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First Trust Advisors chief economist Brian Wesbury’s outlook on the economy

Saturday, November 15, 2008

HH: Joined now by Brian Wesbury. He’s the chief economist at First Trust Advisors based in Illinois. He served on so many capacities, he’s also been ranked as the number one U.S. economic forecaster in the past by the Wall Street Journal. Mr. Wesbury, welcome to the program, it’s great to have you on, thanks for joining me.

BW: Hey, Hugh, it’s great to be with you.

HH: Well now, I had one of your colleagues from the econometric forecasting business on earlier today, and he was really quite sanguine about the future of the economy, believing that the media coverage is hyped. What do you think?

BW: Well, I do believe that as well. We’ve had a serious slowdown here staring in kind of mid-September. People kind of panicked. We saw a panic, but it’s not a traditional kind of recession. This really is a panic thing. And when you look back in history, these things happen very rarely. In fact, the last one I’ve ever seen was 1907, and they don’t last long. And I expect this might last, you know, maybe two or three months. People are worried. But eventually, and in fact, I think we’re in the process of that right now, people are starting to believe that they don’t have to keep everything in cash and stuff it in their mattresses. And I think as a result of that, we’re going to come out of this pretty strongly. And then, you think about it, it’s kind of pent up demand. You can only live out of your pantry so long. And then when people come back, I think we’re going to have the economy grow very strongly in the months ahead. What I get a little disappointed about is people that extrapolate a trend. They say oh, September was bad, and that means every month from now on for the next twelve or eighteen is going to get worse and worse and worse. And I don’t buy that. And I think this believing in that really creates more pessimism than is necessary.

HH: Now Brian Wesbury, I have to go on Hannity & Colmes in a little bit to talk about whether or not Obama’s the new FDR, and I kind of laughed, because we had 26 out of 27 quarters of economic growth preceding the arrival of President-elect Obama. It just isn’t…it’s a silly comparison, economically, isn’t it?

BW: Absolutely. I mean, FDR came in 1932, the unemployment rate was already over 20% at that point. And the one thing people don’t get about the Great Depression is that it was caused because of mistakes in Washington. Herbert Hoover actually raised tax rates and also passed the Smoot-Hawley Tariff Act, which literally shut down world trade. And we don’t have anything like that going on right now, not even close. 6.5% unemployment isn’t great. I wish it was lower, everybody does. But it’s nowhere near what we had in the 1930s.

HH: Now some smart friends of mine worry not about recession or deflation. They worry that we will be in fact, are courting hyperinflation by virtue of the amount of money being printed around the globe right now. How much do you worry about that, Brian Wesbury?

BW: Not…I mean, when I hear the word hyperinflation, and this is what it means in the economic world, it’s Germany after the World War, when you had to take a wheelbarrow full of money to buy a loaf of bread, or Zimbabwe today where they literally have a hundred thousand percent inflation every year. You go into a store, by the time you pick up an item and get it to the counter, it’s already gone up in price. In the United States right now, we have more inflation than we did five years ago. I think it’s about 3.5-4% versus 1%. And it’s probably going to stay more elevated than we’ve seen in the past twenty years. But I would, I’m hard pressed right now to forecast anything more than five or six percent inflation in the next three or four years. And the Fed could fix that, because once things stabilize, I think they’ll lift interest rates and kind of calm those inflationary fears even from these relatively low levels down. I’m not worried about hyperinflation.

HH: All right, stepping back and looking at the three big issues for investors – land, equities and the stock market and commodities…

BW: Right.

HH: What’s your general advice about each of those three categories?

BW: Yeah, and I divide the world, and I’ll add four. I look at, for investors, bonds, stocks, real estate and commodities. And that’s the way I look at it. I think the real estate market, and we’re talking housing here, is a fully valued market. Our models still say we have a little bit of extra inventory right now. Prices might fall about 3% more. There’s still going to be great deals out there. I’m not saying it’s not great, but it’s a little, it’s fairly values, maybe even still a teeny bit overvalued. Commodities right now look to me to be fairly valued or even a little undervalued. We’ve had a huge drop in commodity prices as the world prices in a…I mean, the markets seem to have priced in a really nasty recession, and I don’t think we’re going to have that. So I think commodity prices will rise. The bond market is interesting, because inflation is here, but it doesn’t seem to recognize it, and therefore, I think the bond market is an overvalued market. I would not be buying treasury bonds today. The stock market is where I see the most opportunity. It’s pricing in a nasty recession, thirty or forty percent drop in corporate earning, and as a result, the market right now is about 40%-50% undervalued. I think we haven’t seen an undervalued market like this since the early 1980s, right when Ronald Reagan came in, or maybe even 1974 at the bottom of a huge bear market. So if you really kind of look for the most undervalued asset, I think it’s U.S. equities right now.

HH: And are you advising your clients generally, not specifically with regard to any particular equity issue, that they need to take a deep breath and take their money off the sidelines and put it in?

BW: Absolutely. Right now, cash, just in money market funds, is 44% of total stock market capitalization, which is just a huge number. It’s like fifty feet of snow being in the mountains. And when it melts and starts coming back down, the rivers roar. When it comes into the market, I think this market is undervalued, people have run away from risk. This panic that we saw in September and October, it’s visible in the market. And once people get an appetite for risk again, which by the way, they always do. One of my theories these days, it’s highly technical, so get ready, is dogs bark.

HH: (laughing) Brian Wesbury, I hope this is the first of many, many conversations, remarkable stuff. Thank you, chief economist at First Trust Advisors in Illinois.

End of interview.

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