Washington Summit Part Two

John Osbon - May 8, 2012

I decided to fly to Washington, DC, for one day last week for Bloomberg’s Washington Summit. I went for three reasons: density, depth, and debate.  Three Congressmen, three Nobel prize winners, one Cabinet member, and a gaggle of politicos, entrepreneurs, and regulators – all in one place, in one day!  There’s no substitute for an onsite question and answer format. I expected some interesting insights from the powerful and influential panelists, and was not disappointed.

I am a fan

I like the summit organizer, Bloomberg, for professional reasons, but I value them especially because they “have no dog in the hunt,” that is, the company is not selling any investment products, services, or points of view.  All it sells is information – lots of it – through the Bloomberg terminal, or for free on www.bloomberg.com.  When Bloomberg puts on an investment summit, I am confident that it is a neutral power, with no agenda beyond information and insight.

Furthermore, Bloomberg is big, the largest business- and market-focused news service in the world, with 2300 reporters at 146 bureaus in 72 countries. I find its coverage unmatched, especially for an organization with its independence of thought. (Full disclosure – number one son, Max, works for Bloomberg in NYC).

The issues

There were 33 panelists on 14 panels of 30-45 minutes in length, conducted without breaks. This was a feast for information-hounds, pulse-takers, and thinkers! The conversation and debate were lively, as one would expect. I was looking for common themes or areas of agreement, even amidst the disagreement and debate.  Here’s what I heard:

Have home prices bottomed? ($7 trillion of residential real estate value has vanished since 2008.)

No.  The most optimistic was Shaun Donovan, Secretary of Housing, who said “this winter was a turning point” but went on to point out that the barriers to advancement are “foreclosures, the shadow inventory, and credit availability.” Further progress would “require Congressional action,” he said.  Jim Millstein, former chief restructuring officer of the Treasury was brutally direct, saying “the housing finance system is broken.”   This session was definitely a downer.

What about the dollar?

Tim Adams, former Treasury Undersecretary, International Affairs, pointed out the dollar is flat since 2007, even after two “quantitative easings” flooded the world with dollars.  “The risk trade is still on a flight to quality,” he says.   We’ll “muddle through” because “we believe in a strong dollar and don’t use it for competitive purposes.” As far as the euro was concerned, Richard Clarida of Columbia University, agreed that the (euro) “problem will go on forever, because the structure is fundamentally flawed.”  “The membership may change, but the euro survives” was the conclusion.  Hmm, things at the conference were getting better, or at least, not worse.

Whither interest rates?

The Federal Reserve Board’s Jeffrey Lacker, the sole dissenting voice on the Federal Open Market Committee – he wants to raise rates, sooner than his peers – outlined a good news, bad news scenario.  He forecast GDP growth of 3% on falling unemployment and consumer confidence.  Now there was a ray of sunshine on this rainy day in DC!  And he wants to raise rates a lot sooner than 2014.  He asked the unanswerable question, “How do you back out of a pledge?” (The Fed has promised not to raise rates through 2014).

What does the President’s economist say?

Alan Krueger, Chairman of the Council of Economic Advisors, was circumspect and vague but upbeat.   He felt that the “unemployment rate was going to be better than expected,” and noted that 600,000 new jobs were created since the beginning of the year.  I didn’t hear much else of substance, other than a well-intentioned “education is the prescription for economic equality; community colleges are our secret weapon.” He has to do better than that, I thought.

Will there be another crisis?

This session was also a downer, with participants saying yes, for different reasons.  Representative Scott Garnett (R-NJ), Chairman Financial Services Subcommittee decried the “moral hazard we have created in the marketplace.”  Arthur Levitt, former SEC Chairman said that “catastrophe was predictable and inevitable, and could happen again in other ways.”

What about the corporate tax debate?

Richard Gephardt, former Congressman, Majority Leader and Democrat who voted for Reagan’s tax cuts in 1981, came across as downright practical and non-partisan in his comments about taxes and the political process.  He was not particularly optimistic about a compromise, pointing out that “535 people have votes” on tax cuts and that he “doesn’t see enough or many people (in Congress) involved.”  “We need lots of people to figure out the execution,” he points out.  After the corporate tax debate one questioner (me) asked, “Corporations paid $275 billion in taxes last year, while individuals paid more than $2 trillion. Isn’t the corporate tax pie too small [no matter how much it is raised] to feed very many mouths?”  Silence ensued, followed only by a comment something like “Well, we have to do it on principle.”

Should you be doing anything?

After a full day of intellectual stimulation like the Washington Summit, the temptation is toward action. What did all these opinions and predictions suggest for individual investors? Nothing, I say. As fascinating and compelling as some of the panelists were, I would argue against taking any steps based on what I heard for one simple reason: there is no clear investment link between political events and investment results.  Just look at the last eight presidents, from Nixon to Obama. Could you have consistently predicted stock and bond price performance based on who was in office?  I couldn’t, and I don’t know anyone who can. Markets move on too many unpredictable forces to try to outsmart them. Better to stay informed and engaged in the political debate.  And vote!  But vote with your ballot, not with your investment dollars, is my advice.

[Last week I commented on Alan Greenspan’s remarks at the Washington Summit. Click here for that post.]

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