This week, we've got five terrifying tales from the world of finance from Morningstar markets editor, Jeremy Glaser.
Jeremy, thanks for joining me.
Now sure, there was a lot of quantitative easing during the heart of the crisis, but then basically anything went, and the idea is that the Fed is going to step outside of its mandate that usually has to do with short-term bonds and look at long-term bonds, and try to bring down the price--try to print a bunch of money, put it out there in the marketplace, try to get some inflation going, get people out there spending and doing whatever that they need to be doing to get the economy to move again.
Now, in terms of building inflation expectations, it's been successful so far, and it hasn't even been announced yet. The markets obviously already reacted to it. We saw it rally a few times, when it looked like [QE] was more likely. And when it seemed that [QE] could be smaller, the market actually fell back.
Some TIPS bonds priced with a negative yield, showing that investor expectations for inflation are certainly rising. So in that sense, it's working, but nobody really knows what the outcome of actually doing it is going to be. Are we going to end up with runway inflation? Are we going to end up with nothing happening because the consumer demand to buy these goods isn't there, so giving more money doesn't actually produce that end demand that you're trying to find.
It could be a little bit scary as we wait to see what happens with it.
Stipp: Well, Jeremy, one area where we haven't had any problem with inflation is in college savings in the realm of personal finance. Costs just keep going up and up, and it seems like families are really facing the pinch here.
Glaser: It seems almost impossible to save for college. We had a lot of articles this week when we launched our new 529 Plan Center about how to save for college, what the best vehicle is, the best investments and all of these different questions.
And the real open one is how much is college going to cost if it keeps increasing more and more--if text books get more expensive or if room and board gets more expensive, tuition obviously is getting more expensive? Parents don't even know how much to save, let alone, how to save it.
I think it makes it incredibly difficult. It's easy just to kind of throw in the towel and say, forget it. I'm just going to focus on something else. I'm just not going to worry about it. Maybe my child will end up being wonderful bassoonist, is going to get a scholarship, but the chance of that is pretty unlikely.
So it seems like the best time to start saving is when the child is first born, but probably not for their college, for their children's college is probably how long you would need to keep up with inflation.
I think we got a lot of good articles, lot of good tools this week--hopefully, we'll bring some clarity to the subject. But those costs are going to have to come into control, and universities are going to have to control those costs if we expect people still be able to afford it.
Stipp: Certainly, right now, it's going to require a creative combination of financial aid, probably the student working, some student loans, and lots and lots of savings on the parent's part.
So, Jeremy, one of the other things that's a little bit depressing about this college situation is that when students are done, they have all this debt, and then the job market is just not looking so great for them. Another terrifying point, which is number three.
Glaser: If you are making $0 coming out of college, the ROI is not going to look very good. I think that's an important thing when thinking about universities. But unemployment is crucial, that unemployment is still so high. We've been talking about this for a while that unemployment is going to stay high, and that we're not just going to immediately have all these jobs coming back ... and the problem is not just that we have frictional unemployment.
Frictional unemployment happens all the time. You know, someone loses a job, they're looking for another one, they eventually get it. It seems that we now have a lot of structural unemployment. So, people who can't find jobs because their industries just don't exist anymore, be it in the housing trades or manufacturing or across really a lot of economic sectors.
And it's really difficult to figure out what to do with these people who are structurally unemployed. You can try retraining programs, you can just tell them to wait it out, but if it's another 10 years before we need to be building houses on the scale that we were before, it's hard to tell the plumber to kind of wait around for that.
Jeremy Grantham in his letter about the Fed also talked a little about this and that it might make sense for having a physical stimulus, if you will, to get some of these structurally unemployed workers back in the workforce. I think, the specifics of that would decide if it was a good idea or not. But certainly there's lot to be said that having permanent unemployed class--it's something's that not sustainable; it's not going to be good for the economy, and it's an issue that we're going to have to deal with eventually.
Stipp: Another scary thing investors are dealing with, and this is from classic movies: What's behind that door? The tax situation and the uncertainty around the tax situation: No one knows what's going to happen when that door opens and Congress finally decides. What to do?
Glaser: It makes it very difficult to give good investment advice when nobody has any idea what the tax treatment is going to look like. I think this week alone, I read three or four articles that had completely contradictory advice about what to do with positioning your portfolio for taxes in the future.
Nobody knows what's going to happen to the Bush cuts, nobody knows when new taxes are going to come. If taxes are going to get lower, are dividend rates all of the sudden going to be taxed at a much higher rate than capital gains? Are we going to have to worry about state taxes or about extra taxes on retirement. People just don't know, and without any insight, you can't really get good advice. I have no idea what's going to happen with the tax situation; you have no idea what's going to happen with the tax situation. I think most people in Congress have no idea what's going to happen with the tax situation.
I think it's something that needs to be nailed down. So, whatever decisions are made, I think we need to have a clear pathway that these are what tax rates are going to look like. Here's the way that we're going to get back to, get the physical picture to look the way that we want to: It might mean some higher taxes for some brackets, lower taxes in other brackets. There is lot of different moving parts there, but until people know what those moving parts are, they can't make a decision, and I think it's something that's pretty scary.
Stipp: Lastly Jeremy, we got some news out of Berkshire Hathaway that was I know very scary for you and potentially very scary for Berkshire shareholders.
Glaser: Jason, I was devastated to learn on Monday that I was not selected for the CIO position for Berkshire Hathaway. Now, I've never actually met Warren Buffet, but we've been in the same room before in Omaha, and I assume that through my coverage of the Berkshire meeting that you would have just seen that I was the obvious choice for this position.
Now, I am sure Todd Combs is going to do a fine job and everybody loves financial companies and he's been very successful so far, but I think Berkshire really missed out by not selecting me. I know it's definitely very scary on a personal level.
Stipp: Well, Jeremy, Berkshire's loss is certainly the Friday Five's gain. I am glad that you'll be here to terrify viewers.
Glaser: Don't worry, I'll be haunting the Friday Five for a while.
Stipp: Thanks for joining me.
Glaser: You're welcome Jason.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.
