Analysis: Bursting of the economic bubble of the 1990s and its impact on investors, business and confidence
Host: NEAL CONANTime: 2:00-3:00 PM
NEAL CONAN, host:
This is TALK OF THE NATION. I'm Neal Conan in Washington.
Whatever happened to the new economy? Just a couple of years ago, financial insiders shrugged off Fed Chairman Alan Greenspan's warning about `irrational exuberance' as the stock market spiraled ever higher. Some even said we were past the old cycle of boom and bust. We had low interest rates, low unemployment, the American consumer felt rich and consumer demand seemed like a perpetual motion machine. Ha! Dot-coms turned out to be just the first bubble to burst. Everybody expected problems after September the 11th, but then--well, you know, the list of corporate calumny as well as I do: Enron, Arthur Andersen, Tyco, ImClone, Halliburton, now Xerox and WorldCom. Every day, it seems, new allegations of insider trading, fraudulent accounting and overstated earnings. In those sunny days of yesteryear, it looked like you were crazy not to invest with both fists. Wall Street looked as safe as a bank account that paid off like a slot machine.
So what happened in the 1990s? What made that decade so euphoric? How much of it was fueled by smoke and mirrors and cooked books? How much did our own greed figure in? And what's an investor to think now? With so much lost credibility, who's left to trust? Our phone number is (800) 989-8255. That's (800) 989-TALK. Our e-mail address is totn@npr.org.
And joining us from member station KWMU in St. Louis is Juli Niemann, a stock market analyst at RT Jones Capital Equities in St. Louis.
And welcome to TALK OF THE NATION.
Ms. JULI NIEMANN (RT Jones Capital Equities): Thank you, Neal.
CONAN: And here with us in Studio 3A is Daniel Yergin, chairman of Cambridge Energy Research Associates, also executive producer of the PBS series about global markets called "The Commanding Heights: The Battle for the World Economy," which is just out on VHS. Daniel Yergin wrote an article in yesterday's Washington Post called Herd on the Street--that's H-E-R-D--A Quarterly Stampede.
And, Dan Yergin, always good to see you here.
Mr. DANIEL YERGIN (Cambridge Energy Research Associates): Thank you, indeed.
CONAN: Dan, in your article, you wrote, `The thud you just heard was not just WorldCom, it was the sound of an end of an era.' What did you mean by that?
Mr. YERGIN: I meant that we'd had this incredible buoyant economy in which trees were going to grow to heaven and there were never going to be, as you said, any downturns in the cycle. And it was a time when money was the be-all and the end-all. And that all came to an end. It started to end when the Nasdaq topped out in March of 2000, but the big thud was, of course, WorldCom and all the reverberations for the employees, for shareholders and for this whole issue, Neal, of credibility in corporate America.
CONAN: Well, what caused that bubble of the '90s in the first place? What were the factors?
Mr. YERGIN: Part of it was based on very genuine things. Our economy was reformed, became more efficient, became more flexible. We created 17 million new jobs in the 1990s. We also created about 17 or 18 million new jobs in the 1980s. A lot of technological change. The world was opening up. The Cold War was over. There was spending on defense. So all of those things were happening. But with it, then, began that speculative boom. And, of course, the sudden appearance of the Internet was what really drove it to absurd levels. I mean, it didn't matter whether a company had any way to make money, the stock price was going to go to heaven.
CONAN: Juli Niemann, this isn't the first time we've seen a financial bubble in the market. It's happened before. Tell us about those times, and how this one is different from those, if it is.
Ms. NIEMANN: Well, every 10 years we basically have one of these. Everybody forgets the lessons learned. In the '70s, we had conglomerates, all the hottest things going. You grew bigger by acquiring everybody. Does that sound semi-familiar? Well, in the '80s, it was oil and gas and savings and loans. And in the '90s, it was biotech, high-tech, anything with `tech' in the name. Basically anybody who has any kind of a memory, there's going to be new language out there for calling you a dinosaur because you remember the lessons of past history. So honestly, this is no different from previous speculations we have, with one notable exception: This one was huge! It did a lot of collateral damage. There's so much more money in the market this time that it had an even greater effect than it had in the '70s, '80s and '90s.
Mr. YERGIN: Right. Neal, can I add another--what Juli's saying is that if you were skeptical or if you raised questions or said some of this is going to extreme, you were called a grumpy old economy person and you were really out of it. And she said, you know, if you look at the Japanese collapse at the end of the 1980s and early 1990s, you look at the Asian crisis that actually threatened us in the late 1990s, it's the same thing, you know, that everything's going to go on forever. And what happens, people take on enormous loads of debt which can only be paid back if the rosy scenarios come true.
CONAN: Why does the name Charles Ponzi come to mind? This was the guy who invented the Ponzi scheme, where as long as you were taking in more--you know, taking in enough money to pay out some investors, the rest of the world believed that profits were going to continue forever. Juli, were you a part of that old economic crowd, out of fashion five years ago?
Ms. NIEMANN: Very much so. I'm a value analyst, and basically in 1999 we started dancing toward the door because the valuations were simply too high. Started buying things like bonds, companies that were not all P, no E--not all price, no earnings--actually had earnings, which were not very much in style at that point in time, not just promises. A lot of financial managers lost their jobs during that period of time. If you happened to be a value analyst, you were moved away simply because you were totally out of style. So yes, it has been difficult, but then we have a nasty habit of saying `I told you so' whenever it hits the fan.
Mr. YERGIN: Neal, that date that Juli mentioned of 1999 is really the critical date. If you look at the Enrons, you look at WorldCom, it looks like in 1999 is when the music started to run out, but people started to play games to keep those quarterly earnings growth--to keep their stock prices up.
CONAN: Juli, could you explain to us the importance of those quarterly earnings reports and why someone might be tempted to fudge the books a little bit?
Ms. NIEMANN: OK. This all goes back to follow the money, and that's basically it. Analysts, especially those who are working for large wirehouses, are totally linked with the investment banking department. The investment banking department gets fees from the corporation. If you're going to do a new issue in a corporation, you want everything to look as best as it possibly can. So quarter to quarter, what you want to do is increase the earnings above what analysts are estimating because you get that nice pop in the market. Now does it make sense? Of course not. You know, accounting basically used to be the good old days, you expensed everything because that way you lowered your profits and you lowered your taxes due. This time and age, everybody was either doing one of two things: either cookie jars, which is going in and getting some reserves out when you needed it, or you were backing in, `What's the analyst going to tell me I need to make?'
Now why are corporations going along with this? One simple reason: their stock options. When the price goes up, their options are worth more, and they kept on cashing in their options. So everybody was inextricably tied to each other in this whole charade.
CONAN: But backing in--that's basically starting with the bottom-line figure and then making everything else add up behind it?
Ms. NIEMANN: That's right, `What do we need to rob from another quarter to make this quarter look better?' So what we're continuously trying to do is either lower the expenses or raise the revenues, and you can do that by robbing from other periods.
Mr. YERGIN: And it became a cult, actually, and particularly around sort of 1997 when they started to invent this thing called a consensus forecast, which became this very public number which you had to beat or otherwise your stock took a beating. And it's the companies, it's Wall Street, but it's also us. It's our retirements. It's the $11 1/2 trillion of retirement savings. It's the university endowments, everybody wanting to get a higher return. And you forgot dividends, they were old economy, and all you wanted was stock appreciation. And as Juli said, of course, those who had these huge option packages had incredible incentives.
CONAN: So what has happened to your portfolio, your retirement savings? Our telephone number is (800) 989-8255, (800) 989-TALK. What happened in the 1990s that made the expectations so enormous, and what's happening now? Who do you trust? Give us a phone call or send us e-mail, totn@npr.org.
And our first caller is Sue, who's on the line with us from San Jose, California.
SUE (Caller): Hi. I wanted to ask about, what do your panelists think can be done to help rein in this corporate greed? I've worked in Silicon Valley for many years and have been privy to those backing-in discussions that one of your panelists mentioned...
CONAN: Mm-hmm.
SUE: ...where, `This is the number we need to get.' And it wasn't even just to get our options. It was to get our bonus. So in quite a few companies where options were not the issue, it was, `What can we do to get our bonus?' And I found this in every department of the company. You'd find it in finance, you'd find it in technical services, you'd find it in the sales department. So you'd have all these VPs with their bonuses tied to performance basically saying, `OK, what do we need to do to kind of cook the books to look good?' How can we...
CONAN: And nobody said boo?
SUE: And no one said boo.
Mr. YERGIN: Sue, did you see that change over time? Did it get worse as the decade went on?
SUE: It absolutely did get worse as the decade went on.
CONAN: And why do you think that was?
SUE: Greed.
CONAN: Greed.
SUE: Because the money was there, and it was just sort of like people standing in one of those things with the dollar bills floating around, `How many can we grab as quick as we can before someone finds out and turns off the fan?'
CONAN: Hm. And there was no sense that, you know, this was a bit of a treadmill and that if you fudged it for this quarter, it was going to catch up the next quarter?
SUE: Well, it's amazing how long these things can go on before it is caught, and then once it's caught--because I was with some companies that were owned by bigger conglomerates--once it was caught, the bigger companies would want to sweep it under the rug so that the clients didn't find out how mismanaged this little subsidiary was.
CONAN: So if they merged with somebody or were purchased by somebody, the purchasing company didn't want to look at the books.
SUE: Admit they made a big boo-boo.
CONAN: That's right. Nobody wants to make a mistake. Well, who wants to...
Mr. YERGIN: Well, let me offer a few things, and then Jul--obviously the first thing is to enforce the laws, and where people broke the laws, they should be prosecuted. And I think we're seeing that coming down the road heavy duty. Secondly, we're seeing changes in accounting practices, the splitting of accounting and consulting, because part of it is, you know, in these bad cases, compliant accountants. Third is strengthening the role of the board and reducing these outside option packages. But part of it is that, you know, the system--I mean, it's a double-edged sword. This quarterly performance has been a driver of our type of capitalism. And look at it from the viewpoint of a university endowment. It might have 20 fund managers. The bottom five, it drops every year because they're not getting the returns. So, you know, this will remain, but the whole culture needs to be reined in so it's not a cult anymore.
CONAN: And, Sue, I assume that that similar kind of thing must have happened and this company, we're not asking the name of, in Silicon Valley, where vice presidents who didn't perform, well, they didn't get their stock options, but presumably they were eased out.
SUE: Yes, that often happened, but I'm not even talking about one company. I've been in the valley since way before the boom and so I've been in a number of companies, and I've seen this go on and on. And it's just kind of disheartening, if you do have integrity, to be in an environment where that's not valued.
CONAN: And this was true in all of the companies in which you worked?
SUE: Absolutely. I can say that in the last five companies that I've worked in, and I've worked in them for multiple years, so it wasn't just, you know, in there for six months and out--but yes, it's rampant.
CONAN: Well, excuse me, but did you get stock options, too?
SUE: I got stock options, but they were never based on performance--they weren't based on company performance, they were based on personal performance.
CONAN: But nevertheless, this all seemed like an escalator and you were along for the ride.
SUE: Not really, because I did leave companies when I was asked to do things that I felt were not ethical.
CONAN: Ah. And did you tell them why?
SUE: Yes, I told them why, and they said, `OK. Well, there's the door. And by the way, you weren't here to vest your options.'
CONAN: Hm. Huh.
Mr. YERGIN: Are you in the finance or accounting area?
SUE: No.
Mr. YERGIN: All right.
CONAN: OK. Juli, what about this corporate culture that Sue was describing? And I don't think it's unique to Silicon Valley, either.
Ms. NIEMANN: Oh, no, it's not. One thing Sue mentioned was when management leaves. They always leave with many lovely parting gifts. It's hush money. Basically they know the dirty tricks that are being played and they move on to other things. So any kind of a management parting always has a lot of money that's being paid for a perfectly awful job that they did. And we've seen that time and time again, especially in the latest scandals here. But the biggest problem we're faced with right now is the whole structure of it. Really what we need is more disclosure. Analysts have not been doing their jobs for one major reason: It's too easy to ask management, `What are we going to do?' and then they pull the rabbit out of the hat. That's where the whisper estimates came out when they were looking at saying something more than what management was actually predicting. And so the Street became accustomed to getting whisper estimates that were more or less of what management was saying. There has to be full disclosure. I've been working on disclosure issues for 20 years and we still do not have disclosure. I want a proxy and a prospectus that looks like a telephone book. Then we're going to have to do our jobs to really analyze the companies.
CONAN: Sue, thanks very much for the call.
SUE: Thank you.
CONAN: We're talking about the bursting of the bubble. How are you doing in today's economy? Have you changed your investment strategy? And how did we get into this mess in the first place? Our phone number, (800) 989-TALK, (800) 989-8255.
I'm Neal Conan. This is TALK OF THE NATION from NPR News.
(Soundbite of music)
CONAN: This is TALK OF THE NATION. I'm Neal Conan in Washington.
We're talking about the economic bubble of the 1990s and the impact its bursting is having on investors, on business and on your own confidence in Wall Street and the economy. Our guests are Juli Niemann, a stock market analyst at RT Jones Capital Equities in St. Louis, Missouri; and Daniel Yergin, chairman of Cambridge Energy Research Associates, a research and consulting firm focusing on energy markets. Of course, you're invited to join the discussion, (800) 989-TALK. Our e-mail address is totn@npr.org.
And our next caller is Hale(ph), who's on the line with us from Columbia, South Carolina.
HALE (Caller): Hello.
CONAN: Hi.
HALE: Yes, I'd just like to bring into the discussion something I don't hear enough of these days in this context, which is that I think most people out there are not evil businessmen looking to cash in on some greed urge that they have and deceive people. I think that a few people can do a lot of damage, but the key component--and this is really my point--is if people aren't educated, if they just take somebody's word on an investment, you know, if they rely on someone else without even checking it, cross-checking, getting educated like you would in any kind of endeavor, if you were serious, I think that sort of culture is really what creates the weak link that allows this type of thing to get out of hand. So I'd just like to sum up by saying I don't buy the idea as is implicit in so many of these discussions that, you know, capitalism is about greed and taking advantage of people. And this is just proof of it all. I don't buy that and I don't think most people out there listening buy that if they really think about their neighbors going to their jobs and doing their jobs. So I would like to hear the discussion, in a more constructive way, focus on how to account for where the ignorance is feeding this problem on the part of a few people who create it actually.
CONAN: Juli, I was wondering if we could get a comment from you on that.
Ms. NIEMANN: Well, Gordon Gekko is a caricature. I mean, our caller is absolutely right on that. But I think more likely is, what is the responsibility of business? And Peter Drucker said, `The responsibility of business is no more or less than what society demands at any particular point in time.' Things that are happening right now were actually not illegal many years ago. Michael Milken, when he was taken down as junk bond king, was tried on very bad law, as a matter of fact, but the regs were written later. So what we're seeing now is society does demand more because people lost more money. So, you know, morality aside, honestly morality has nothing to do with it. What do we have to have for a fair, level playing field in business? That's what we need to write the regs about.
Mr. YERGIN: I think it's funny that Juli quotes Peter Drucker because I was just thinking that in the first edition of "Commanding Heights," and we've kept it in ever since, we quoted him--and this is 1998--saying that when the next downturn comes, the bitterness and contempt that the public will feel for overcompensated senior executives will be a very important political force. And four years later, we see exactly that. I think it will probably turn out that it's a handful of companies, as the caller said, a relatively small number who have really done illegal things. And, of course, the impact of WorldCom is cataclysmic. Seventeen thousand people just lost their jobs. So we'll see that. A larger number have--most everybody was sort of caught up in this pressure of quarterly performance that became kind of absurd. And there was a very interesting article in The Times yesterday about Sprint and AT&T, which couldn't compete against WorldCom and they didn't understand why. And they did all these things to change. And it turned out the reason they couldn't compete is because WorldCom was cooking its books, and so it led to sort of distortions that affected everybody.
CONAN: Hale, I wonder if--you talk about this lack of education. To some degree, wasn't there also, you know, a sort of, as Daniel Yergin suggested in his article yesterday, a herd psychology that we all stampeded to get into the market whether we knew anything about it or not?
HALE: Absolutely. And I think your point is really a more helpful one than--you know, you listen to the news and it just seems--you can almost hear the glee with which people seem to end the story in a sense implicitly by saying, `Well, see, this is just all about greed.' But what good will anyone's greed do them if they don't have some sort of accomplice, be it even in the form of ignorance?
So I just would like to make one more point and then I'll let you go. The entire time throughout the '90s--I'm an investor--the entire time throughout the '90s and continuing to this day, there have always been a great number of advisers out there who were saying all of these things the entire time. They were cautioning people. You know, the very idea of this bubble and, you know, the exuberance and say, `Hey, you know, this seems--you know, you need to think about it because'--whatever. This has always been there if you were the type of investor who really wanted to find out what you were doing. And that's never been a problem--you know, it's a marginal effect that is amplified by this herd mentality, as you point out, which is really just ignorance, and it doesn't have a whole lot to do with capitalism and the average man. I guess that's want I wanted to say.
CONAN: OK.
Mr. YERGIN: I think it is a very good point, but I think that, of course, one concern is that with so many people having 401(k)s and managing their 401(k)s is not their major job. And, in fact, how do they get guidance and so forth? And we're still going to see how this whole great 401(k) experiment works out.
HALE: That's a valid point, and it needs to be addressed through education.
CONAN: Hale, thanks very much for the call.
HALE: Thank you.
CONAN: I wonder, following on Hale's point, though, if we were all driven by herd psychology to jump into the market five years ago or three years ago, is reverse psychology happening now, Dan Yergin?
Mr. YERGIN: I think that these things always go to extremes. We had an incredible extreme in one direction and probably a great extreme in the other and, of course, there's a malaise, but it's not just because of this. There's a malaise from September 11th and a fear of terrorism that's hanging over our economy, a kind of pessimism. There's other things that are happening. We might be close to a financial contagion in Latin America. The dollar is going down rapidly. So there are a lot of different things that come together that, despite those good growth numbers we heard about in the news broadcast, that are worrying it and affecting this whole picture.
CONAN: The numbers Daniel Yergin was just referring to were, I believe, manufacturing sector up a little bit more strongly than anticipated.
Mr. YERGIN: Right.
CONAN: Juli, though, as Dan Yergin pointed out earlier, this wasn't all smoke and mirrors. I mean, there were real jobs created. There was real value.
Ms. NIEMANN: And the whole thing focuses on risk analysis, and that's where it comes into. We kind of took leave of our senses on that. The real risk in the market is the variability of returns, and everybody stopped looking at what was achievable within that market. Any oil and gas analyst who had looked at Enron knew you couldn't make that kind of money off of that asset base. What they were doing, nobody knew, but you couldn't make that kind of money on it. You said MCI-Sprint. Sprint was curious as to how in the world you could make that kind of money in the business that they knew very well. Obviously there's fraud involved there. Risk analysis is everything. And finally when you really get to a momentum-changing decision, you enter the biggest risk of all, liquidity risk, and that's when you tell your broker to sell and he says, `To whom? Do you have anybody in mind?' All of a sudden, you have everybody stampeding toward the door and liquidity risk becomes a huge factor.
Mr. YERGIN: Right. And that's when these towering debts become so hard to deal with. And I think what Juli has said is, you know, we had a new economy in the 1920s, too, and it ended badly, but that people really just discounted risk in the late 1990s and thought they didn't need to worry about it anymore.
CONAN: Our next caller is Paul, who's on the line with us from San Francisco.
PAUL (Caller): Yes. Good morning. I just wanted to know if we talk about the bubble being pricked, I'm wondering if the bubble really has been pricked and if we're waiting for, you know, further deflation of this bubble. I'm thinking in terms of mainstream stocks that make up the Dow Jones. In this week's Economist, they said that if the Dow Jones declined by one-third, it would still not be undervalued. I'm just wondering if this is just the first shoe to drop and we're waiting for other shoes to drop in the wider stock market as well.
CONAN: Juli Niemann.
Ms. NIEMANN: Well, Dow's actually holding up better than the S&P 500 because that's still dominated by technology. So, yes, I'm in the camp that's looking for the market to go down further before it turns around here. Now that doesn't mean that there aren't great values out there. Secondary stocks, the smaller stocks, have done exceptionally well. Foreign stocks are coming back nicely. So even when you see the mainstream index stocks out of favor because they do have further correction to go, there are still other things out there because we are in a low inflationary environment.
CONAN: Daniel Yergin, correction on how large a scale?
Mr. YERGIN: Well, I think I would leave that to Juli. I would just note when Alan Greenspan spoke about irrational exuberance, the market was only two-thirds where it is today. But Juli's the expert.
CONAN: OK. Paul, thanks very much for the call. Let's go now to Mark, who's on the line with us from Minneapolis.
MARK (Caller): Yes. I was a venture capitalist in Dallas, Texas, back in the late '90s and have since moved back to Minneapolis. But one of the main problems that I saw that led to the stock market bubble was a willingness for corporate executives and investment bankers right along the line to mutual fund managers to compromise what normal and ordinary people would consider commonsense ideas for their own personal financial gain. And I saw this all the way along the line, from company executives all the way through to the fund managers. And one example of that was we had a company come to our group and ask for $10 million, and in exchange, they would give us 10 percent of their company, and what it really was, was a jewelry store in Beverly Hills in strip mall that had put a dot-com at the end of its name. And they thought the value of that company should be worth, you know, a value of a company that had real estate of maybe a million to $2 million, and they thought with the dot-com at the end of the name, it was worth $100 million.
And that's just a small example of what I saw all the way through, you know, the entire sector at that time, and it wasn't uncommon for everybody to buy in all the way along the line. And at the end of the day, the people that were really served are the people that are putting their money in the mutual funds, the people that are depending on those returns so that they can retire and so that they can, you know, build a portfolio for the long run. Everybody is accountable, and not just one person or not just one segment of people is accountable in this whole case.
CONAN: Including the investor.
MARK: That's right.
CONAN: Because, you know, this machine just seemed never-ending.
MARK: That's right. It's a continuous loop.
CONAN: And I was reading over the weekend that, indeed, there may be more in terms of venture capital concerns still out there. There may be some more shoes to drop over there as well.
MARK: I've seen the venture capital portfolios decrease in value significantly simply because the way they value their portfolios and the investments in those portfolios are based off of the public market valuations. And with the devaluation of the stock market, you're going to start looking at a lot of these companies and a lot of them will stop making sense very quickly.
Mr. YERGIN: Yeah...
MARK: And that's already happened to some extent.
Mr. YERGIN: Instead of hearing phrases like `first mover' and `eyeballs' that you heard in the Internet boom, the kind of phrase you hear now is `underwater.'
MARK: Everything is underwater. Quite honestly, quite literally, everything is underwater in these VC portfolios, and on top of that, the money that you need to stir the next technological innovation is going away. And it'll come back at some point in the future, but I'm not seeing a lot of money going into new ideas right now. I see a lot of venture capital money going into ideas that they're trying to save.
CONAN: Prop up.
MARK: Prop up. That's right.
CONAN: Are you still in the business, Mark?
MARK: No, I'm not. I was a junior venture capitalist and I'm actually going back to business school.
CONAN: But still to business school. Now that's interesting. Tell us about your faith in business then.
MARK: Well, my faith in business actually has been quite shaken, and I am looking for an industry that will have some stability and an industry that will have some long-term growth prospects. And quite honestly, I'm looking at some companies to go work for in maybe a business development role that will be more on the medical technology side or the product and the medical innovation side, because I guess it's my belief that growth and economic value is driven by population growth, and I see that with the aging of our population that the value might be accruing in the sectors that will serve those people.
CONAN: Well, Mark, thanks for the call, and good luck.
MARK: Thank you.
CONAN: OK. You're listening to TALK OF THE NATION from NPR News.
Our next caller is David, who's with us from Santa Rosa, California.
DAVID (Caller): Good afternoon or good morning, all.
CONAN: OK, depending on where you are, but go ahead.
DAVID: Out here in California it's morning still. I work and have worked for many years for an old-line high-tech company who hurt itself pretty badly trying to play the game. If I can speak for the company, without naming it, we are a company that isn't creative enough to cook to the books to make ourself look good, but we still tried to keep up with the rush here this last several years and got hurt pretty bad, had to do a lot of layoffs.
Now the thing that came to me was, is that what we make takes a heavy technical investment and base to make, and so it's very difficult to achieve the sort of--How should we put it?--DeLorean cocaine-fueled earnings that have been expected by the market in recent times.
(Soundbite of laughter)
Mr. YERGIN: Exactly.
DAVID: Railroads are the worst case I can think of, of you have to have a huge capital investment and you don't get a great ROI, but...
CONAN: Excuse me. ROI, rate of return?
DAVID: Yeah, rate of inv--or rate of return.
CONAN: OK.
DAVID: Sorry, return on investment is the other term I'm thinking.
CONAN: I see.
DAVID: Now the thing is we have to have businesses that are not going to make huge amounts of money but that produce vital services when the expectation is then that those companies--I can think of the old phone company, which didn't make a lot of money but provided stable service; the railroads, without which the country would stop. If they can't just run along and make an honest living because they're running around trying to do crazy things--I met a finance person for the old Burlington Northern Railway that said that about 10 years ago, all the management was doing was try to figure out anything except how to run the railroad because they weren't making enough profit. How do we keep everything going across the range of industries if everybody's expected to make cocaine-type profits? I'll take my answer off the air.
Mr. YERGIN: Well, one way...
CONAN: Thanks for the call, David.
DAVID: OK.
Mr. YERGIN: Yeah, one way to do it is to bring back something very old-fashioned called dividends, and maybe we have to eliminate double taxation of corporate earnings to do that. I think we are sort of in the `morning after the night before' situation and there'll be more shoes that will drop here. But the process of reform has begun, and we do need to remember that we have a $10.4 trillion economy with a lot of flexibility and, you know, this is one part of the cycle and we'll come out of it, and hopefully we'll be smarter.
CONAN: Juli, can you look at quarterly earnings reports and see companies that are trying to make it straight, right down the middle, and are being honest with people and having a terrible time trying to keep up with those demands for profits?
Ms. NIEMANN: Well, I'm one of the analysts who won't do quarterly earnings estimates, I never have, because I know how you can move them around. But when you have a--most companies do do full and fair disclosure, so you can determine just exactly what they are doing, though. But I'd like to make the point, you have to separate out fraud, which is what WorldCom was doing, from the dot-comedies. All the information was out there on the dot-coms. P.T. Barnum, `A sucker is born every minute.' Everybody had all the information before them. In the early '80s, oil and gas--I used to read prospectuses that said `We intend to explore for oil and gas with golf spikes,' you know, so, I mean, it's all out there. If you buy it, you're a sucker. But the fraud is a different situation. I cannot detect fraud as an analyst, and what I want is clear disclosure and constantly changing auditors so that at least I can do my job.
CONAN: Now we have to say goodbye to Daniel Yergin. Thanks very much for coming in.
Mr. YERGIN: Thank you.
CONAN: Daniel Yergin, chairman of Cambridge Energy Research Associates, co-author of "The Commanding Heights: The Battle for the World Economy,' a book which was turned into a television series on PBS. It comes out on DVD later this month. He was with us here in Studio 3A.
And we would like to let you know that this Thursday, July the Fourth, TALK OF THE NATION will be broadcast live from Battery Park on the southern tip of Manhattan. The show will include music from the Juilliard Jazz Quintet, the Lincoln Center Jazz Orchestra and our guest list is headlined by Wynton Marsalis and Stanley Meises. We won't be able to take phone calls during that program, but we still want to hear from you, so please write us at totn@npr.org.
Up next, we'll continue our talk about the economy. What should investors do now, and who should they believe?
I'm Neal Conan. This is TALK OF THE NATION from NPR News.
(Announcements)
CONAN: This is TALK OF THE NATION. I'm Neal Conan in Washington.
Tomorrow, inside ground zero, the stories of the people who spent the last nine months of their lives there.
Today, we're talking about the economy, the bubble that burst, and what do we do now? Our guest is Juli Niemann, a stock market analyst at RT Jones Capital Equities in St. Louis, Missouri. And joining us now from his office in Albany, New York, is Hugh Johnson, chief investment officer at the brokerage firm First Albany.
And welcome to TALK OF THE NATION.
Mr. HUGH JOHNSON (Chief Investment Officer, First Albany): Thank you.
CONAN: You're an economist and a financial strategist, Mr. Johnson. What was your advice to people three, four, five years ago?
Mr. JOHNSON: Well, my advice--sort of remember you think about the tune that you sort of entered this conversation with--was forever chasing rainbows. Needless to say, many of us, or at least investors, were forever chasing rainbows and it was somewhat clear to me, and I think somewhat clear to those that are students of financial history, that we were in the middle of a financial market mania, and no one could tell, least of all myself, when the mania was going to end, but financial market manias historically always have ended. And so I simply was sort of describing to investors that I talked to, those that would listen, and there weren't many, that this was a financial market mania which would have all the stages of a mania--financial distress at the top, followed by revulsion, which, of course, kind of tells you that there's going to be a race for the exits, but you just don't know when it's going to start.
So I was describing that anatomy, but believe me, most everyone was caught up in the euphoria of speculation and really either didn't want to listen or, you know, had turned their hearing aids off, perhaps for the time.
CONAN: Yeah, we were talking about similar experience that Juli Niemann had in St. Louis. And now that the bubble has burst and that things are changing, are people more willing to listen to--well, I was going to say bad news, but to, you know, bearish advice perhaps?
Mr. JOHNSON: Now they're very receptive to bad advice or advice that tells them to, you know, sort of, oh, be on the defensive side of the ledger. Now it may very well be the case that we've seen the worst. After all, stocks, particularly stocks of Internet companies, are down nearly--well, between 60 and 90 percent, depending on what you're referring to. So maybe we have better times ahead of us, but believe me, they're more receptive, quite receptive I might add, to news that says `Look, you better play it on the safe side now.' So maybe that's a good sign of better times to come. But the point is, is now folks are certainly willing to listen.
CONAN: Juli, is that your experience as well?
Ms. NIEMANN: What we're seeing right now, though, is a lot of people at the extreme: can't see opportunity. Just on the euphoric side, you should have been in there short selling. The bears were in there short selling, and now they're standing before television stations and everything talking about how smart they are. But the market, once it goes through the extreme, will come back again, and this is the time where you have to start looking for opportunity.
CONAN: OK. Let's go back to the phones. Our next caller is Amy, who's with us in Philadelphia.
AMY (Caller): Hi. I just kind of wanted to anecdotally mention my husband received an inheritance. It is an inheritance that is not making us rich, but it's like a nice little nest egg. And we were speaking with an adviser last year, about this time last year, about investing it, and things were already starting to look not so great and he was promising us 10 percent return at the time. And fortunately--he was really anxious to get us in and get us investing, and fortunately my--hus--hello.
CONAN: Yeah, we're still here.
AMY: OK, sorry. Was more hesitant and we didn't do it and, you know, my husband looked at me just recently and said, `My God, what would our money have been--we would have had half of what we started with if we had gone ahead and signed it over.'
CONAN: So what...
AMY: So, you know, I have that as an anecdote, but I also...
CONAN: Well...
AMY: The investment adviser was not--or the financial adviser was not real keen on helping us to get educated. I mean, he basically was happy to just take our money and get his percentage or his commission.
CONAN: So what did you end up doing with that little nest egg?
AMY: Well, we actually have not done anything with it yet, so it's still worth the same amount. In fact, a little bit more because it's getting a little bit of a return in a bank. But my husband is the curmudgeon that you were talking about. He has always felt as though we should do bonds and real estate, and I thought he was too conservative.
(Soundbite of laughter)
CONAN: Well, this comes up on an e-mail question that I was going to put to both Juli and to Hugh Johnson. This comes from Shawn, and it addresses your situation as well. `Is it so wrong now just to take the money we are putting into the market 401(k) and stick it in the bank? My wife and I have been doing this for about six months. We haven't lost anything, and folks all around are complaining about large losses. Why keep investing? Just save and wait till things right themselves. I never hear this strategy recommended.' Hugh, what about that ideas?
Mr. JOHNSON: I've been using a defensive strategy for a long time, not because I'm so bright, but simply because the markets have been performing very, very poorly, as we all know, and the markets themselves have been saying `Look, we're not doing very well. You should, you know, structure your portfolio or your nest egg somewhat defensively,' which means a somewhat smaller-than-normal exposure to the equity markets. Doesn't necessarily mean none, but it means smaller than normal. At some juncture, however, I think we're all going to be wrong in being defensive if long-term history is any sort of source of comfort, and that is I think that we'll probably need to increase our exposure to stocks. But the markets so far have said `Play it on the defensive side,' allowing me and my clients to sleep at night, and there's nothing wrong with sleeping at night. So being defensive is not a bad strategy in this environment, although, as I say importantly, sometime the markets are going to tell us to become much, much more--Shall we say?--positive, optimistic or bullish.
CONAN: Juli, you were talking earlier about seizing opportunities when they emerge. Is this a good time to--and, Amy, thanks for the call, by the way.
AMY: Oh, thank you.
CONAN: Is this a--does your strategy change if you're thinking in terms of five years, 10 years, 30 years?
Ms. NIEMANN: Well, the strategy has to change when you're confronted with reality. Never ignore the obvious, and the obvious was we are in a historically speculative period of time. You knew the collateral damage was going to be impressive. I didn't think it would be this large. So taking a very defensive posture when, you know, the violence, where planes--exactly what you needed to do. But again, doing the opposite right now, putting it in the mattress and running and hiding--the damage has already been done, and there are sectors in the market that are attractively priced. Right now even intermediate-term bonds still look relatively attractive, so you can't stay with one mode of thinking. You have to look to where the opportunity is.
CONAN: And the mantra, of course, diversify, diversify, diversify.
Ms. NIEMANN: And that got you a 4 percent return last year if you had diversified. If you'd stayed in the index, you lost your shirt.
CONAN: Our next caller is Mike, who's with us from St. Louis.
MIKE (Caller): Hi...
CONAN: Hi.
MIKE: ...Juli and gentlemen. Yeah, I was always concerned about the market. I was concerned when it went to 4,000. And what I didn't appreciate then was the momentum of our baby booms all investing in 401(k)s. And--can you hear me?
CONAN: Yes, but it sounds like you've got a baby boom of your own going on there.
MIKE: No, that's a cat that wants...
CONAN: Ah.
MIKE: No, I'm past that section. And then, of course, the market went to 11,000. I mean, I just couldn't chase it, from 4,000 to 11,000, and, of course, I might have lost a lot of money, but now we're back to where we were maybe four or five years ago, so I guess I haven't lost a lot of money. What do we do now?
CONAN: Well, there's the question of the day. Why don't we go first to Hugh Johnson.
Mr. JOHNSON: What I said before and I'd say again is you can continue to play it on the defensive side, but I'm also in Juli's camp, suggesting that there's certainly a lot of opportunity there, and I would argue the market's going to be higher, stock market's going to be higher at the end of this year than it is right now. But at the same time I'm saying that, I never, ever, ever ignore what the market's telling me to do. So it's saying `Play it defensive now,' but it's my expectation that the market's going to give me a different message, and I hope it's going to be sometime soon. So defensive for now, watch the market, and when it starts to improve, then you can add to your exposure to stocks or put some stocks in your portfolio. That's the way I would do it.
CONAN: OK, Mike. Thanks very much for the call.
MIKE: Thank you.
CONAN: And good luck. Maybe feed the cat first, though.
You're listening to TALK OF THE NATION from NPR News.
And let's get Denny on the line from Cambridge, Massachusetts.
DENNY (Caller): Hello.
CONAN: Hi.
DENNY: Hi. (Technical difficulties)
CONAN: Denny, I think your cell phone is breaking up. Can you try one more time?
DENNY: Can you hear me better now?
CONAN: A little bit.
DENNY: OK. I apologize for the connection. I spent two years (technical difficulties)
CONAN: Denny, I'm not sure that this is going to work. I'm sorry, we may have left you on hold for so long that your batteries ran down.
DENNY: I apologize. I'll call on the other line.
CONAN: All right. I'm not sure there's going to be time in this program, but thanks very much for the thought anyway.
DENNY: Sure.
CONAN: OK. Let's go to an e-mail question. And I think, Juli, you were talking about this earlier. This from Heather in Coronado, California, `If companies are cooking the books, is there any way we as investors can detect this in quarterly and annual reports?'
Ms. NIEMANN: No. I as an analyst, who am on top of these things, cannot detect fraud. Certain accountants and auditors can't detect fraud. But there's so much of it going on right now, the best way of having it surface is to continuously change auditors. Every five years change auditors because they end up being in the back pocket of management. This is one huge reform I'd like to see come out.
CONAN: Here's another e-mail question about reforms. `Yesterday on one of the Sunday TV talk shows, Dick Grasso indicated he thought part of the corporate calumny'--nice alliteration, thank you--`was initiated by Congress' limiting the salary that could be paid to CEOs. Stock options were, in part, created to find a way to increase income. This seems to be another case of legislation that attempts to rein in capitalism and often backfires. I would be interested in your guests' comments.' Hugh, why don't you go first.
Mr. JOHNSON: Well, there's no question that a lot of legislation, regulation that we see does backfire. I think it's much more sort of poignant right now to sort of look back over financial history and just to mention that a lot of the regulation that we've seen in financial market history is primarily in response to scandals and swindles that have already occurred, and it certainly closes up loopholes. But no one should for a minute believe that scandals and swindles are going to be a thing of the past, that regulation will rule them out. There'll be new ones, and every mania has been associated with swindles. This is not unique, what we're going through now. I think that's one observation.
The other observation is we'll get the regulation and it will close the loopholes or the mistakes that have been made over the last four years; there will be new ones to be made. But what's really important is the last disclosure of a scandal or a swindle associated with those last mania will occur someday and will start a process of rebuilding confidence and the bull market will once again resume. I know you don't believe it now, but it will occur, and hopefully it's sooner, not later.
CONAN: Juli, let me switch to another e-mail question that just came in. This one from Eric, `What happened to people researching a company and, if they believe in the company, just investing in it? I believe in future energy products, so I invest in companies that promote non-nuclear and clean energy. If these businesses' stocks go down, I look at it that at least I invested in somebody that's doing something good for our future instead of just trying to make money on the latest flash in the pan.'
Ms. NIEMANN: A stock doesn't know if you bought it or not. It's a point of total indifference as to whether you purchase a stock or not. The company only makes money once, and that's in the initial underwriting. That's when they take your money, put it to work doing whatever they're going to do. Anytime you go in and invest in the stock market, you're buying it from somebody else who disagrees with you for whatever reason. There's a seller on the other side. So making a statement or socially responsible investing in my opinion really is almost an exercise in futility because you're not making a statement. The company doesn't know whether you own it, nor do they care.
CONAN: Well, at that point we're just going to have to leave it. Thank you both very much for this discussion. And you just heard Juli Niemann, a stock market analyst at RT Jones Capital Equities, and she was with us from member station KWMU in St. Louis, Missouri. And thanks very much for joining us today.
And also, thanks to Hugh Johnson, chief investment officer at First Albany Corporation. And he spoke to us from his office, as you might suspect, in Albany, New York.
Now finish this sentence: Houston, Texas, has made history by acquiring what? Well, if you answered by acquiring Yao Ming, the Chinese basketball star who was the first pick in the NBA draft, well, you're only partly right. Houston, Texas, has also acquired TALK OF THE NATION. Today we welcome our listeners at KUH-FM through the voice of a Texas native son, Johnny Copeland.
(Soundbite of song)
Mr. JOHNNY COPELAND: (Singing) Well, I used to go and play my guitar every day. Now I'm up here getting pretty action, but I can't get no satisfaction. Houston, let me come home.
CONAN: Johnny Copeland. In Washington, I'm Neal Conan, NPR News.
No comments:
Post a Comment