Mike Norman, HardAssetsInvestor.com (Norman): Today my guest is Peter Cardillo, chief market economist at Avalon Partners.
Look, you’ve been in the business a long time, Peter, you’ve been in the business a very long time. Tell us your thoughts about what we have gone through recently, particularly this enormous market plunge, not just in stocks but in all asset classes. Have you seen anything like this in your career?
Peter Cardillo, chief market economist, Avalon Partners (Cardillo): Percentagewise yes, of course, but you know, in such a short period of time, the answer is absolutely no. I have not gone through anything like this before in terms of market declines, of the market losing 20% in one week; that never happened before, and of course the reason for that is, obviously what we had out there was a fear factor that was gripping everyone, and of course, with the credit market seizing up, that just added even more fear out there, and then of course the blowing up of a lot of hedge funds didn’t help either. That’s probably one of the reasons why we saw this market dive the way it did.
Usually the markets always discount, and this market has discounted a lot of things, just recession, and probably even a recession is going to be a little bit more severe than we previously were contemplating, but nevertheless, as I said, the way the market dropped, you might say, fast market action that we had, and the volatility that we had was all due to this unwinding of assets, whether they were equities, bonds or hard assets, commodities, you name it; it went all down at one time.
Norman: Except for the highest quality, like Treasuries. Where are we, do you think, in this whole process? You sort of alluded to perhaps that the smoke may be clearing. We’ve discounted a lot, we’ve discounted perhaps a very, very deep recession, and as you mentioned, investors have pulled out of assets of all classes with the exception of the safest, most liquid. Where are we now, in your mind, in this process? Are we in the middle, are we still in the early stages, or are we closer to the end?
Cardillo: I think we’re closer to the end of the crisis as we know it. In terms of economic activity, I think it’s going to be at least two or three quarters of some real tough going here. We’ll probably see unemployment climb above 7.5% and we’ll probably see inflation really fall off a cliff.
Now there’s a positive side to that, and of course there’s a negative side to that. In fact, I think if you read between the lines, if you heard today Mr. Bernanke, obviously you know he’s for another stimulus package; why is he for that? Very simple: Because he knows that we’re in for some rough times here in terms of economic activity, and the greatest fear out there - although I believe it was avoided - was a deflationary period. Yeah, I think that was avoided; I really do.
Norman: Through the actions taken by the Fed and the government and other central banks, you mean?
Cardillo: Absolutely; there’s no doubt in my mind that if we didn’t have those actions, this market could have been really down even another 20%, 30%, maybe 40% from these levels.
Norman: Some say that the government intervention in all its forms - the central bank and the federal government - is a negative thing. Do you agree or disagree with that?
Cardillo: No, I think it’s a positive, but it does have some negative implications. Obviously somewhere along the line, when we do get back on track, the government, the Fed, is going to have to fight inflation and not disinflation or deflation. You’re printing money, you’re creating deficits that have gone into orbit, and that’s not a positive, that’s always a negative.
But as I said before, right now they needed to avert a serious deflationary spiral within the economy, and I think they’ve done that, not only here domestically, but on a global scale as well. Look, you saw the numbers out of China; growth is at 9%. Now 9% is pretty strong, but by the same token, for an emerging market, that was almost at 11%, 12% - it’s down rather sharply.
Norman: A big surprise there, no question about it.
Norman: Peter ..you were talking about the Fed and other central banks and actions by the government that have prevented a deflation. Now leading up to this, over the past five or six years, the big concern has been inflation. Indeed, we've seen materials prices rising across the board, a lot of concern about inflation, we've seen a fall in the exchange value of the U.S. dollar. All this happened very quickly, this sudden idea or notion of a deflation.
Cardillo: Well, obviously, you know, when you have the credit markets seizing up and no one is willing … when the banks are not willing to lend to each other, that's a serious problem. Look, what we went through … there were signs of what happened in the early 1930s, there's no question about that. However, I think that the governments certainly have learned the lesson now in terms of avoiding a deflationary era, and that's why I think the fact that they came out with all these stimulus packages, rescue packages - whatever you want to call them - basically is the right thing at the right time.