With Michael Farr, President/CEO of Farr, Miller & Washington, LLC, Author of A Million is Not Enough
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Steve spoke with Michael Farr about the current state of the economy and the stock market and what investors can expect over the next several years. Michael holds the distinction of being the longest-serving paid contributor at the financial network, CNBC. He is also President/CEO of the investment advisory firm, Farr, Miller & Washington, LLC, and the author of a number of books, including A Million is Not Enough and Restoring Our American Dream.
Fears Of A Possible Recession
Michael doesn’t think another recession is likely to rear its head any time in the immediate future—unless we make the mistake of talking ourselves into one. It’s important to note that when a recession occurs, the economy actually shrinks.
A current concern is that as the economy’s growth rate and the bull market in stocks begin to slow down, the financial talking heads on the business networks may start painting clouds on the horizon as darker than they actually are. If everybody suddenly starts talking “recession”, that kind of talk can easily become a sort of self-fulfilling prophecy. Business and consumer confidence starts to wane and we all become more conservative and risk-averse and stop buying and investing, thinking that prices are headed down. If that sort of ultra-financially-conservative scenario plays out too far, it could actually trigger a real recession.
Michael said, “We have to be aware of our own rhetoric, of our own messaging…”, to make sure that we don’t generate that kind of negative feedback loop. Steve recalled how that self-fulfilling prophecy phenomenon occurred in regard to inflation in the late 1970s and the 1980s. The fear that prices would continue climbing higher made people feel pressured to spend more now, and that buying pressure naturally led to higher prices and more inflation.
Adjusting To Full Employment
Over the past few years, employment numbers in the United States have improved dramatically. With an unemployment rate of just 3.7% as of September 2019, we basically have full employment. But with 96.3% of the workforce employed, we’re not going to keep seeing above-average monthly non-farm payroll (NFP) numbers, adding 200,000 jobs per month. You just can’t keep adding that many jobs every month when roughly 97% of the people already have a job. You have to expect those employment numbers to plateau rather than continue to improve.
And, again, we have to keep an eye on our attitude so that we don’t start feeling disappointed just because we stop seeing those really high numbers of “jobs added” month to month. In fact, Michael has already noticed some of that negative attitude creeping into some of the jobs reports commentaries, with some analysts sounding critical when they talk about the number of jobs added tapering off.
Steve pointed out another factor in regard to leveling off employment numbers: Millions of baby boomers are retiring every year now, leaving the workforce permanently. Michael agreed that’s an important concern because population growth is, historically, necessary for continuing economic growth. However, the population growth rate in the U.S., as of 2019, is the lowest it’s ever been, at about 0.4%.
This means that immigration—a current hot-button political issue—becomes an increasingly important element for continuing economic growth. A sufficiently large and sufficiently skilled immigrant population could help the U.S. at least partially overcome the ongoing loss of baby boomers in the workforce. It could also help supplement the relatively low population growth rate in the country.
The Investment Market
Steve and Michael discussed the rather unique interest rate environment that currently prevails, with continuing low rates in the U.S. and even negative interest rates in Germany and Japan. Steve noted that while falling/lower rates typically spur economic growth, there currently seems to be a shortage of demand for loan capital. This may indicate that companies are a little short on great ideas that they’re willing to borrow money to invest in, or it may indicate a still-lingering risk aversion hangover from the 2008 financial crisis. On the other hand, the problem may lie on the supply side rather than the demand side of the equation. Nobody knows for sure how many trillion dollars the U.S. government churned out in its efforts to weather the financial crisis, and there’s been no concerted effort to roll back the money supply.
Michael’s attitude toward the stock market is essentially the same as his attitude toward the employment numbers. That is, we’ve enjoyed unparalleled good fortune and excellent gains for several years, with the S&P 500 Index more than tripling in value since 2009. So, if stock market gains start to level off or slow down a bit, just as the “jobs added” numbers have, investors really shouldn’t complain.
Michael’s current market advice is good advice under any economic conditions: focus on value investing and manage your risk exposure. “I think that there are still a lot of value stocks that have underperformed the past few years, with great balance sheets and decent dividends. If you can find stocks with 4-5% annual earnings growth, a 2% dividend, and a 7% annual return on investment, I think you might be very happy with that for a long time.”
Steve echoed Michael’s sentiment, comparing the stock market to the real estate market—it’s all about quality, quality, quality! In any event, with returns on fixed-income assets so low, the stock market continues to look like the much more promising investment arena.
In conclusion, Michael said that while another recession is eventually inevitable, he’d be surprised to see one develop within the next 12 months. But on the other hand, he said that he’ll be very surprised if he doesn’t see one within the next five years.
You can contact Michael Farr at Farr, Miller & Washington – or check out any of his books for sale at Amazon.
Disclosure: The opinions expressed are those of the interviewee and not necessarily of the radio show. Interviewee is not a representative of the radio show. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances. The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by the radio show.
Steve Pomeranz: Well, I am thrilled to have my next guest back on the airwaves. This is the gentleman who I don’t think we’ve spoken to in a few years. He is the longest-serving paid contributor on CNBC. He’s an American author of three books, A Million is Not Enough: How to Retire With the Money You’ll Need, book number one; book number two, The Arrogance Cycle; and number three, Restoring Our American Dream, which came out in 2013 and he is the one and only Michael Farr and his company is Farr, Miller, and Washington located in Washington, DC. Michael Farr, welcome back to the program.
Michael Farr: Thank you, Steve, very much. It’s a great pleasure to be back with you. I’ve missed you guys.
Steve Pomeranz: Ah, we missed you too. I don’t know why we … why it’s taken so long, but that’s water under the bridge.
Michael Farr: Perfect.
Steve Pomeranz: We’ll look towards the future. You know, you’ve been writing a lot, as you always do, and there were a couple of articles that caught my attention and one of which was this idea about let’s not talk ourselves into a recession. What does that actually mean? How do you talk yourself into a recession?
Michael Farr: I hope that it’s a hard thing to do, but it’s not certainly an impossible thing to do. You know, recessions are periods of where we actually go negative on growth and the economy actually starts to shrink. It’s not just slower growth. When you get these down days in the markets and they bring all the talking heads on TV and we all start talking about worries about slowing growth out of China and whether we’re going to be able to continue to see GDP growth and all of the other problems that we face around the world, we can kind of create enough of a negative scenario that we start our own soundtrack, right? We listened to it enough on radio and we start to quote each other in different reports and then CEOs who are thinking about investing in new plant and equipment and new jobs don’t really know why they’re going to hold off, but their gut starts to tell them to hold off. I think largely it can happen because we’ve really created the clouds on the horizon and left them hanging there when maybe they really aren’t there at all.
Steve Pomeranz: You know, it reminds me of this phenomenon we see sometimes with an individual, the stock price of an individual company. So if the stock price is high or hitting new highs, one tends to think, “Oh, this company is great”, but if there’s a hiccup and you start to see the price go down and maybe it’s just … it’s languished for six months or something, you automatically get the perception that this company is not so great anymore and sometimes you think it’s actually bad and the stock price is really just the stock price. It’s not really a true reflection of the business necessarily. If we start talking about things like inverted yield curves and especially that has been a big one, the trade war with China, all these worries start to come to mind psychologically.
The market might sell off or experience a correction. Then, the big eight news outlets to sell advertising—or as we used to say in the newspaper business—it’s when it bleeds, it leads. The negativity is something that attracts people, attracts eyeballs, and they sell more advertising. So now everybody starts talking about recession and then everybody starts to get depressed and investor confidence wanes and consumer confidence is … isn’t that kind of what we’re talking about here?
Michael Farr: Well, it is and I think when you’re talking to an economist or you talk to the folks at the Federal Reserve or central bankers around the world, when they look at something like inflation, they look not only at the inflation data, but they place an equal weight on the expectations for inflation, for what people think is going to happen. Because if people think that prices are going to go down, they stop spending. I mean, wallets stay in the pocket, they can be very patient waiting for those lower prices, and that becomes a self-fulfilling prophecy.
So those expectations for inflation or not inflation or economic growth or not economic growth really are very important. I think you’ve hit on a very key point that we have to be aware of our own rhetoric, of our own messaging, and that we don’t start that negative feedback loop, not only for ourselves, but for the economy.
Steve Pomeranz: I remember in the early ’80s when interest rates were so high and inflation was high and rising inflation, there was a self-reinforcing cycle with inflation as things went up in price, people were buying now in anticipation of higher prices later. So there was buying demand which outstrips supply, which created higher inflation, which created higher interest rates. Right now we’re really kind of talking about the opposite. If things are negative then and price, the expectation for prices are down, then people are going to wait, which exacerbates the problem even more.
But you said in your recent article that it’s not only about what’s happening right now and it’s especially now, we get these metrics that are published every single month from the Fed and the Bureau of Labor statistics and all of this and that’s kind of old news. It’s not where we are right now, but it’s the foreseeable change in the future that’s going to determine whether, in fact, we are going to get a recession. You use an example of unemployment right now, this low unemployment, how would a rate of change either way affect our vision of whether we’re going to have a recession or not in the next six to 12 months?
Michael Farr: Over the past few years we’ve seen unemployment fall dramatically, which means we’ve, of course, seen employment, a number of people employed, rise dramatically, and you get used to seeing these numbers of we’ve added 200,000 jobs last month. We’ve added 200,000 jobs this month. We’re going to add 200 and then all of a sudden, we get to be 3.6 or 3.7% unemployed. And when you’re 3.6 or 3.7% unemployed, you’re 94.3 or 94 point, I’m sorry, 96.3 and 96.4% employed.
Well, if you’re 96.3% of anything, I mean, how much more can you add and how quickly and sooner or later you can’t just keep adding 200,000 more jobs a month. There aren’t any people left. You got 96.3 or 96.4 of them. I mean, you’re not going to add that many more of them. They just aren’t out there to be added to the workforce. So at some point, you’ve got to get used to seeing those numbers plateau.
Steve Pomeranz: Right.
Michael Farr: They could stay that way for a while, but all of a sudden a plateauing number, if we’re not careful, can represent a disappointment. We’ve actually started to see that as some of the economic data and employment data have been released that people say, “Well, we didn’t add as many jobs last month. Number of jobs added really are tapering off.” Well, of course, they’re tapering off. I mean, we’re reaching … we’ve really gone beyond full employment.
We have more job openings than we’ve got people looking for jobs. I mean, so it doesn’t mean that it’s awful, but we just got to make sure that we don’t start seeing it as awful or start seeing it as something that’s negative, when it really isn’t.
Steve Pomeranz: So if it’s the rate of change and we can suspect that the future rate of change is not going to necessarily mean more or accelerating employment, then maybe we just have kind of a stable 4% unemployment rate. You know, don’t forget, there’s millions of baby boomers that are retiring every single year as well. So they’re coming out of the system as well, which is, I guess creating some restraints … constraints as well. So can we not go into recession if unemployment or employment plateaus?
Michael Farr: Yeah, we can. We absolutely can because you have that huge workforce, almost the entire workforce is working and producing and generating economic growth. Now, what we need to see at some point, and this is … it is an issue. We have to see a growing workforce. I mean we do need to see more people out there working.
One of the ways you look at GDP growth is to take the growth of your workforce plus productivity and that is a definition of GDP growth. So growth in your workforce. Think of it as a donut shop. I’ve got three people coming in to make donuts every morning. They show up at 4:30 every morning. God help those poor people who have to show up at 4:30 to make those donuts.
Steve Pomeranz: I agree.
Michael Farr: But I’ve got my three people who come in and work on three machines and to figure out the productivity growth of my donut shop, pretty much an economist is going to say, if I add a fourth person, I should have more donuts. If I add a fourth machine, I should have more donuts. If I add both, I should have a lot more donuts. In the US right now, and this is half of the equation because this is the supply side of the equation, not the demand side of the equation, but in the US right now population growth is as low as it’s ever been.
Historically, when an economist wants to figure out whether how an economy’s doing around the globe, you pick the country and we’ll say, “How’s their economy doing?” The first question the economist typically asks is, “What’s happening to their population growth?”
Because a growing population typically has a positive economy and positive economic growth. Ours is stalling 4/10 of a percent in population growth from US babies being born as United States citizens, so if you want to grow your workforce, you then have to rely on immigration and there has been political pressure on immigration.
Steve Pomeranz: Right.
Michael Farr: So we have some headwinds to growth as we look at the GDP growth formula, but it doesn’t mean even though it’s going to be … we can see where it’s going to be slow and we can see where there are pressures on forward growth. It doesn’t mean that where we are is necessarily awful at all. I mean, we’ve come a long way. When you look at where we were in 2008 and 2009 even in the stock market, that was … You mean we’re up almost 20,000 points from the lows just in 2009.
Steve Pomeranz: Yeah.
Michael Farr: I mean, that’s an amazing return and if we’re going to have this economic recovery over that same 10-year period and growth slows at the end of that, man, that’s not, I’ll take that. That’s okay. We can grow slowly from these high numbers.
Steve Pomeranz: You know, Michael, I want to talk about interest rates because when, again, going back years and years when I was first became an advisor, as I said before, interest rates were rising, so rising interest rates were for the economy were a bad thing and falling interest rates were a good thing. And yet in this kind of upside-down world, we have this falling interest rates and everybody is miserable. They’re all worried that this means … You can’t get a break as an advisor.
Michael Farr: You can’t get a break.
Steve Pomeranz: I can tell you that. You just can’t get a break, you know?
Michael Farr: Yeah. You know, falling interest rates too. One of the implications, the bad implications for falling interest rates is there’s not enough demand for money. It’s just the supply and demand. So, if you and I and 10 of our best friends went to a bank to buy, basically for the same loan, the bank might at some point say, “Well, wait a minute. Everybody’s standing outside for a loan, we’re going to charge a little bit more for it.”
Steve Pomeranz: Yes. Right.
Michael Farr: But even at these low … and we might say, Steve and I might say, “Okay, we’ve got such wonderful prospects for this business that we’re going to start on this borrowed money. We’re going to pay him a little bit more because we’re so optimistic.” So this idea of lower rates is if people aren’t willing to go borrow the money when it’s this cheap, then maybe they don’t have any real … It comes back to the attitude largely again, but they don’t have any great idea for how they can make more money than the 3% that the bank’s going to charge them, and that begins that negative feedback loop too.
Steve Pomeranz: But Michael, I feel that these low-interest rates to a large degree are a function of the need for this large amount. I mean, trillions of dollars that are floating around the world to find a safe home, especially if the stock market gets a little funky, that money has got to go somewhere and it goes into US treasuries, which drives up prices and drives down yields. So is it really a lack of demand or is it somehow on the other side of the table where the forces lie?
Michael Farr: Certainly there’s a supply of dollars and in the global rate neighborhood, we are the most, one of the most attractive houses out there. Germany has negative rates, Japan has negative rates.
So, and of course, this … Steve, for all the years, for all of the decades that I’ve been doing this, and as much as I understand negative interest rates on paper, I still don’t get them. I mean, I’m going to give my money to the government of Germany for a 10-year note with basically a contract to receive back less, to pay them to hold my money every year and give me guaranteed back less money at the end of 10 years. I mean, that’s mind-boggling and people are lining up to do it.
Steve Pomeranz: Well, Michael, I want a mortgage where I get a reduction. Instead of me sending principal every month, I actually have the bank reducing my principal every month because they’re paying me-
Michael Farr: I think it’s a … Get me … I would take … Let’s go. If any bankers are listening, Pomeranz and Farr are customers right now, the answer’s yes.
Steve Pomeranz: I got some money.
Michael Farr: We need negative rates whenever you’re ready.
Steve Pomeranz: I’ll lend you money any day if you, if I don’t have to pay you, you pay me for the right of me borrowing money from you. It’s insane. So we live, I guess we live … unfortunately, we only have a minute and change left. I guess the, getting back to the original idea or question or thesis here, do you see a recession on the horizon right now?
Michael Farr: Not on the immediate horizon, I don’t. I do see some signs that are worrisome, but we haven’t had a recession for 10 years. Are we going to have another recession? Sure. We’re going to have another recession. When, I don’t know. It doesn’t look like it’s going to be anytime in the next 12 months. I’d be amazed if we didn’t see it in the next five years.
Steve Pomeranz: I don’t know where else to put money if 10-year interest rates are at one and a half percent and everything else is so low, with the low-interest rates, asset prices rise and companies are earning a higher return on their investments than one and a half percent. It still seems like the stock market is the right place. You agree or disagree?
Michael Farr: I do agree. I do think you need to try and stay out of the thin branches of risk and I think that there are still a lot of the value stocks that have underperformed for the past few years with great balance sheets and decent dividends and if you can get yourself 4 to 5% a year earnings growth and a 2% dividend and a 7% return in this environment, I think I’d be very happy with that for a long time.
Steve Pomeranz: Quality, quality, quality, it’s like real estate, right? Location, location, location. This is for right now, quality is the key. Michael Farr, CNBC contributor, as always, a stimulating discussion with you and I thank you so much for joining us.
Michael Farr: I get to join this quality Steve Pomeranz. Thanks so much for having me.
Steve Pomeranz: Thank you Michael, and to hear this and any interview again or if you have a question about what you’ve just … what we’ve just discussed, visit our website which is stevepomeranz.com. No T in Pomeranz. Just go straight to the Z after the end. Stevepomeranz.com to join a conversation. While you’re there, sign up for our weekly update. We will send you into your inbox, all the segments that we do that week in transcript form and summary form, and you can also hear them as well. That’s stevepomeranz.com.