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Forbes Financial Round Table: Mortgage Market Relief? WALLY FORBES: Thank you Vahan.
Let me ask a question.
I went to the New York Security Analysts Society's meeting yesterday where Treasury Secretary Henry Paulson spoke. He said that the administration is pushing for a concerted relief for some of the problems in the mortgage market. This could be tried through agreements be worked out between those who initiated the mortgages and representatives of the investing public.
He wasn't making a representation that this was going to be an immediate cure and would have a long way to go to find out how effectively it can be applied. He is trying to promote some ways of relieving the pressure of having mass forecloses which would not be in anybody's interest. Not in the interest of the investor and not in the interest of the public. I wondered if any of you have any comments with respect to that proposal and the potential affects on what has been the trigger to some of our problems.
BYRON WIEN: I think Hank has very good intentions. The administration has good intentions. But I think what the administration is proposing is only a palliative. It can put a Band-Aid over a serious problem, but I'm more worried about what's going forward.
I'm worried about these unsold homes that mean no homes or very few homes are going to be built. I'm worried about all the people that are going to be laid off. I'm worried about the fact that the laid off people aren't going to spend.
So I think you can cure the historical problem of people having gotten in over their heads and lenders giving out money they shouldn't have given out, but I don't think that's going to solve the problem going forward. And this is that five percent of the people who want jobs don't have them and the number is going to increase. That's going to have enormous implications for the economy.
Let me throw out a question, Wally, for the others. Every year I make these 10 forecasts. Let me throw out the one I'm most insecure about. I said that this would be a stagflationary period. I think that we're going to have a period where the economy is going to slow. Everybody around the table pretty much agrees with that. But I think inflation is going to increase rather than decrease and I think interest rates are going to rise rather than fall. Does anybody think that's a reasonable position?
DOUG COHEN: I do think it's a reasonable position and that's why I tried to caveat my comment regarding financials. I think it is too early to buy financials aggressively when there's even a whiff of stagflation in the air.
That's a challenging endeavor and that's why I think you really want to either close your eyes and take a multi-year timeframe or just hold off.
You do have to give the Fed a little bit of credit here though. I think the Fed's hands are going to be more tied than we wish they were because of inflation and because of the weakness in the dollar, but the Fed is on the case. They are cutting. They will continue to cut and allow the housing situation to stabilize toward yearend. Housing is an important part of the economy. There's no question about that. But it's not the entire economy. We can have a five percent unemployment rate, which we have now and which is far from devastating by historical standards. And that can increase somewhat and still be below historical norms. But housing alone is not going to be a cause of a massive economic slowdown from here.
HENRY MERCER: Byron has really hit on the key issue here because the market really seems to fear stagflation. When you look at the recent inflation numbers you're starting to see commodity price pressure and oil price pressure starting to work their way into the numbers. If you look at the 1970s, it was a stagflationary environment and it was a very, very difficult period to make money on Wall Street in equities -- particularly the early part of the decade where we experienced one of the worst bear markets in history.
But the real gorilla in the room is whether or not the U.S. is entering, or is going to enter, a recession. Since 1945, there have been 11 recessions. All of them have been preceded or accompanied by severe stock market declines. Only one of the 11 stopped short of the 10 percent level. That was back in the third quarter of 1944 just prior to a recession which began in early 1945 during the last days of World War II. That is really the key issue.
From my perspective, it's very, very difficult to predict the economy. When times get tough, I become more fundamentally oriented. But I also pay a lot of attention to psychological data, sentiment figures. I start looking at put-call ratios, oversold technical indicators. That is what I'm going to be watching more than the actual economic background. Some technical figures, such as the percentage of New York Stock Exchange issues trading above their 200-day moving average has fallen below 30 percent. It's now around 27 percent. When that gets down to 20 percent -- or the high teens -- it can be a very reliable oversold indicator. That's one of the more reliable ones.
I agree with Mike, Vahan and Doug. I'm looking at larger cap, really dominant franchise type U.S. companies -- the GEs (NYSE:GE) of the world. They're very, very reasonably priced on an historic basis. Vahan mentioned Johnson & Johnson (NYSE:JNJ). That is really our favorite right here. For the last six years J&J has stayed in sort of a trading range. The earnings have caught up to the stock price in the last couple of years. It, unlike some of the things we like which are normally trading at the low of their trading ranges, is up near its all time high. But the earnings have closed the gap to the stock price so that, on a relative basis, it’s trading at one of its cheapest levels historically.
I'm also pleased to see that Warren Buffett and Berkshire Hathaway have bought Johnson & Johnson in a big way for the first time ever. Like Mike, I also like Berkshire Hathaway (NYSE:BRK.A) in this environment. It's been a long-term core holding, but it's attractive now because it's not a bad thing to have the oracle of Omaha still tip toeing to work every day and he's been very, very active lately. So that's something we're looking at very closely.
Next: Forbes Financial Round Table: Berkshire Hathaway's Fate
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