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By Christine Benz | 03-08-2012 03:00 PM

5 Things That Have (or Have Not) Changed in the Last 3 Years

We've come a long way since the market bottom in 2009, but some concerns still linger, according to Morningstar markets editor Jeremy Glaser.

Christine Benz: Hi, I'm Christine Benz for Morningstar and welcome to the Friday Five. March 9 marks the three-year anniversary of the market bottom. Joining me to discuss what has changed since then as well as what stayed the same is Morningstar markets editor Jeremy Glaser.

Jeremy, thank you so much for being here.

Jeremy Glaser: Christine, it's my pleasure.

Benz: Jeremy, we are marking the three-year anniversary of the market hitting bottom. We've had a really good rally since then. What do want to talk about?

Glaser: Well, these three years certainly have gone by pretty quickly, but today I want to talk a little bit about how private-debt problems have really become public debt problems, about consumers, about the tech industry, the Federal Reserve, and finally valuation levels.

Benz: Let's start with the first point--private debt. Consumers being overextended was really at the epicenter of the housing crisis. How does that relate to what's been going on in the public debt market?

Glaser: Three years ago I think we really were focused on consumer debt. We were worried about the debt that was on banks' balance sheets--from consumer lending to mortgages, credit cards, student loans, or whatever it could be. The idea of sovereign debt being a big issue wasn't really on a lot of radar screens, and I think that's something that has really changed in the last couple of years. Instead of worrying about banks' balance sheets--in the U.S., they have really raised enough capital to ameliorate a lot of those concerns--we hear a lot about debt in Europe; we hear a lot about debt in the United States and across the world and what that's going to mean for investors.

A lot of that was that governments guaranteed a lot of that bank debt. They guaranteed a lot of that credit debt and took it from a private issue into a public issue. A lot of it was just the spending that went on for so long in so many countries, well beyond what tax revenues were coming in and what the countries could really afford to spend. I think we've really been seeing that reverberate for a long time. And in this week, in particular, we're still completely focused on Greece. The country has been able to get its private creditors to agree to bond swap and wipe out EUR 100 billion of debt on its balance sheet, but obviously, Greece is not out of the woods yet. We still have to see if this deal is really going to stick and if it is really going to stabilize the market. If that contagion is going to spread to larger and more important economies such as Italy and Spain, I think that sovereign debt and kind of the idea of public debt is something that we're going to be talking about for quite a long time.

Benz: So, in terms of Greece, how do the markets seem to be reacting to this latest deal to do a swap with the bondholders?

Glaser: They seem to be a pretty happy with that. I think it is mainly because it reduces a lot of the uncertainty and really pushes out any prospect of a disorderly Greek default. Don't mistake this as anything but a default. They're saying, "Instead of getting 100 cents on a dollar, you're going to get $0.25 on the dollar." They are coercing, through collective action, some bondholders to take losses even if they didn't want to. Certainly, this is Greece admitting finally that it cannot pay all of its obligations, but there are still a lot of other problems. So, I think the markets have some cautious optimism here. The markets see that it gets just past that March 20 date when Greece has a lot of debt coming due. But certainly this is not the last time you're going to hear about the Greek debt crises.

Benz: I'm sure you are right. How about consumers? Do you think consumers have made strides obviously since the financial crisis and the housing market crisis? But you know that recently there have been some indications that consumer debt is creeping back up.

Glaser: Deleveraging was a big story that we've heard a lot about from before the market bottom. The worry was that consumers had built up all of this debt, either in their homes or through credit cards, and they were going to need a long time to pay it back. They're going to have to work extra hours. They're going to find money wherever they can to really get rid of this crippling debt load instead of being able to just refinance their homes and kind of use that as an ATM to pay off those debts. They are going to have to really go through that long process of slowly paying it off while still having pretty big interest charges coming in. That makes those balances more difficult to really pay down.

For the first time since really the start of the great recession, the Federal Reserve said that household debt actually ticked up again, and that the deleveraging has really slowed down a lot. I think this speaks to the fact that a lot of that debt was paid down. Consumers who really couldn't afford their homes anymore have gone through the foreclosure process, and that debt is no longer with them. People are feeling a little bit more confident about the job situation; they're feeling more confident about their ability to earn money and therefore are willing to put some more purchases on credit. They are able to buy both durable goods and consumable goods with some of that credit. So I think that's a sign that consumers are certainly feeling more confident. Could we have another period of deleveraging? I think absolutely, but I think the fact that that debt is starting to inch up shows that consumers are feeling a little bit better.

Benz: One thing consumers appear to be wiping out their wallets for are iPads or other consumer-electronics devices. You know that that's something that has remained somewhat steady during the past three years, that there has been a strong appetite for getting new gadgets. What's the latest news there?

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