Monday, March 19, 2007

Are We Being Mau-Maued?

The following is an excerpt from my conversation with Wharton finance professor/WisdomTree Senior Investment Strategy Advisor Jeremy Siegel on Friday night's Kudlow & Company. My take on the subprime virus is that while it's certainly a problem, it looks more like a capital markets issue, not a major economic recession call. The key point is that there’s no economic collapse out there. Consumers still have a lot of spending power.

KUDLOW: Jeremy Siegel, are we all overrating the subprime effect? Are we all being mau-maued by the permabears and the media? Because when you look at the consumer spending power, household wealth is very high, actual income is very high, actual mortgage extractions are still high--over 400 billion--even though it's down from its peak. Isn't there enough spending power and business profits to keep this economy more than afloat?

JEREMY SIEGEL: Absolutely. I agree with you. I agree with those experts who look at the data and say, `This is a subprime issue.' Actually, only the adjustable rate mortgages of that subprime, that is really where the problems are really located. It is true that that lending did boost the economy in 2004, 2005, maybe early 2006. That part of the boost is going to be withdrawn. But, as you say, household wealth is still at a record high. And even if housing prices come down a little bit, and even if the stock market comes down a little bit, there's enough buying power. It's fear. I mean, can they generate enough fear in consumers? And that's why I think one of the good things we saw today, the preliminary University of Michigan report, little bit of a drop but not very much—first real report since the stock market. If we keep the consumers from, you know, falling apart and thinking the economy's going to fall apart, I don't think there can be a recession.

KUDLOW:...I hate being mau-maued, and I particularly hate it when desperate permabears do the mau-mauing, which I think is a very big part of this subprime story...All I'm saying is, when you look at household net worth, it's up $3.8 trillion. The Fed says use 4 percent of that for consumer spending, so that's $150 billion. Wages and salaries at the end of '06, up $325 billion. And as I said earlier, mortgage equity extraction is still rising by $470 billion. Put all that together, you've got about $950 billion of consumer spending power, which is almost twice the volume of consumer spending in Q4. So what I'm saying is, if you get nicked a little bit, why does this bring the whole house down?