Ed Yardeni, president and chief investment strategist for Yardeni Research, expressed strong optimism about the U.S. economic recovery when he spoke at IndexUniverse’s ”Inside Indexing” conference last week.
And when IndexUniverse.com Managing Editor Olivier Ludwig caught up with him on the sidelines of the conference, he elaborated a bit, saying he quite likes stocks in the consumer discretionary, industrial, technology and financial sectors right now.
Still, Yardeni is less sure about the future. While everyone more or less knows what has to be done to solve America’s long-term fiscal problems, Yardeni worries the United States just might lack the political will to get it done.
Ludwig: You said during your talk that corruption was the cause of the crisis that’s still with us. Can you elaborate on that?
Yardeni: I’m not smart enough to figure out who specifically bears most of the guilt for causing the crisis, but it seems to me what we saw happen in 2008 was the collapse of what I call the “credit insurance fraud industry.”
If you take a junk credit and convert it into a Triple-A bond, that’s not alchemy, it’s just fraud. Again, I call it an industry because so many banks and Wall-Streeters and mortgage brokers and individual borrowers all played the game.
And the cover that everybody took was the argument that “Everybody knows home prices could only go up, so what’s the difference if I don’t really have the income and am lying?”
Ludwig: You’re saying there’s blame on both sides—the people getting loans, the people giving loans—that the whole system was unhinged?
Yardeni: Yes. The rating agencies deserve blame. The government certainly participated in the corruption of the system, but so did Wall Street, so did the banks. It’s like one of those Agatha Christie mysteries: They all did it.
Ludwig: The sentiment you expressed in your speech about the Iranian situation struck me as particularly interesting. You seem to think disaster can be averted. The possibility of some military action there is pretty horrific, but you seem to think it’s unlikely.
Yardeni: It may be wishful thinking on my part, but I think everybody knows that a confrontation in the Persian Gulf would be a disaster. It would sink us all back into a recession, and then how would we get out of it now that we’ve shot all our fiscal monetary policy shots. It would be ugly. I don’t think anybody would want to see that happen.
Meanwhile, the West has come with these sanctions, which in the past didn’t work, but now it looks like they might. These sanctions are very tough. They make it almost impossible for them to clear transactions through the global transactions systems. It’s like if your bank just refuses to cash your check. It’s already having a severe impact to their economy, and it may very well get their attention.
Ludwig: As far as Washington goes and the unfunded-liabilities issue, were you betraying a little bit of optimism on that issue in the sense that the public discussion is slowly becoming more reality based?
Yardeni: I think you are reading too much into my comments. The main point I’m making on fiscal policies is that all of our problems in the U.S. on that score are political. We can fix the problem just by adopting the plan that was put together by the president’s deficit reduction committee in 2010. That way we would eliminate tax loopholes, save about $1 trillion a year and use that to cut marginal tax rates—and still get significant deficit reduction. But I don’t know that we have the political will, quite honestly.
Ludwig: What areas of the investment universe look particularly prospective to you at this juncture?
Yardeni: I like consumer discretionary, but some of those stocks have gone absolutely vertical, and are probably going to correct. I like the industrial sector and information technology; they both benefit from ongoing global economic growth. Financials—as in regional banks—continue to do well.
Ludwig: Do you have any opinion about the Apple dividend, in the grand scheme of things?
Yardeni: I think it’s a healthy development. Maybe other technology companies will now realize that there’s nothing wrong or embarrassing about paying a dividend.
I’m an old-fashioned kind of guy: I like the idea of going back to dividend/discount models where you actually get some cash back just to double-check that they really are making money. I don’t like these phantom earnings where they buy back shares. There’s a place for that, but companies that are making a lot of cash should be paying some of that back to shareholders.
Ludwig: It sounds like you’re talking about investment as opposed to speculation.
Yardeni: I’m kind of optimistic that investment approaches are making a comeback here. So far this year, fundamentals for individual stocks finally seem to matter. It’s not all risk on/risk off, which I think is a good development.
Ludwig: You’ve expressed some optimism about the labor market, noting that initial jobless claims are moving down, and that that could be a strong indicator moving forward.
Yardeni: It’s a little tricky, because as the labor market improves, a lot of people who dropped out will come back in, and we will suddenly get an influx in the labor force that sort of offsets the employment gains. I think we could be looking at under-8 percent unemployment in the second half of the year. It’s not a particularly brave forecast, but I have to factor in that the participation may increase.
If CalPERS is taking hedgies out, ETFs may be coming back in.
As valuations grow uncomfortably high, ‘quality’ ETFs makes more sense—if you can figure out just what quality means.
‘Smart beta’ almost surely means loss of more market share for active managers.
Be careful of your assumptions (and headlines!) about volatility ETFs.