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
Eric Schurenburg: Or you can turn about the dollar. Does that play into your
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
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
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.
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