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Brian Wesbury of First Trust on the economic news of the week.

Monday, December 8, 2008

HH: Brian Wesbury joins me. He’s the eminent forecaster with First Trust Securities in Chicago. He’s been on for the last few weeks, you people really like him. Brian, welcome back, good to talk to you.

BW: Hey, Hugh, great to be with you. And economics should always be the first segment.

HH: Well I know, but we do like the audience to stick around for the second, so you’ve got to be really upbeat and happy. And today’s news makes me think it’s not much upbeat and happy, but I’ll start with what I said at the beginning. I got a call from a broker today who said market rallied on bad news, traditionally understood to be the sign of a bottom. Brian Wesbury, what do you think?

BW: Yeah, I think that’s absolutely true. We had priced in, believe it or not, even this bad news. That’s what it kind of says today. And if you, you know, you kind of look at what happened in the economy, I think we froze in September. We had this panic. But if you’ve looked at the kind of minutiae, the real time data in the last couple of weeks, holiday shopping data was really good. And for the last two weeks, fewer people, still too many, but fewer people have filed for unemployment insurance. And one of the things I watch is movie box office receipts. And we just had the fifth, the best November in five years. And that kind of tells me that this may be the worst data that we get on the economy, and that’s kind of what the market was telling me today, too.

HH: Now if it’s the worst data, then does the 6.7% not tick up in December? Or does it tick up another month or two as people get through the process of filing, because I don’t want people to be confused, because I still think, my experience with folks who’ve lost their job is they take three or four weeks to file for it, and then they get around to it. What do you think?

BW: Yeah, absolutely. Well, some of this goes on…remember that the November employment report that we just received today, loss of 530,000 jobs, that’s really from the second week of November. So it’s already pretty old data. And those people would have filed for unemployment insurance in the last couple of weeks. And that’s, we’ve definitely seen unemployment insurance pick up. But here’s one thing I will warn everybody about, and that is that the market always turns up before the economic data does. So we’re likely to see a couple of more months of pretty bad economic news on the employment side. I think the unemployment rate’s going to go into the sevens, maybe 7.4 or 7.5%. But we shouldn’t trade on economic data, because by the time that data turns around and gets better, the market will have already priced in the recovery.

HH: And so the recovery at Wall Street leads the recovery on Main Street?

BW: That’s exactly right. And that’s why some people look at today’s action as a positive sign. Now there’s another way to look at today, and that is the news was so grim on the economy that Washington’s going to throw even more money at the problem, and some people believe that might have been what drove the market up. I don’t think that’s really it. I think what people are doing is they’re looking at some of the more real time data we have, these little bit better news on claims, and better news on retail sales, and saying we might have seen the worst. And I think it was in November.

HH: Now we also get, we’ve talked about this a couple of times, but I’ll keep talking about it if only my effort to stem the tide of bad reporting. Hysteria from news people, I mean, just hysteria, and I hate…I’m not being sexist, it just happened to be two women who were doing it today about Two o’clock my time when I was listening…

BW: Right.

HH: And they were absolutely over the top, and they used the Great Depression analogy. And it makes me scream, Brian, because I’ll bet you they’ve never read a book about the Depression.

BW: Yeah, I agree. And you know, this is one thing that happens during a recession. And for some reason, and especially in the last 25 years, I mean younger people today, they don’t know what a bad economy is. And so we’ve gotten so used to things being so good that when we have a recession, they think somehow it’s the end of the world. Now let me defend them just a little bit. You know, sometimes when you get the flu, you feel like you want to die, let alone you’re going to die. And then when you feel better, it’s like wow, it was just the flu, but boy it felt terrible while you had it. So part of what’s going on is that when you have a recession, it feels really bad. But that’s why we ought to have economists and kind of calmer heads talk about this, because economies get the flu every once in a while. This happens. But we recover and we turn back and we grow. I mean, nobody got rich shorting the U.S. economy over a long period of time.

HH: Now we also then come to the Big 3. And if I read this correctly, Ford will survive, Chrysler won’t, and GM might. Is that how you assess it, Brian?

BW: Yeah, at least that’s the way it looks right now.

HH: And so if that happens, and you actually had Chrysler fail, what happens to unemployment? I’ve seen the head of Chrysler, the Cerberus guy, and I just don’t trust him saying oh, it’s going to mean unemployment at 10%. Do you buy that?

BW: Well, I mean, we could lose up to, let’s say, a million, million and a half jobs. But what would happen immediately is that…well, and immediate is a pretty…it would happen pretty quickly. I think those jobs would be absorbed. There are a lot of car companies that are in very good shape right now that would be chomping at the bit to pick up the parts businesses, to pick up more business. And they would need new employees. So there would be a sharp increase in unemployment, but I don’t think it would last that long. The one thing you don’t want in an economy is a bunch of companies that continually lose money over time. If you kind of go back to Russia, they didn’t have profits for thirty years, and they took a great economy and drove it completely into the ground because they continued to support businesses that didn’t make any profits. And if you don’t have profits, you don’t have any growth. So some cases, the best thing for our economy in the long run would be to let companies that continually lose money year after year after year go. That’s what bankruptcy is all about.

HH: I’m talking with Brian Wesbury of First Trust in Chicago, one of the most well-regarded economic forecaster by the Wall Street Journal, USA Today and others, and now a frequent guest on the Hugh Hewitt Show. Brian, you’re an economist, and I want to test out the Hewitt Plan.

BW: Uh-huh.

HH: And the Hewitt plan is simply this. If we’re going to throw $25, 30, 35 billion dollars at GM, Ford and Chrysler, the Republicans ought to go up and say we want Michigan and Ohio to become little Irelands. We want them to have a 12.5% corporate top tax rate. What would that do, in your professional opinion, to Michigan’s and Ohio’s economy if companies headquartered there, I mean really headquartered there, there are tests for that…

BW: Yeah.

HH: …had a top corporate tax rate of 12.5%?

BW: Oh, it would absolutely create a boom there. And that’s…by the way, that’s one of the big problems with Michigan and Ohio right now. They have raised their state tax rates. I mean, under Governor Granholm, tax rates in Michigan have gone up considerably in the last few years. And when you add that negative on top of these failing industries, no wonder the state has been in recession for two years. That would be a great plan. I’m all for the Hewitt plan. I think that would create a boom in those states, because investment dollars would flow in, those workers, if those companies were to go bankrupt, would be absorbed by all that new investment. And the state would come out so much better on the other side.

HH: Okay, given that this is not rocket science, this is what Ireland has done, and Ireland is booming as a result, so the Irish zones are what I’m suggesting. But given that we know this works, why don’t elected officials do this, Brian Wesbury?

BW: Yeah, this is the $64 zillion dollar question. And I wish I had a good answer other than you know what, that puts it in the hands of the private sector. And a lot of people in elected office, they love to turn the dials and flip the switches and think they control everything. And they, it’s one of the hardest things it seems they can do is to let go and have faith that everything will turn out okay. I mean, you know, there are some parents like that, right, who can’t let go of their children because they’re scared to let them go out into that world. Well, maybe those people end up being politicians, because they like to control everything, and it’s sort of their nature.

HH: All right, Brian Wesbury, last question, because I don’t know how to measure this. I wonder, where is risk in terms of capital right now? You know, they had all these venture funds for the last fifteen years, and they made a lot of money lending a lot of start up people a lot of money. But I’ve seen, I’ve heard anecdotal stories that it’s hard to raise money right now. What do you know?

BW: It is hard to raise money right now. I mean, the funds that are doing the best raising money are money market funds, which is basically in a sense a checking account. It’s just cash. That’s…money has been flowing into cash like crazy. Now at the same time, there are private equity funds, there are merger and acquisition funds. Business has slowed down incredibly, but there’s money flowing, and it’s happening in a private way, and it’s kind of hard to follow. But at least right now, there’s definitely been a pull back by investors, a risk aversion. What’s happened, though, is that asset values have plummeted, and I think you’re going to see a resurgence in risk taking in the months ahead.

HH: Brian Wesbury of First Trust, thank you, my friend, I appreciate it very much. We’ll talk to you again next week. All you have to do if you want to find Brian, and I’ll put up a link, is Google Brian Wesbury and First Trust in Chicago, and you’ll find he’s their lead economist. And you folks like him a lot.

End of interview.

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