3:00 P.M. EDT 
MS. SHIELDS: Well, everyone, welcome. This is our annual briefing by Gail. We're very lucky to have you come visit us again. And you all read the bio that I passed to all of your e-mails, and we have that also printed for you, if you need another copy. But what I like is the Wall Street Journal has named Gail Fosler America's most accurate economic forecaster twice. So this woman will tell you what's going on in the world.
We're very privileged to have you and we hope you keep coming back.
MS. FOSLER: Well, thank you. Believe me, given all of the forecasts that economists make, if you only get named -- if you only get honored for being accurate twice, it's a fairly small percentage. (Laughter.) So that was nice of you to say.
I just am really going to walk through some of the global outlook issues. You all -- I'm quite familiar with this group -- always have lots of questions on your own. We, I think, represent the optimistic side of the consensus view. The IMF numbers are pretty much looking at growth rates slowing quite substantially next year. We think that actually growth is being pushed into 2005.
So we've got 4. -- we've got actually a slightly higher growth rate -- I think it's 4.7 percent for next year versus 4.4 for this year, and global growth rates which approximate those as well. So a lot of our work at the Conference Board, many of you are familiar with, is really rooted in sort of business cycle, looking at business cycle dynamics. And in our view, while some of the intensity of the momentum is kind of come off -- the business cycle has sort of come off the boil, we're still very much in a positive trajectory for next year with the U.S. and Asia leading and Europe maybe not surprisingly lagging, but I think next year is going to be a significantly better year for Europe than 2004.
I suppose it's not controversial to say that inflation and interest rates are rising. I think if anything has surprised us, it's really been the calm, particularly on the part of Greenspan, in the face of extraordinarily high oil prices. Some of us are children of the '70s, and we remember when oil prices presented quite a different set of inflation risks.
And while we would argue that oil prices at 50-plus dollars are not sustainable, it's just very clear that oil prices, as a general factor, are going to be higher going forward than they were for much of the '90s, so that, you know, much of the disinflationary structure, when we look at it on a structural basis, whether you're looking at commodity prices, oil prices, in particular, or some of the structural factors like health care costs, and the like, are just not going to be contributing to the disinflation going forward that was so important back during the decade of the '90s.
However, when we look at the global economy, it's really not the cycle so much that bothers us. I think the -- I was sort of tempted to say, make the title of this, "What's wrong with this picture?" You know, global growth is really pretty good. Businesses are more optimistic than they've been in quite a while. What is there really to worry about?
And in our view, rather than worrying about the cycle itself and the notion that somehow it's going to slow down or growth is going to be sub-par or the jobless recovery or any of those questions I'm happy to entertain, I think what is really worrying to me is the amount of liquidity that we have in the global marketplace at the present time. One could argue that the internet bubble was a result of too much liquidity in the U.S. We managed to destroy some of that through the internet bubble and the stock market meltdown, but we also added a lot of liquidity in order to get ourselves out of the recession and stabilize the economy.
So it almost -- you know, in almost every sector that you looked, businesses and markets are washed with liquidity when -- and it is not at all clear either to others or even to themselves exactly how they're going to employ this liquidity in terms of effective rates of return.
I've just finished -- some of you are familiar with my publication, Straight Talk, and I just finished the one for October, and it's the conclusion of that, I cite a quote from Charles Kindleberger's Crisis Manias and --
QUESTION: Panics.
MS. FOSLER: Pardon me?
QUESTION: Panics.
MS. FOSLER: Panics. Thank you. All those kinds of words, right?
And there is a -- the introduction is by a fellow named Walter Baggett, and it's a quote from a book by him on Edward Gibbons, and basically, he says that on occasion stupid people have a lot of stupid money and a country that is awash in liquidity finds a way to have that liquidity devoured. So as we go forward, a lot of the same dynamics that we saw in the '90s are beginning to emerge with money flowing into emerging markets.
We’ve seen a huge amount of money flowing into the mortgage-backed securities market here in the U.S. We've seen a big run-up in terms of housing prices. Actually, one can argue we've seen a lot of money flowing into the U.S. bond market. But one could argue that actually the stock market, maybe because it was the source of the last set of risks, is pretty fairly valued.
So, you know, maybe it will be that we will face another emerging market crisis of some sort because this money tends to be more than even these economies, as they develop, can absorb efficiently, and so for the time being everything looks quite good because things are rather liquid. But the amount of financial activity and the amount of liquidity is really what in this global economy actually makes us uncertain.
So let me just run through a few charts and I'll illustrate a couple of these points. This shows you global industrial production in U.S., IP industrial production, and the red lines are the six month rates of change, the 12 months -- the blue lines are the 12 months. And the reason that I show this to you is because it is really -- you know, these periods here are real acceleration phase. Okay? And you see here in terms of the U.S., six months rates of change so that, you know, these are what put tremendous pressure on the supply chain but they are also great periods from the standpoint of corporate profitability.
When you get these exceptional rates of increase, you get productivity that just flows to the bottom line. So you're beginning to see -- you know, as you sort of see some of this acceleration phase, you know, here you have each peaking higher, but now we have a downturn. Here we have each peaking higher, but it looks like you may have a peak.
You're beginning -- you know, there is a lot of discussion about the economy "slowing down," but we would say that it's really just a change in -- you know, a shifting from this acceleration phase, if you can think about it, as you would in a car, from a stick shift in a car moving through first, second, and third. You're really getting into what you might call cruise speed for the economy, which is at a fairly rapid rate. You know, I said for GDP, 4.5 to 5 percent, for the industrial sector in the U.S., 6 to 8 percent in the first part of next year.
When you look at Asia -- I should probably have put Asia and the U.S. on the same chart. Asia and the U.S. are highly synchronized and you see this big acceleration in Asia. I think one of the things that's striking is the extent to which you have seen a deceleration -- I mean, you know, we almost have a troth in terms of the most recent numbers.
That’s at six months in the change, that's equal to the low point that was reached in 2003. So it does suggest to us that the Asian economy is cooling somewhat, and I think this maybe -- you can think of the Chinese economy as having a kind of a leverage or multiplier effect on the rest of Asia.
And so, it's not that the Chinese economy is cooling, is slowing so much, in our opinion, but when you begin to get rates of change instead of moving up toward 10 percent, but start to move down toward 9 percent, as I think we're having in the second part of this year, that has a really chilling effect on the rest of Asia, and at the same time, you know, you have the knock-on effect from the second quarter slowdown in the U.S. on Asia.
In Europe, Europe is just kind of crawling out of the doldrums, but I think doing so rather successfully. We have a 2.5 percent growth in Europe this year and 3.5 percent growth next year. But once again, you know, we think that actually Europe, in part because it has tended to lag the rest of the world, and Germany, which used to lead Europe itself lags Europe, that actually you've got a little bit of a break in the synchronization where next year, even though growth rates in the U.S. will be very good, I think the growth story will start to look much more positive in Europe.
And I think one of the things that I saw in today's Financial Times, the French reform in the service sector, and some of you have been here to briefings that my colleague Bob McGuckin and his friends -- his colleagues have made around the work that we've done about market reform and the importance of reforming product markets in Europe, to getting the European growth engine going.
So I was really -- I was impressed and pleased because Europe spends a lot of time looking at the labor markets and not a lot of time looking at the product markets, and we actually think the product market regulation holds more opportunity for European growth than the labor markets.
This is just looking at our industrial production forecast for the global economy in the U.S. It sort of follows the same story that I've been describing, that shows you generally, even though GDP obviously is, you know, moving at the 4 percent, 4.5 percent rate through next year, you're getting much more if you look at industrial production. You get much more of a run-up in the economy through the first half of the year and then a slowdown.
So these, generally, through 2005, we should look to a slower second half globally and in the U.S., the same for Asia and then with Europe, picking up actually pretty smartly towards the end of 2005.
Now these are just some -- these are factors that we use to look at whether the investment environment is favorable or unfavorable. These are -- you know, was one of the assessments that we do periodically, and I think although there is always a lot of hand wringing around investment, we really look at the investment environment as being extremely strong.
I mean growth has been in the, you know, 3.5 to 4 percent. Corporate yields are almost at all-time lows, relative to Treasury. Manufacturing activity is picking up but some of the big driving factors are business profits and business liquidity. We have corporate profits in the U.S., as a share of GDP, that are very near an all-time high. And I think one of the things the stock market may be reacting to is that it took us five years to get to the peak, you know, in the mid-1990s, in terms of corporate profits, to GDP.
When you look at corporate profits to GDP today in the U.S., you really have to wonder how much better can they get. And I think that's one of the reasons why the market is sort of stepping back and really looking, you know, as to what the next earning story is going to be.
Our view is that corporate profits will still be up 15 percent next year. That's the good news, but that that will be half of the 30 percent corporate profit growth that you saw in 2004, so, you know, moving in the wrong direction from the standpoint of the market.
This is an analysis that we do that looks at some of the dynamics around inflation. The black line is core crude materials in the producer price index. The red line -- and for any of you who want color copies, we can certainly provide them to you because it's hard to read it in black in white -- but the red line and the blue line are essentially -- are core finished goods. This is excluding food and energy. And the blue line is excluding what we would say some of the -- both tobaccos and cars have introduced a lot of noise into looking at what's happening in the producer price index.
One of the things that's very important in terms of assessing the direction of prices, which is very often missed, is that what you see at the top line is really not what you're likely to get if you look out into the future. This black line, we've actually moved ahead 12 months with crude materials prices because it is really crude materials prices a year ago or more, which actually, the direction of which actually affects finished goods prices today.
So if we actually look, shifting this forward 12 months, as where crude -- and this is setting oil aside where crude materials prices are actually the direction that they are likely to push the producer price index industrial prices. You see that the direction on that black line is still up. And I will say I've been at the Conference Board 15 years this year and this is the first time that I have heard companies on a fairly broad scale talking about pricing power.
Now, a lot of them aren't able to capture it in terms of profitability because it's passed through, you know. But rather than -- there's kind of a wink and a nod throughout the supply chain that everybody knows you really have to increase prices; everybody's costs are going up. And so, our view is that rather than what I think is the rather optimistic interpretation of the price number -- of the price index behavior on the part of the Fed, I think that this kind of analysis suggests that there is more caution that's warranted.
Now let me go into this liquidity and then I'll wrap it up just for questions.
This shows you the -- what would I call them? -- the convex lines are compound annual rates of change. So on the 7.5 percent line, for example, that would show you what stock prices would be if they appreciated uniformly at about 7.5 percent a year. That's not total return because it doesn't include dividends. And you, you know, could go back to about 1950, the average compound rate of appreciation in the S&T 500 is roughly around 7.5 percent, and probably dividends add another percentage to that in terms of total return.
This whole area, incidentally, which of course we all remember as the stock market bubble, and it's quite interesting because you see the stock market bubble was not just a 1999 phenomenon, it was really something that began to emerge in the late 1990s. It's almost all of the tech boom. So if I were to show you this chart less technology, it would look much more normal. But I think the take away from this is that what the rebound -- you know, while we had the stock market meltdown and with the rebound, it would be very hard from a historical perspective to come to any conclusion other than the stock market is really pretty fully valued.
Now that's the bad news. The good news is that earnings I think really put a cushion on the downside for the stock market. I am a regular watcher of Bloomberg. I hope I'm not insulting anybody by speaking about a competitor, but it helps my coffee go down in the morning and I think they do a very good job, and every once in a while they have a stock market bear on.
And so, after the stock market meltdown, you know, and they start talking about how low the stock market can actually go, I'm very braced and, you know, the worst projection that I've seen is sort of 10,000 on the Dow and I'm thinking, well, that -- there is really not a lot of downside in that, and I think one of the reasons is because earnings have been so extraordinary.
The red line, the little dotted red line, shows you our view of what PEs would be if you just base them on interest rates. Okay. So we kind of impute what's a reasonable PE. The blue line is what PEs actually area based on earnings. And so, what you see is that PEs have just absolutely dropped (inaudible); in fact, the PEs have dropped much faster than any in-drop that you'd expect from the rise in interest rates, which obviously to this point and time have been relatively minor.
And in fact, if you carry that out, and we've got a forecast of the 10-year bond rate, I think maybe like five-and-a-quarter next year, which is not all that awful, you carry that out, you know, you get an imputed PE of 25. And if you look at the S&P at its current level with a 15 percent appreciation in terms of earnings, you know, that PE just keeps going right down and then you end up with PEs down in the mid-1990s levels, obviously above the late 1980s, I would point out.
But investors really just seem to be taking earnings to the bank. Maybe the market is positioning itself for some other kind of future move but they really -- you know, having gone through this period here, they really do not seem to be inclined to make bets to take PEs back.
I think one of the interesting things when I look at this chart, you see here back in the late 1999-2000 was when the imputed PE chart would have suggested PEs would have come down. This was when a lot of my colleagues in the investment community used to say to me, "You just don't get it," remember, the you just don't get it.
Well, PEs did, you know, eventually that gap closed. So when I look at that chart, I say, okay, it's unusual to have that kind of a gap. What's going to happen here? Maybe it means that the stock market is going to rebound. Maybe it means interest rates, by my judgment, are still too low. I don't know. But this kind of enormous gap, as you see, really doesn't persist over time. So it either means we will have higher interest rates or that the stock market will turn around. But for the moment, it's very, very hard to make a case that the stock market has a lot of downside in it.
Now where else is this liquidity going to? It's not really going to the stock market. I'm going to show you this chart in terms of total internal funds and capital spending. You know, if you look at the end of the 1990s internal funds, cash flow wasn't really all that bad. I mean it continued to sort of rise. It had a hit in '98, but really what got out of line was capital spending. I mean you just -- this was the internet bubble. This was the technology boom. You know, it just got well beyond the ability of companies to be able to finance their spending plans.
But now we've got the reverse. So, you know, you've got cash flow that is running well ahead of where investment is. So for those people who, again, are calling for slower growth next year -- and I think I mentioned that we've got 12 percent investment growth, real investment growth in the U.S., I really think the burden is on them to sort of say, "Where is all this cash flow really going to go?"
Part of the benefit of being an economist of the Conference Board is that you have an opportunity to talk to business executives all the time. It's sort of like being a scientist with your own personal laboratory. Well, having sat with a bunch of CFOs a couple of weeks ago, I sort of challenged them. It's a great -- it's a very humbling experience actually because I tell them what I think about the economy and then they go around the table and they tell me what's really happening.
So there is always a little bit attention around whether -- you know, and they're not beyond saying Gail doesn't know what she's talking about because I've been doing this for a long time. But they're also a little bit puzzled. You know, people say, "Well, maybe we'll do stock buybacks and maybe we'll do dividends and, you know, maybe there's an acquisition spree out here someplace."
But, you know, when too many people have too much money, they tend to get themselves into trouble. So in terms of trouble signs -- again, I'm not so much watching the cycle, I'm watching more of these financial indicators.
Now, one area where there is some trouble signs I think is in the U.S. housing market. Until very recently, I really haven't been much of a -- I haven't been all that concerned about what's been going on in the housing market because the housing market, you know, goes through some periods. Once again, you see these lines, the 3 percent compound annual rate of appreciation in home prices. The average is about 4 -- 4 percent?
A PARTICIPANT: Four-and-a-half.
MS. FOSLER: Four-and-a-half?
A PARTICIPANT: Four-and-a-half.
MS. FOSLER: Four-and-a-half. The average since 1981, which you think is a non-inflationary environment is about 4.5. But since 2001, the compound annual rate of appreciation is 8 percent, and in the last year it's 9 percent. So, you know, you really got to watch what's happening here in terms of these home prices because this could represent a bubble of sorts. It's probably local but I didn't bring the chart with me. But behind this is extraordinary lending in the mortgage-backed securities market.
So, once again, you know, you've got all of this liquidity but searching for ways to buy yield. And to go back to this chart, there aren't good, clear ways of earning yield, at least that are evident in terms of the underlying level of economic activity. And so, you get some of this financial -- this non-financial liquidity that's flowing into some of these financial investments, including home prices.
And then, finally, is emerging markets. The amount -- this is total foreign investment. This is gross total foreign investment, commercial foreign direct investment, commercial bank lending and portfolio investment, head of into emerging markets. And as you see, even in 2003, it was at an all-time high.
Now, emerging markets have come a long way since the mid-1990s. You know, the financial markets, the bond market has begun to develop in Southeast Asia, financial markets are beginning to develop in Asia. Latin America has got its inflation and, you know, a lot of its sort of structural problems, if not under control, at least they're moving in the right direction.
But what happens when you have all this liquidity is that it -- in search for yield and the mortgage -- the emerging market bond index is almost at a all-time low, relative to treasury. Once again, it goes seeking yield. You know, I can understand when you have a stock market meltdown, the effort to -- you know, people become very risk averse, the Fed reduces interest rates to rock bottom levels, in order to sort of raise the opportunity cost for not taking risks.
So, you know, your choice is either take some risk or get 1 percent in a treasury. So, you know, after you hide under the bushes for a while, you just sort of ask yourself, how bad can it really be, and you begin to move out into, you know, a corporate securities and then higher yield securities, and the like.
But these are really some very, very large investment numbers, and I think what we see in China is really a case in point, even an economy like China that has -- I mean for an emerging market, it's quite big, but it is absolutely saturated with liquidity. The money supply, I mean it is a object of note that money growth or credit growth has gone up from a 35 percent annual rate to a 25 percent annual rate.
Well, you know, this is an economy that's growing at a 12 percent annual rate in nominal terms. So credit growth is still twice the underlying growth in the economy. And we don't have, you know, good measures. We need -- we're going to be doing some more due diligence around this because this is really somewhat worrisome in terms of not this year, maybe not next year, but I think we're really setting ourselves up for a -- maybe a very unpleasant surprise.
So this in small numbers is our global forecast. You can go through it, as I mentioned, 4, 4.5 percent in the U.S., Euro zone picking up. My colleague at the Conference Board changed these numbers on me this afternoon. I'll have to deal with him later. It isn't Mike. That's Jason, right?
Japan slowing. And we do these leading indicators in the case for Europe and Japan, Korea, which we don't list on there separately. We actually do some imputing from our leading indicators to actually develop forecasts for these countries. But the emerging market numbers are still very good. China, we still regard China as being -- as growing faster than the Chinese would like, and we still think there is going to have to be more aggressive action taken in China to get it to slow down even more.
So, you know, 4.5 percent growth is not the highest growth rates for the world that has ever taken place, but it's two back-to-back years of very good growth. So just in summary, we really think that, you know, as I mentioned, the year-to-year comparisons in terms of profits are less favorable going into 2005.
But I think more interesting to us is what's really happening in terms of the yield curve, and it seems to us that, as opposed to the short end of the yield curve shaping the yield curve, then increasingly the yield curve is being shaped by the long end when a lot of liquidity whenever interest rates go up, the mortgage-backed market works in this direction, you get a lot of liquidity moving into the long end of the market when long rates go up seeking yield.
So there is a lot of what you might call arbitraging the yield curve that really makes it hard for long-term interest rates to go up. And I think it also makes it hard to interpret long-term interest rates. You know, a lot of my peers on Wall Street would say because the long rate has come down that means the economy is weak. I don't agree with that. I think, you know, my interpretation is that the long rate has come down because there is so much liquidity that when yields go up there is a lot of liquidity that flows into the long end trying to capture some of that yield.
We think that the Fed is on a measuring course. We might advise that that course be -- I mean measured is not exactly definitive, but that it be faster rather than slower, but we think that the dollar is still set to strengthen as interest rates rise. And I think as the -- we have the trade deficit actually stabilizing, to some extent the oil prices have made the trade deficit look worse than it actually is, but the trade deficit is really roughly stabilizing with imports and exports roughly flat.
And, you know, our view is that the dollar is really going to respond to this continued good growth and that the weakness that we have seen recently is because people really doubt that there is going to be strong growth in 2005. And then, you know, the comments that I made about liquidity that it really, it's not the economy that represents our risks going forward. It's really the liquidity side of the equation.
So I thank you for the opportunity to be here again.
MS. SHIELDS: Would you like to have questions and answers?
MS. FOSLER: Yeah, absolutely.
MS. SHIELDS: If you'd please identify yourself and your publication when you ask your question.
QUESTION: Bente Bundgaard of Berlingske Tidende: Do I understand you right that you're basically saying that we are set for a kind of recurrence of the dot.com debacle, if there is a new technology, like say, nanotechnology or something like that than can sort of attract this profile liquidity?
MS. FOSLER: There is a favorite book of mine by a guy named Peter Bernstein called The History of Risks, and for anyone who has a slight statistical bent, it's a wonderful read. But the future, as he says so aptly -- I think Dwight Eisenhower said, the future lies before us, but the future always presents itself in different ways than in the past. So it's always easy to say, yeah, you know, that's -- and I'm sorry to be so -- you know, I should have some sort of big story to tell you except that there just is -- whether it is emerging markets.
And in the early '90s, for example, if you remember, all the growth was going to take place in emerging markets. Emerging markets were going to head straight up. You know, I did some of these presentations myself, looking at these, you know, in some cases, double digit rates of growth. And what we found was that we were taking the present and signing a trajectory and it just never panned out.
And then in the late '90s, we had the Y2K and we had the technology bubble. And, you know, I hope you don't write this in your newspapers but I'm not smart enough to figure out what exactly the next thing is. But the thing that is discomforting to me, you know, when I sit around even with a number of technology companies in the room, who used to be masters of the universe, nobody has really got a good idea where you say, "Wow, that's a great business. What a great investment area."
There just aren't, unlike I remember in 2000, when the CFO of a major technology company, their orders were rising at 50 percent a quarter and you don't know -- you know that's not sustainable. You know it's not real, but you don't know what to do about it. So I think really we just have to be vigilant, and what I'm arguing is that we exercise more vigilance on the financial side relatively than we are spending a lot of time focusing on whether the next quarter's GDP is going to be 4.2 or 3.6.
QUESTION: (Inaudible re the risk of emerging markets)
MS. FOSLER: I think, in some ways, that some of it may be underway in the increased scrutiny about -- over the government-sponsored enterprises in the U.S. It's very clear that we could benefit from some disinflation in this marketplace that has really been so white-hot. People are looking at the regulatory structures around things like hedge funds. Investment banks have voluntary regulatory kind of compliance structure.
But we, at the Conference Board, are doing several different types of projects around risks and the concern -- and you hear this from some of the companies that do a lot of risk assessments -- is that people -- is it in the financial sector, or that some of the biggest players are -- have, you know, state-of-the-art risk management systems? It's really the second-tier players that are worrisome.
And then you go back to the 1970s, there is the one systemic problem that emerged in the 1970s was a bank known as Herstatt, that simply went bankrupt on a intraday basis and was able to make -- was unable to close its payments. It was a small German bank. It wasn't all that significant, and yet it had these ripple effects throughout the financial system.
So it's usually the things -- you know, you try to find a balance of regulation because you want markets to function without being overly inhibited, but I think asking some critical questions about whether there is that balance of regulation around key financial players would be one, certainly, Herstatt.
QUESTION: Torsten Riecke with German business daily, Handelsblatt.
I have got two questions on the Fed. Once more, I just wonder what rate of interest rates mean for the Fed in regards to politics, therefore.
And the other question, which is related to that, if we have a strong economy, as you describe, and if we are awash with liquidity, why don't we put up interest rates even more quickly, put up half a point? Why do we have to stick to another pace now?
MS. FOSLER: Well, you're going to have to ask somebody else the second question.
QUESTION: What's your opinion on that?
MS. FOSLER: (Laughter.) Well, the -- I mean, I think, first, to answer your first part of the question, is that the Fed has an opportunity. The Fed -- I don't know how -- this is a personal opinion. It appears that the Fed has the ability to kind of play the yield curve like a violin. I mean, usually, the Fed can only operate on the short end, and then, you know, the traditional inflation expectations and our growth expectations determine the long end.
Now, they can even raise interest rates in the short end and depending on, you know, what happens in the long end, if the yield curve is still steep this liquidity goes in so they can almost raise rates and then implicitly take it back or have it taken back by the fact that the long end comes down so sharply. There is no way. You had said to me that the ten-year treasury -- and I haven't looked at it today -- but would end last year at four.
I would have bet you a hundred bucks against that because I'm looking at growth inflation, metrics dynamics, and the like. So I think that this makes the Fed's job more difficult. When it really decides to tighten, I don't think it is going to be so easy in this world of liquidity, if it really wants to tighten for it to really slow the economy.
And actually, the channels, when you think about, you know, old fashioned commercial banking system and credit disintermediation and that sort of thing, there used to be clear channels from Fed policy through the economy. Now I think one has to ask exactly what are those channels because now there is a lot of intermediaries that are coming into play and they look for ways to manage the yield curve, like exactly what the mortgage backed security is doing, the mortgage back -- you know, people talk about carry trades, the banks do, as, "Uh, my God, that's, you know, dangerous stuff."
Well, essentially what the mortgage backed securities market is doing is a carry trade, and yet and there are several people who touch that trade depending on, you know, they want yield or they're trying to lower costs. So our concern as an organization and what we'll be looking at increasingly is this kind of complexity that's -- we've introduced a lot of financial innovation and along with it a lot of complexity.
And, you know, what are some of the key implications of that for monetary policy for financial stability, for regulation and for global capital flows, for how this liquidity gets itself into the global marketplace?
As to your second question, I really -- I'm sorry. I'm really puzzled. When I was at -- in Washington for the IMF meetings, and I had a chance to see both Greenspan and Trichet, on the same podium. It seemed to me that Chairman Greenspan went out of his way, as he did in his recent testimony, to minimize the impact of oil prices, to talk about the worst of the inflation concerns were over. You know, I don't know that he looks at these same lags the way that we do.
You know, it's very easy to just look at commodity prices sort of turning down, you know, or stabilizing and saying, "Well, that must be over," without fully realizing that there are dynamics that have been in the pipeline that will continue to affect prices going forward.
Trichet had -- and, again, I'm a child of the '70s, he had, what for me was a more traditional Central Banker's view, which is I'm not alarmed about -- they were asked about oil prices and he said, I'm not really alarmed by oil prices, but which is what Central Bankers are supposed to say. There is always supposed to be a but. One has to worry about the secondary and tertiary impacts, as these oil prices get into goods prices and ultimately into wages.
So we must be vigilant, says Trichet. We don't need to be -- this is not a crisis. We don't need to be, you know, concerned in the short-term but we must be vigilant. And I thought that that was a much more balanced response. So they just clearly have two different views of the same situation.
I think Greenspan is very impressed with the productivity -- you know, the productivity impact of the economy, and that's good. I mean the economy, in our view, is on a higher productivity threshold. But I would be, if I were a Central Banker, I would be more worried than he has expressed by the amount of financial activity. You know, if you think I have some material from the IMF that looks at, you know, money and M1 and 2 and 3, all those traditional measures, and then it has all this kind of financial innovation added on top.
And so if you look at that as a percentage GDP, each economic transaction -- between you and me, if there is an exchange between you and me, it has much more financial content today than it did five years ago, even five years ago. There is a lot more -- you know, there is credit and then somebody is laying off the security and somebody is buying the security and they're financing it with a swap, and you know and you go on and on. And you just have to wonder if everyone in that chain understands what they're doing, and also stress tests to understand how those transactions are affected when the interest rate environment changes.
QUESTION: Neeme Raud of Postimees from Estonia.
The Conference Board is known for that. Consumers tend (inaudible). What does the mood index show now before the election, how Americans are going to the election? And what do you think about the impact the election, if any, will have on the economic future?
MS. FOSLER: Well, first, it is true. I actually took out the election slides but -- and I think I saw it in an article. Our consumer confidence index, as a rule, when consumer confidence index is above 100, the incumbent is reelected; and when it is below 100, the challenger is selected. The September reading is 97 and the -- we will have a reading in the last week of October.
So the index, I sort of say, "Gee, you could save a lot of money on all this polling because the index has that the race is tied." And it is. And I think I would have -- you know, probably I left the most interesting stuff at home, but we are a non-partisan, non-policy advocacy organization. You know, we just report the news.
But if you look at the -- I think one of the reasons that actually neither candidate has been able to get traction on the economy is because while the economy is improving, and if you look at our jobs, we have a jobs question. Jobs are plentiful, not so plentiful, and hard to get, and I really urge you -- I mean it's a wonderful set of questions and it's very indicative of what's going on in the job market, and we got a deterioration before this recession.
Sixty percent of the survey said that jobs were plentiful. That was like 20 points above the all-time high. I mean the labor market was just, you know, booming. Ten percent said jobs were hard to get. There were 30 percent that didn't know -- okay -- are in the middle.
Now, today you've got something like 30 percent that say that jobs are hard to get and you actually have about the same proportion that say that jobs are plentiful. The numbers have sort of crossed. But people aren't looking back to the early 1990s and making some sort of statistical appraisal about what things are usually like, as economists might.
They're looking back to the other side of this recession and they're saying, you know, the people who are saying the economy isn't doing that well are saying it was fabulous before and it just doesn't feel that good to me. And the people who say that the economy is really doing poorly are, you know, sort of saying, looking back and saying -- I mean saying that it's doing well, you know, are looking from the recession up and they say, "Gee, things do seem to be a little bit better."
But it isn't -- it's just not so definitive that either candidate can really get their teeth into the economic questions.
QUESTION: Sean Aylmer, Australian Financial Review (Inaudible re two tax policies...)
MS. FOSLER: Well, we don't -- you know, the measure asks very specific questions about your attitudes about jobs, your personal finances and your -- and business conditions, and so until something actually happens. Now, when the stock market, during the stock market meltdown, we got some -- usually, it's the job question that moves the survey.
For the first time, we actually had the personal finances question move the survey. So it is not -- I mean people don't -- I think the power of the survey is that it's not sort of like how do you feel today, but you ask some very specific questions that you can track over time, and it's only until one -- till the incumbent -- to the president does something that effects one of those factors, or, in fact, the economy itself has an impact that you get any kind of a change in reading.
Yes.
QUESTION: Sean Aylmer of Australian Financial Review newspaper. (Inaudible), why are they spending more? Why aren't they investing more? Is there (inaudible) issue? Have they lost entrepreneurial spirit? Have they --
MS. FOSLER: No, I think, as I said, number one, actually, I think Sarbanes-Oxley is having some impact, particularly this year. I mean companies are doing fairly plain vanilla projects, but corporate boards -- and I'm on some corporate boards -- corporate boards are so focused on what's fondly known as 404 -- you know, this control, this issue of controls, the adequacy of controls -- that -- I mean this represents, you really feel like you're on a raging bull riding into midnight.
I'm a reasonably intelligent person and I can't sit through one of these presentations and at the end of it know where I am. It's all --
QUESTION: 404?
MS. FOSLER: 404. And so, I think that after you get through the whole 404 business early next year -- and also the stock market has really -- you know, the stock market has been okay for a lot of companies, but boards are then going to really get back and dig into the strategic questions. And so, I think you're going to see a lot more pressure. Nobody wants to rock the boat. In fact, there are organizations who don't do certain things.
You know, you simply, if you've got a significant acquisition in Hungary, you make that next year free because you don't want to have the control implications of bringing this new entity into a system that has already been tested and, you know, dealt with. So there is a lot of inertia in the system at this particular point and time, but I think once we get past this with this liquidity, you cannot -- investors don't regard companies as banks, I mean, non-financial companies as banks, so either you give it back.
You buy the stock back, which all the research shows it does nothing for the stock price, unless you're going to commit to a long-term program; or you really have to develop a strategy for growth. And that's where I think then, as we get into next year and maybe beyond, we're going to being to see pressure around that strategy and maybe even nanotechnology, or whatever it is, but maybe these new platforms, these new investment platforms will become more apparent.
QUESTION: (Inaudible), things like that
MS. FOSLER: Not really. I mean companies really -- now it will -- I think people are still very much in the growth mode, even though there is a lot of caution about it in the stock market numbers, I mean the dividend -- you know, somebody gives you a dividend, you have to redeploy it. So what your hope is is that the rate of return of a company that's holding your money is going to be greater than your alternatives if they give it back to you.
I don't want to keep you all beyond whatever your allotted time was.
Yes.
QUESTION: Torsten Riecke of Handelsblatt
I have another question regarding Mr. Greenspan. One of the most important decisions the next president has to make is to naming a successor of Mr. Greenspan. I just wonder what you thought about what kind of person should it be, or whether you have a name in mind you wish to share with us.
(Laughter.)
MS. FOSLER: No, I think it needs to be a person who comes into the job with high respect for both their financial and their political acumen. Mr. Greenspan is a very astute reader of the tea leaves, in terms of taking policies that are viewed as being sort of acceptable, but it really needs to be somebody who has -- I think where the public has been able to evaluate whether that person is a person -- it's not exactly like evaluating a political candidate, but, you know, where the public can look at this person and their past history and say that's a credible candidate.
Certainly, Paul Volcker fell into that category and Greenspan had been in the public view, and I think it will be somebody who has been very much in the public view. It will not be someone who is sort of a name that is not -- really hasn't been in the midst of controversy, been able to manage controversy, been able to manage difficult policy issues.
QUESTION: Outi Toivanen-Visti of Talentum Media Oy (Inaudible.)
This is a follow-up for the elections, particularly (inaudible) if Kerry is going to be selected as the president, what do you expect him to do for the economy? Does the president have kind of (inaudible) for the economy?
MS. FOSLER: I would imagine that Kerry would put together something that would be very much like the first Clinton budget. If you remember, back -- no, you don't remember back. You were still in -- (laughter). I'm just going to keep getting all these whippersnappers.
But back in the -- you know, in '92 -- I mean he talked about -- oh, I can't remember what his slogan was, but it like, power to the people. I can't quite remember but it was -- you know, it had the word people
