biggest expense is redoing this -- master bath.

TOTH: So, the tile was old and starting to crack. The bathtub actually has some cracks in it.

ROMANS: All-in, a $7,000 gamble her realtor says will pay off.

ELIOT LONARDO, REAL ESTAT BROKER: I would say that she could probably get between another $15,000 to $20,000 return on her investment.

TOTH: Think about all the money you're going to be making.

ROMANS: It's a bet this homeowner is going to take.

(END VIDEOTAPE)

ROMANS: I'm just so happy people are buying and selling houses again, right?

By the way, Marissa's husband is a carpenter. He's going to do a lot of the work himself that will save money on the labor.

Up next, a bold move by Yahoo. Was calling back of the company's telecommuters an example of good business, poor communication, or both?

(COMMERCIAL BREAK)

ROMANS: Yahoo! CEO Marissa Mayer has revoked the company's longtime work from home policy. Is she bad for working parents, or is this the right thing for a economy she's trying to rescue?

Here's what Tina Brown, editor of "Newsweek" and "The Daily Beast" tweeted, "Cheers for Marissa Mayer for making staff show up at the office. Not afraid to be retro when it works."

But others shot the policy change. Richard Branson, founder of Virgin Group, wrote on his blog, "This seems as backwards step in an age when remote working is easier and more effective than ever."

Marissa Mayer isn't just an executive. She's a mother, too. Many say the policy change is elitist, considering Mayer has a nursery in her office so she can spend time with her infant son.

I want to bring in Nell Merlino, founder and president of Count Me In for Women's Economic Independence. She's also the founder of Take Our Daughters to Work Day.

We -- you were one of them getting girls in the office and now arguing whether in show stay in the office.

NELL MERLINO, FOUNDER & PRES., COUNT ME IN: That's right. That's right.

ROMANS: Is this the right thing for Yahoo! right now and why is it sending such a big message to the rest of women out there that, hey, you know, now we've got to play on a playing field again, and this might not be great for our lives?

MERLINO: I think it's the right thing for Yahoo in terms of what we all want Marissa to be successful. If think is what she thinks would get her there, that's important. I think she could have handled it better --

ROMANS: Yes.

MERLINO: -- in terms of maybe talking to her employees before she made this decision, rather than being edict, and helping them make plans because certainly, somebody who does have a nursery in their office understands the value and the desire to keep your children close to you. What is she doing, you know, is she --

ROMANS: But she's a 37-year-old woman, the first pregnant woman that -- the first pregnant woman to be put a position of CEO of a Fortune 500 company.

MERLINO: Right.

ROMANS: Why does she have to be suddenly this model of feminism for working mothers? She just wants to do the job like a man would do this job, which is to win. Win in a company that's failing.

MERLINO: That's absolutely right. But she also has a family and we have an opportunity here to really, all the innovation and creativity she needs to save Yahoo perhaps out of this will come real innovation how we handle this work/life balance stuff, because women choose to be CEOs of a company like Yahoo, or CEOs of their own companies, they choose it often because they get to decide how to handle their own children.

ROMANS: True, but if you're the CEO of your own company, you know, you're not -- maybe you can't do flex time, the way you like to do flex time, because you're trying to run a company.

There's something about these two classes of women workers that's developing, right?

MERLINO: Yes.

ROMANS: Leaders or ferocious competitors, right?

MERLINO: Right.

ROMANS: And then you have the rest us who are trying to figure out thousand balance work and home and all of it together. Are there -- so are the women who are staying home on Fridays or telecommuting Tuesdays and then there are women who are all-in. They're playing on the playing fields, which is the office.

MERLINO: But there are women all-in who are at home, seriously.

ROMANS: This argument that if you're not innovation -- comes from the collaboration of in the office?

MERLINO: See, I go back and forth on this. As someone who's been innovative, some of it comes from solitude.

ROMANS: Oh.

MERLINO: Some innovation often comes from an individual, that then is translated and worked on by the group. So, I think there are moments where people do need to be isolated.

ROMANS: The Facebook COO Sheryl Sandberg has got a new book out about leaning in, telling women how they can lean into their career. She's been criticized by some of who say, look, she's got two Ivy League degrees and lots and lots of money.

MELINO: She made that money, though.

ROMANS: Well, some people say -- I'm interested to see what she's going to say about tech, but also women on the workplace.

Nell, really nice to see you.

MERLINO: Very nice to see you.

ROMANS: I really want to talk to you about this story because you were one of -- you got girls into the office. Now, we're arguing about, how we're going -- the new generation.

MERLINO: I think the issue is where is the office? And how do we define this in terms of work, because we've gotten so many pictures since yesterday of women who are showing themselves with their children all over their offices.

ROMANS: I know.

We got leave it there. Nell Merlino, thank you so much.

All right. If Washington can allow cuts they call unthinkable, imagine what Washington could do next? We're going to tune in later at 1:00. Come back. I'm going to be on "YOUR MONEY" with Ali Velshi.

"CNN SATURDAY MORNING" continues right now.