Ludwig: But if you jumped in when all the killing was finished, then you did quite well, didn’t you?
Stein: But you never know when it’s finished. Nobody is ever smart enough to know when it’s finished. Who possibly would have guessed that March 9, 2009 was the bottom, and that from then on, you were going to enjoy close to 90 percent recovery. Nobody could have guessed that. Nobody knows where the bottom is and nobody knows where the top is.
Ludwig: On that note, who knows that there’s not going to be another swoon? You hear guys like Jeremy Grantham say that figuring out fair value has been distorted by the Fed’s quantitative easing.
Stein: Well, the quantitative easing does not seem to have had the effect that it was supposed to have. It’s quite the contrary. People are hedging against inflation instead of lending more. We desperately need easier credit, especially in home finance. In fact, mortgage rates have just skyrocketed in the last several months. And it still causes brain damage trying to get a mortgage. The banks say they’re willing to lend, but to get a loan, you put your life in your hands in terms of what the banks require of you.
Ludwig: So, prognosticate a bit: What is your outlook?
Stein: I’m not a good prognosticator, but we’re certainly in a recovery. But will it last? Will there be some new crisis in Europe that will cause the market to crash? Will spending restraints by the federal government cause some sort of unwelcome change on the demand side? We don’t know these things, and that’s why it’s important to be extremely diversified, both around the globe and in terms of having cash and very, very short-term bonds.
Ludwig: So what are we living through now? It almost seems like a very mild form of the 1930s combined with the inflationary pressures of the 1970s.
Stein: Realistically speaking, the situation we’re in now is not even remotely close to the situation of the ’30s. In the ’30s, at one point, we had roughly 25 percent unemployment. And those were in the days when most families had only one breadwinner, no meaningful unemployment compensation and no federally insured savings accounts. So if that breadwinner lost his job, it was really a disaster. Right now, we have 9.4 percent unemployment; it’s been as high as 9.8 percent, but it’s not even close to being comparable with the amount of suffering we had in the Great Depression.
But, having said that, I remember thinking after Lehman declared bankruptcy that there’s no bottom here. Had Bank of America not stepped in and rescued Merrill Lynch, or had Mr. Paulson suddenly not come to his senses and instituted TARP, the disaster could have been on an unprecedented scale. People were terrified.
Ludwig: What about the employment situation?
Stein: It’s still too high. Unemployment is always a lagging indicator; it’s always one of the last to recover. Employers lay off and find they can do quite well without the workers and they work around the shortage of labor in their factory or shop. And only when demand really increases will unemployment fall in a big way. Demand has increased, but nowhere near the level that is needed to make a meaningful dent in unemployment.
I will say that I used to dismiss anecdotal evidence as being meaningless, but I no longer do. And what I see around many of the shops in Southern California is a lot signs up looking for new employees. Maybe people won’t be employed at the level they’d like to be, but there are jobs out there.