Financial Predictions for 2010

Alan Levenson of T. Rowe Price tells Eric Schurenberg why stocks will be better than bonds in 2010 and tries to channel Fed chief Ben Bernanke.

Eric Schurenburg: 2010 is shaping out to be another mystery year. Will there be inflation, deflation, where will you make money? T. Rowe Price, the big mutual fund company is on its annual forecast road tour grappling with those very questions. One of the stars of the tour is Alan Levenson, T. Rowe’s Chief Economist. Welcome Alan. Thanks for joining us. Alan Levenson: Thank you very much. Eric Schurenburg: As the Chief Economist of T. Rowe Price, what are you telling people and what does your company tell people about the best places to invest right now? Alan Levenson: Well, as one general thing, we’re talking about, this coming year is being one where stocks are likely to do better than bonds just because bonds have done so well and interest rates are so low. And with the economy recovering, that suggests good things for corporate earnings. And the second thing is just to make sure that you’re exposed to international markets. There’s been a tendency to have what we call a home bias and to think of the global economy as very exotic and unknown place. But emerging economies in general are far healthier than they were say 10 years ago and we would caution people that there are a lot of growth opportunities beyond our shores and so, that part of the diversification strategy should include their global dimension. Eric Schurenburg: Or you can turn about the dollar. Does that play into your international interest? Alan Levenson: Yes, it does to the extent -- it’s not so much personally that I would bet on the dollar and then going down on the fast lane. Looking abroad, it’s just more for the growth opportunities over time. The dollar is a very hard thing to forecast. But to the extent if the dollar goes down, earnings denominated in foreign currency in a Chinese company or a French company, when you bring those back into the dollar, it increases your return. Eric Schurenburg: Okay. Just to go back to bonds for a second. Since you think that stocks will do better than bonds, do you have any recommendations for where to keep your safe money? This might be a bad year for bonds. I assume that you’re talking about interest rates going up, maybe a whiff of inflation. What would be a safe place? Alan Levenson: Particularly, in light of what we’ve been through the last two years. To me, safe means only one thing. That’s money that you might need to spend at a certain amount of time and I’m a big believer that you’re going to sell assets from time to time but you don’t want to have to sell assets at the wrong time. So, even though the interest rates are quite low, if you’re sufficiently concerned or sufficiently certain that you’re going to need money in a few months time, put it in the bank and recognize that you’re not going to earn interests. Other than that, I’d say there are short term bond funds. We offer one that gets more yield than a money market that tries to reduce capital fluctuations. So, that’s another option. Eric Schurenburg: Okay. If you were Ben Bernanke, what would scare you most looking out of the economy? Alan Levenson: Looking out of the economy, I can think of a lot of fears that inflation is going to pick up and the economy is not going to recover. But what would keep me up at night is that if I’m successful in getting the economy to recover, having taken all of these heroic measures, having taken all these assets under the fed’s balance sheet, how am I going to get back to a normal balance sheet and conducting monetary policy in a normal way? Because again, looking at the economy and responding to it, I think the fed knows what to do with the question. From where they are right now is that when it comes time to tighten monetary policy or to raise rates. It’s not automatic that they’ll be able to do that as they have in the past. Eric Schurenburg: If they can’t raise rates and money continues to flow in the system, what happens then? Alan Levenson: Well, if they find that they can’t successfully raise rates and they didn’t do anything else about it, the risk would be inflation and a weaker dollar. I think what they would end up doing is selling assets that they have purchased. That’s plan B, that’s not plan A. But if they found that there was too much leakage in the system to allow them to raise rates effectively, they’d begin to sell some of the -- it will be closed to over a trillion and a half dollars in assets that they’ve bought. It’s a way to push out the interest rates. Eric Schurenburg: Okay, good. Those treasuries and mortgage-backed securities that they’ve been buying [Voice Overlap] Alan Levenson: Yes. And it would be risky to do that. You could be disrupted to the marketplace but I think that they would say that when push comes to shove, better to take those first, try to send the market a message about where they’re trying to get interest rates then simply to throw out their hands and let inflation go up. Eric Schurenburg: Good. Alan, it’s been a tough economy to peer into the future in. So, let me ask you a question, as an economist, why should people believe economists about the future? Alan Levenson: Speaking for myself, they shouldn’t. If you’re asking me about forecasting and why should I believe that forecast, I’m not going to insist that you do. I don’t have any special expertise about forecasting. I have expertise about analyzing the current situation. So, if you want to ask those questions, that’s the reason to listen to me because I have expertise there. But nobody is very good at predicting the future, what’s going to happen and even less so, when it’s going to happen. Eric Schurenburg: Well, that is an honest answer. Thanks but, darn! Alan thanks for joining us. Alan Levenson: My pleasure. Thank you. Eric Schurenburg: Thank you for watching.