There Are More Serious Issues Than the Fiscal Cliff

In the interview below, Bruce Greenwald, distinguished investor, professor, and advisor, sits down with Brendan Byrnes to discuss a variety of topics as they relate to investors today. Professor Greenwald is a famed value investor, always trying to buy mispriced assets at a discount to their intrinsic value.

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Brendan: Let's take a look at a bigger-picture, macro issue; the fiscal cliff that's been dominating the news, at least the financial news, lately. Is this just noise? Does this matter for investors?

Bruce: I think there are macro issues that matter for investors. I think, actually, there are more serious issues than the fiscal cliff. I don't think the fiscal cliff is going to help. On the other hand, the apocalyptic view that this is going to recreate 2009 is just not justified.

Britain, in a sense, has voluntarily gone off the fiscal cliff. They've done a lot of austerity. They did have a double-dip recession, but it was very mild. It was a 1% drop in GDP, so people who think this is going to be a 5% drop like we experienced in 2009 just are not being realistic about it.

On the other hand, there are big problems out there. The biggest is that the business community -- and business investment at this stage in the cycle is typically what sustains growth -- really is not comfortable, I think, with the level of risk. You see that in the investment community, in the willingness of investors to accept these ridiculously low returns on government bonds that they think are safe.

If the perceived risk, or the hostility of government, or the hostility of the fundamental environment because of what's going on in Europe, reduces business investment -- and you know in the last quarter it went down -- that's going to be a big drag next year.

The second thing is that there's a simple point at which you can see where consumers are going. The basic story with consumers is that the top 20% of households, who have about 40% of the permanent income, save about 15% of their incomes, so if everybody else spends everything they have, you have a 6% savings rate.

When the savings rate goes below 6%, it means that the bottom 80% are spending more than their income, and that's not going to last. In the last few quarters, saving rates have been around 4%, so that can't be sustainable.

Thirdly, on housing, I don't think you're going to get a dramatic improvement in housing until people feel comfortable in their jobs -- so, until the employment market improves. There will be some improvement, and there is improvement in rental housing, but until people start to get jobs, I don't think you're going to see a big boom in residential construction.

Right now, if those companies don't feel comfortable because they think it's a very risky, hostile environment, they're not going to be hiring people.

Then, of course, you've got the problem overseas, which is the Chinese slowdown, of course, has been corrected by exporting. If they export, somebody's got to import. And if Europe decides to save themselves by exporting, too, and letting the euro fall, somebody's got to do those imports, and the obvious candidate is the United States.

If our trade deficit worsens, that has a depressive effect on the economy. I haven't looked at it in detail, but I think there are many, many concerns beyond the fiscal cliff that people ought to be looking at to solve.


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