It’s a bittersweet way for investors to begin a new year.
On the one hand, economic news in the U.S. has been getting steadily better. This holiday shopping season is shaping up to be the best since the Great Recession; the housing market is showing signs of life and even the job market is on the mend.
Then, there’s Europe. The region’s leaders have failed again to convince investors that they will be able to prevent a breakup of their 17-nation currency union. Greece could still default on its debt, causing huge losses for banks in France and elsewhere that hold Greek bonds. Investors fear that could cause a financial panic to spread around the world, like what happened in 2008 after the U.S. brokerage Lehman Brothers collapsed.
In the U.S., too, there are plenty reasons for investors to be cautious. Many companies are still wary of hiring, and banks are afraid to turn on the lending spigots.
Who better to guide investors during these uncertain times than Bob Doll, who helps oversee $3.6 trillion in assets as chief investment officer at the world’s biggest money manager, BlackRock.
Doll recently spoke with The Associated Press about how 2011 worked out for investors, what he’s optimistic about in 2012 and what he’s worried about. He’s hopeful that Europe can stick to its goal of greater fiscal austerity. But he acknowledges that ? like his own New Year’s resolution of losing 15 pounds ? enforcing the outcome is the tricky part.
Here are excerpts from the conversation, edited for clarity.
Q: How does 2011 stack up for you?
A: We entered the year hopeful. Global economies were looking better. But the tsunami disaster in Japan cast a bigger shadow on global growth than a lot of people initially thought. Then there were big political upheavals in the Middle East with the Arab Spring. Those political and social issues contributed to a rise in oil prices that didn’t help the fledgling U.S. economic recovery. Then Europe kept coming back as problem. All the wild cards that showed up were on the negative side. The year started high on hopes that were dashed.
Q: With Europe looming large going into the New Year, what’s the outlook for 2012?
A: The probability of a solution to Europe’s issues is low. Nobody even knows what it will be. Or what a solution looks like.
The European authorities’ attitude to dealing with their problem is to close their eyes, hold their noses and hope it might go away. Stumbling along is the most likely path forward.
The alternative is more troublesome. If there’s immense pressure on politicians, there can be an accident that takes the form of a bankruptcy, or nationalizing some banks, the collapse of the euro, or that a country exits the European Union. Nobody even knows how that can potentially take place.
Muddling through is the best option. Europe can then face a mild recession and economic contagions are limited. But the darker scenario could lead to a financial contagion which will be drag the global economy down.
Q: But that won’t make the problems go away.
Q: The European Central Bank has a lot of different masters to serve. The ECB has Germany looking over its shoulder and is aware that it will have to help the troubled countries, but doesn’t want to help them too fast.
They want to see fiscal austerity before bailing out anyone. But how do you enforce fiscal austerity? It’s nice for me to say that I will lose 15 pounds in the first month of the year. What recourse does anybody have if I’ve actually gained 2 pounds instead?
Q: It’s like those stories coming out of Greece where people get higher taxes tacked on to their utility bills and they say they won’t pay them because they can’t.
A: Exactly. It’s an illustration of the principle that they want to do the right thing, but how can they get it done if nobody will pay the bill.
Q: OK, let’s talk about the U.S. What’s your view of economic growth here?
A: One thing is for sure: we are not heading into a recession. The recent numbers are encouraging, but we can’t get carried away. If the economy grows from 2.5 percent to 3 percent or a little higher, we can’t expect the next stop to be 4 percent.
Consumers are spending, but not a lot. Employers are hiring, but not a lot. There are constraints and headwinds that prevent us from having the typical bounce-back recovery that you’d like to see after a recession. What’s important for the U.S. is to maintain respectable growth. Our economy is not yet strong enough to withstand any financial contagion that spreads from Europe.
Q: And what about the big drag on the economy: housing. Is there a turnaround on the horizon?
A: My view is that we are probably in a long-term bottoming process in real estate. According to the Case-Shiller index, the cataclysmic decline in home prices has long ended and prices bottomed out in May 2009. But we’ve continued to bounce along. Banks are unwilling to make mortgage loans and many loans are higher in value than the homes. All that’s kept the real estate recovery very slow.
New construction is taking place at just half the pace of population growth. At some point those things will have to balance out.
Q: Globally, China and India seem to be slowing down. Does that worry you, given that a lot of corporate growth seems to have come from overseas lately?
A: You’re right; corporate profits don’t equate to U.S. growth anymore. U.S. consumption only accounts for 28 percent of the S&P 500 profits. Only 55 percent of the largest companies’ revenue comes from the U.S.
Even with continued slowing, China and India will count for about half of global GDP growth in 2012. So those are critical economies. If the authorities can beat runaway inflation in those countries, and Europe doesn’t fall off a cliff, their economies will have a soft landing. And that’s important.
Q: Did I hear you right when you said you’re aiming to lose 15 pounds?
A: Yeah. Fifteen pounds would be a good number to lose, but only after the New Year.
Q: But if I check back with you in a month I wouldn’t be able to enforce it, right? Just like the ECB?
A: Exactly. (Breaks into booming laughter.) Who’s going to enforce it?