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YOUR MONEY

Fear Hits Stocks: Don't Panic!; Spend, Baby, Spend

Aired June 22, 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: The most important man in the world right now is not a president or a prime minister. He doesn't need Congress or the executive branch to approve his policies. He controls the most important decisions that affect your money.

I'm Christine Romans.

And I'm talking about Ben Bernanke. He's the nation's top economist, a depression historian trying to prevent one today. And this week, he put the economy in terms we non-economists understand.

It's like a car.

(BEGIN VIDEO CLIP)

BEN BERNANKE, FEDERAL RESERVE CHAIRMAN: To return to the driving analogy, if the incoming data supports the view the economy's able to sustain a reasonable cruising speed, we will ease pressure on the accelerator by gradually reducing the pace of purchases.

(END VIDEO CLIP)

ROMANS: Not put on the brake but was ease off accelerator. With the pedal to the medal, the Fed has been buying $85 billion a month in bonds. That money rushes right now into the economy, fueling a huge rally in stocks, a huge rally until this week. It keeps interest rates low on your home and your car loans.

But investors are nervous that tapering, taking the foot off the gas will end the big gains. Just the fear of Ben Bernanke easing up on the gas pedal sent the Dow down 500 points Wednesday and Thursday. And regardless if you own any stocks, your money is on the line.

Terry Savage is the nationally syndicated financial columnist and author of the "Savage Truth on Money"; Brian Belski is the chief investment strategist of BMO Capital Market.

Terry, welcome to the program. Let me start with you.

You say all of the worrying about when stocks will pull back is a good thing. Explain.

TERRY SAVAGE, SYNDICATED FINANCIAL COLUMNIST: Well, I'm not saying that it's a good thing for your psyche to be worried about your investments overnight. But the fact is, as you pointed out -- a lot of money flooded into, well, not so much the economy but mostly into the stock market, with so much uncertainty overhanging economy about regulation, health care and so forth, a lot of the money has not come out of the banks and into loans to businesses or consumers. It's gone straight into the stock market. And money moves markets.

Now, you're right, the Fed did not say tightening up. It said just not adding as much. And the paradox is, Chairman Bernanke said, we'll stop adding as we see the economy is strong enough to do it on its own.

So, really, that's not bad news for stocks. A growing economy. The idea that a lot of excess money will flow into the market, of course, scares -- that it will stop happening, scares market participants.

ROMANS: You know, another surprise out of the news conference, moving the goalpost. The Fed chief says when the jobless rate hit 7 percent, the Fed will likely pull back. We're at 7.6 percent.

Bryan, explain how lower unemployment could lead to negative results for the market.

BRIAN BELSKI, CHIEF INVESTMENT STRATEGIST, BMO CAPITAL MARKETS: Well, it's one of these things where if things go up too fast in terms of the economy then the market participants, in particular those institutions who have now become reliant on monetary policy to drive stocks they may force Mr. Bernanke to become more aggressive and take the pedal off -- put pressure off the pedal and start to taper a little bit faster. I think that's what most people are worried about.

We think it's nonsense. We think that, from a longer term perspective, fundamentals drive stocks and we're in the mid of a grand transition from dependency on monetary policy to dependency on fundamentals. And we think there's volatility along the way.

ROMANS: Yes, I think you might be right. Volatility is something that certainly real normal investors like me and people I know are going to care.

Terry, I want to talk about who's invested in this market and their 401(k), their nest egg, their retirement. I mean, look at savings numbers here for the beginning of the year you can see the average 401(k) account hit a record high of $80,900. People with -- 55 and older, people 55 and older, they also hit a record high, $255,000 on average in retirement accounts.

They had come so far since the deficit of the recession. But, Terry, if there's going to be a lot of volatility and a lot of Fed getting how does someone with a retirement account like that protect themselves?

SAVAGE: And that's a very good question because 401(k) retirement plans are designed to accumulate and grow wealth. It's not just the match. It's the investments in them, assuming they have low fees. And the ideas that most of the investments inside your plan are designed to grow wealth tax deferred.

So, if you're getting closer to retirement one of the things you want to do in the market up is rebalance so you have the appropriate amount in the stock funds. But since there are not a lot of places to hide -- you don't want to be in bonds when rates are rising -- it's important to save outside your 401(k) plan. That can be in cash.

I know bank deposits pay little.

ROMANS: Yes.

SAVAGE: But that offsets the risk and the opportunity for growth that's designed to be inside your plan. That doesn't mean you get out of your plan. It doesn't mean you stop contributing. It means you save more in addition to those stock market funds.

ROMANS: Save more, save more, save more. I say that every week.

People give me hate mail. I can't save more because I can't make the money last as long as the month.

But the key here is saving more.

You know, Brian, last word to you. You see the Dow down more than 350 points like it was on Thursday.

I mean, really, sometimes the first time people notice, really, when the market's down so much. People become frantic and approach me on days like Thursday with one question, should I sell? My answer is always no, don't panic, don't lock in losses.

You've got a number of folks like regular folks, not traders and market professionals, just want free advice when they see the Dow plunge. What is your free advice to normal people when they see the market move like it did this week?

SAVAGE: We would say this. We're blessed with perspective of doing this for almost 24 years. So, that kind of we've been through the cycles.

What we would say is don't try to time the markets. Stick with your analysis and process in terms of what you're buying, be diversified, university opportunities like this to meet with financial adviser and talk about goals longer term.

But this is what creates opportunities. We believe that we're heading into a 15 or 20-year equity bull market and the issue with U.S. investors in particular is, we think now they're under exposed equities and that's a real opportunity for the next 15 to 20 years to be reallocated.

ROMANS: You made me feel better, Brian. Thank you so much.

Terry, stick around. We've got a lot more to talk about.

Thank you, both of you.

Coming up: former President George W. Bush once told Americans, he told them how they could help the economy.

(BEGIN VIDEO CLIP)

GEORGE W. BUSH, FORMER PRESIDENT : I encourage you all to go shopping more.

(END VIDEO CLIP)

ROMANS: So, is a recent surge in spending saving the economy or dooming us to repeat history?

(COMMERCIAL BREAK)

ROMANS: Spend, baby, spend. You the consumer are supposed to be the engine of this economy.

But a quick check on the hood shows all is not well. Investors are worried the economy's not strong enough to survive a wind down, a taper of stimulus from the Federal Reserve. Adding weakness in Europe and slowing growth in China, uncertainty is back. But many of you, you never felt certain to begin with.

A new CNN/ORC poll finds 44 percent of those surveyed say they're worse off than a year ago, just 36 percent say their financial situation has improved.

And yet you are spending. Consumer spending rose 3.4 percent, the fastest pick up since the fourth quarter of 2010. The U.S. economy relies on your consumption to thrive.

But that spending is coming at the expense of something else, saving. Americans saved 2.3 percent of their disposable income in the first quarter. That's a post-recession low, and a huge drop off from the previous quarter.

Too much spending, too little saving. Isn't that what got us into this trouble in the first place?

Terry Savage is still with us.

And I want to welcome Kai Ryssdal, host and senior editor of "Marketplace" on public radio.

Nice to see both of you.

Terry, just this week, the National Institute on Retirement Security said the retirement crisis is worse than it thought. Even after a big stock market rally, it says the typical working age household has only $3,000 saved for retirement. The message is, spend, spend, spend, spend, it's good for the economy. Wwe need it for America to recover.

But shouldn't it be save, save, save?

SAVAGE: I think it's a seesaw and it belongs somewhere in between. Healthy spending is good for the economy. I mean, just think back to 2009, when nobody spent anything out of fear. And restaurants were empty, so everybody got laid off, waitresses and busboys.

And car show rooms were empty, so auto manufacturers laid off employees. We need healthy spending. Consumers have learned a very important lesson about dangers of excessive spending, credit and debt.

So, we do need spending to keep the economy going. We don't need people to spend their way into debt. And belatedly, I hope the younger generation learned the lesson that a little bit saved for retirement in your 20s, time works magic if you let it grow and invest.

People who are approaching retirement are realizing that they only can save their way out of it and that's a real tough spot to be in, especially when your job is insecure and you play not get to work the extra three years that may make up the difference.

ROMANS: I think everyone needs to save more earlier and save more, but also spend more smartly, right?

Some of the things we spend money on are not necessarily the best priorities. And that just comes from being smart.

You know, Kai, I know you've been asking this question, can we afford this consumer economy? Can't we?

KAI RYSSDAL, HOST, APM'S "MARKETPLACE": Right. Well the short answer is, no, we can't, not if we keep going the way we're going now. You know, we are Americans, right? We want what we want when we want it.

ROMANS: Now.

RYSSDAL: The problem is -- right now. The problem is it's not sustainable on a bunch of level.

First of all, the kinds of job the economy -- is the kinds of jobs, rather, the economy is creating, right? It's creating part-time jobs. It's creating lower wage jobs. That creates consumers who can't spend when they want to and boost the economy. It creates people who can't plan for the future. It creates people who work 30 hours a week and thus doesn't get benefits instead of 40 hour a week with full-time benefits.

There are real costs to what's going on in the economy. And I think the problem is that there are going to be long-term costs and nobody can see quite yet. And that's really the big issue.

ROMANS: I'm scared to death so many of the jobs we've created in the recovery are low wage jobs, jobs making $13 or less. Two- thirds of the jobs in America -- a third of the jobs in America make $24,000 a year or less. I mean, that's really terrifying for saving for retirement and saving to sending kids to college.

You know, Terry, Americans have been repairing balance sheets at the same time. Household debt at its lowest several since 2006. But there's a big exception. Student debt has been exploding.

Are we graduating a generation of debtors who won't even have the ability to spend to buy a house, to buy a car, to move forward? That's going to reshape the economy.

SAVAGE: Oh, absolutely. You know, I've been saying this, you've been saying this for a long, long time, we're graduating students into debt and no jobs.

But these economic cycles unfortunately take a while to unwind. And what we're seeing now is colleges competing for students offering more aid out of their endowments, cutting their prices, cutting their offerings to be sensible about how they spend resources.

I just can't paint the pictures so negatively because we never know what's around the corner.

In the '80s, there was a great fear that we were in grips of the OPEC oil embargo for the beginning of the decade. We thought we had a heartland recession that would never bring back manufacturing. And who knew the Internet and technology would bring us tremendous growth and productivity.

Now, as you look forward, we don't know what the next thing is around the bend but one thing is: cheap energy. America's about to be awash in oil. That could change everything, the components into growth. Energy is a big key component.

So I don't think the picture for the future is necessarily so bleak.

ROMANS: Yes.

SAVAGE: Yes, you have to save, yes, you have to invest. But you don't have to crawl under a rock not lib your life. We need to readjust our priorities.

ROMANS: And I've been spending time talking to college kids, I gave a commencement earlier this spring. And I'll tell you, they don't know what they don't know, which is kind of cool, and they're really optimistic. I mean --

SAVAGE: Yes, they should be.

ROMANS: -- they don't know what we've gone through over the past four years. If they do, they don't have the perspective to put it in. So, that means creativity. They're born wired.

I mean, these kids, I think, Kai, are going to be -- they have all of the adversity but they're actually -- it's up to them to fix it all.

RYSSDAL: I think that's exactly right. I mean, you know, so one of our reporters, (INAUDIBLE), has been doing a piece out of Cincinnati on kids coming out of a high school there, the oiler school. They're actually looking forward to getting out into the economy, going to college, figuring out what's what.

They are seeing the economy is growing, right? It's growing in terms of jobs. It's growing in terms of GDP. Not as fast as we want, not as fast as anybody wants, but it is growing.

So, unlike five years ago, and college graduates were looking around, going, man, what I'm going to do? At least now, today's college graduates have a hope. They have some chance that things are going to work out and they're going to be able to find a job that means something.

ROMANS: Terry Savage, Kai, it's nice to see both of you on the show this weekend. Great conversation. Let's have it again soon. Thanks, guys.

SAVAGE: Thanks.

RYSSDAL: All right. See you, bye-bye.

ROMANS: Up next, is this housing market hot or just full of hot air?

(BEGIN VIDEO CLIP)

NINA PEDERSON, SEATTLE HOMEOWNER: We literally own the air above this house.

(END VIDEO CLIP)

ROMANS: I'm going to show you why a Seattle couple who bought the space above the neighbor's home and why others are doing the same thing.

(COMMERCIAL BREAK)

ROMANS: Six years now after home prices collapsed in the U.S., the housing market is back. It's booming in some parts of the country. The pace of building is picking up. Existing home sales are up almost 13 percent in the past year, home prices, prices, up more than 15 percent.

Now, before you break out the champagne, consider inventory. It is tight. What does that mean? It means very few homes are on the market, and those that are going often sell quickly. Flash sales are heating up in once hard hit markets like Texas, California, Florida, Arizona.

It's tough to get in. Many homeowners are learning to love the homes they already have. In Seattle, that may mean protecting a view.

One couple actually bought and sold the house next door but retained the air rights above it. That way future neighbors can't build up and block their view. In It cost them a cool $100,000. It's a growing trend in that area.

In Boston there's something else going on less extreme.

Zain Asher is with us to tell us that story.

Hi, Zain.

ZAIN ASHER, CNN BUSINESS CORRESPONDENT: Hey, Christine.

In Boston, it is all about construction. That is the game to be in right now. People are doing very well in construction right now.

And here is why: during the recession you had a lot of construction companies that were forced to close down, forced to lay people off. Now that housing is back, you have more construction work to be done but fewer construction companies doing the work -- obviously great news for anyone in the business.

I actually spoke to one boss who said for the first time in his eight-year career, he has so many offers to work, he's actually having to turn some of them down. Take a little.

(BEGIN VIDEOTAPE)

ADAM RICCI, BUILDING CONTRACTOR: We can cut the pieces.

ASHER (voice-over): Adam Ricci has a problem many people in this recovery only dream of.

RICCI: Instead of the stress of not finding the work, I have the stress of too much work.

ASHER: It's more proof that the recovery in housing is real, and a big change from the height of the recession when he was forced to close down.

RICCI: One of the hardest things to do as an employer is to tell the people you're feeding that they don't have work anymore. It was one of the most difficult times in my career.

ASHER: Across the country, contractors building single family homes are applying for new permits faster than at any time in the last five years. But here in Boston, space for new construction is limited.

NICOLAS RETSIANS, SENIOR LECTURER IN REAL ESTATE, HARVARD BUSINESS SCHOOL: People do value living close to the center city. We don't have in the Boston area large plots of land available for large- scale development. As other parts of the country do, the southwest, southern California, Florida, other parts of the South overall.

ASHER: The solution? Buy an old home and then renovate it.

RICCI: This was and will be the living room.

ASHER (on camera): OK.

(voice-over): The cost of gutting and rebuilding this interior, $400,000.

RICCI: We just decided to pull the trigger and do a 100 percent gut on walls, electrical, and plumbing.

ASHER: Renovation spending is expected to rise 20 percent this year. Homeowners who are staying put are also spending. The cost to renovate this kitchen, $60,000.

CHRIS MAYER, PROFESSOR OF REAL ESTATE, COLUMBIA BUSINESS SCHOOL: People have their financial resources and the desire to live in a home, that's what they want.

ASHER: It's a pretty nice pay day for Ricci, but he worries rising home prices and interest rates may discourage potential buyers.

(on camera): What's going to happen to your business?

RICCI: I honestly don't know. I don't think we'll be getting as much as the $200,000, $40,000 jobs. My focus right now to keep the company on progressive growth without growing too big. It's not fun to lay people off.

(END VIDEOTAPE)

ASHER: And I think the takeaway from all of this, Christine, is that even though housing is back, even though it's slowly taking upwards, it is still from fragile.

I think it's going to be very interesting to see now that we know that Ben Bernanke does plan to ease up that stimulus later on this year, I think it's going to be very interesting to see what happens to housing. We know that housing is up for three reasons, high demand, low supply, and, of course, those low interest rates.

And when interest rates slowly start to tick up, I think it's going to be -- I'll be curious to see how the story ends.

ROMANS: My hope is when you have interest rates start to rise, but you have more inventory, you get a healthier balance in the housing market, and that means more jobs, that means more money in people's pockets.

ASHER: We do need more inventory, though.

ROMANS: We definitely do.

All right. Zain, nice to see you. Thanks.

The school year is ending. Final report cards are out. Are your personal financial grades bad enough to earn a spot in summer school? I'm going to show you the five things you need to do right now to get to the head of the class.

Remember, smart is the new rich. A crash course, next.

(COMMERCIAL BREAK)

ROMANS: How would you grade the economy? If you don't have a job, you might give it an "F," but if you're in the stock market, it might get an "A." The economy is still on fragile ground but the recovery is for real.

A new CNN/ORC poll shows a growing percentage say economic conditions are good. Thirty-five percent, a number that's been steadily rising since the end of 2012. That's how you're feeling.

But I have been conducting a little poll of my own. The school is out for summer, the report card for the economic recovery is in.

(BEGIN VIDEOTAPE)

ROMANS (voice-over): Summer is here and the stocks are in turmoil after a 13 percent gain. Unemployment is still too high. Investors are making a fortune in housing, but nearly 10 million people owe more on their mortgage than their home is worth.

There are a rash of statistics to measure this recovery, but let's look at it this way. Let's give it a good old-fashioned letter grade starting with a man whose firm manages $2 trillion.

MOHAMED EL-ERIAN, CEO, PIMCO: I would give the economy a B to a B-plus. It's getting better but not fast enough.

ROMANS: He buys and sells bonds. These guys are real estate tycoons.

DON PEEBLES, CEO, THE PEEBLES CORPORATION: I would say it's a C-plus.

ROMANS: What do you think, Mort?

MORT ZUCKERMAN, U.S. NEWS & WORLD REPORTRE: C-plus.

ROMANS: And here's a Harvard professor.

NIALL FERGUSON: I think it's a B-plus at this point. We should be creating way, way more jobs.

ROMANS: And the view from the stock market?

JEFFERY KLEINTOP, MARKET STRATEGIST: I think a B-minus, this economy has held up well. Maybe more of a "C" plus, I give B-minus, because the government sector is fading. Remember, government job growth is fading.

ROMANS: He's talking about Washington belt-tightening -- belt- tightening at exactly the wrong time says this former Clinton adviser.

LAURA TYSON, FORMER CHAIR, COUNCIL OF ECONOMIC ADVISORS: On fiscal policy from the Congress, I'm afraid I will not give a passing grade right now.

ROMANS: "Wall Street Journal" editorial writer and critic of the Obama administration.

STEPHEN MOORE, THE WALL STREET JOURNAL: I give it about a B- minus but I'm optimistic about the future. You've got the low interest rates. You've got the housing recovery. I'm pretty optimistic that we may see that B-minus turn into a B-plus.

ROMANS: And, finally, the former chair of President Obama's economic team doesn't give a grade but nails how many Americans are feeling.

AUSTAN GOOLSBEE, FORMER CHAIR, COUNCIL OF ECONOMIC ADVISORS: I don't know. On the economic conditions, I'd say modest at best.

(END VIDEOTAPE)

ROMANS: OK. So, the average for the U.S., it's about a B- minus. Let's say it's a B-minus.

What about Europe? The eurozone gets a D.

And what about China? That grade is a B-plus, but it is slipping.

So the U.S. is doing pretty well compared with the rest of the world, but these grades matter less than how you grade your personal economy, right?

Here are five ways you can improve your marks. These are all pass/fail. Spend less than you earn. Cut your debt. Save for college and retirement, rebalance your investments. Do it now. And refinance your mortgage.

All right. Thanks for joining the conversation this week. Join me at 2:00 p.m. Eastern for a brand new edition of "YOUR MONEY." A dysfunctional government, crumbling infrastructure, crushing levels of student debt, stagnant wages. Do you feel like you're living in an American that parallels Rome before the fall?

I'll be back at 2:00 Eastern today with the facts on that. Until then I want to hear what grade you are giving to your personal economy. You can find me on Facebook and on Twitter My handle is @ChristineRomans.

"CNN NEWSROOM" starts right now.