Catching up with... Liz Ann Sonders

We don’t know. It’s a question, again, of how much gets done. One can talk about it but ultimately it has to become policy for it to have an effect. The market probably will devote a lot of attention to the minimum wage hike and also, obviously, to tax policy because I do believe that part of the reason for the long-term market rally–i.e., the bull market beginning from the end of 2002, certainly the liftoff we got from the market lows of 2003–had a lot to do with the capital gains and dividend tax cut

What’s your outlook for the rest of this year and the first half of 2007?

The rest of this year could have a trouble spot or two–we had such a singular move without any kind of corrective phase for a pretty extended period of time now…We’re looking at some sentiment measures now that suggest, maybe, we’re a little bit troubled. There’s a lot of complacency. I think the market has this somewhat rose-colored view that we have engineered that elusive but perfect soft landing: that inflation is kicked, that the Fed is out of the game, that the next move will be a cut–but it won’t be a cut because we’re risking a recession; that the yield curve is inverted not because of any problems in the economy, but because of excess liquidity that has just pushed yields down on the long end. It just seems almost a little bit too pat. Valuations are reasonable, earnings growth is exceptionally strong, but it’s been exceptionally strong for a very long period of time and we may not be at the peak, but there’s a disconnect in a quarter when you have 19% earnings growth and 1.6% GDP.

When you look at recent trends in productivity and unit labor costs, it suggests that the profit margin story, which has been stellar, may start to become less stellar… but I think housing is the key. If you can answer all the unknowns about housing, you can answer the questions about the ultimate path the economy is on, and in turn, the market.

What about housing?

I spent time with Alan Greenspan yesterday and the most interesting comment, for me, was he seemed to be not less optimistic about housing, but he was so well quoted a few weeks ago in suggesting that the worst in housing was over, and when I posed the same question to him he was not as definitive that the worst was over. He suggested that maybe it gets a little bit worse. . . Maybe the plunge in prices is past its most severe point but when I think about $2 trillion of resets yet to kick in between now and 2008 and all of these packaged mortgages and $300 trillion in derivatives in general, a lot of it tied to housing, and the employment side of it–I’ve seen numbers as high as 40% to 45% of all jobs created in the last five years had some association with real estate–I’m having trouble putting my rose-colored glasses on when I look at housing.