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S&P’s David Blitzer on What’s Next for the Markets

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There’s something anachronistic about David Blitzer. It’s as if he’s straight out of central casting for one of those faux black-and-white, mahogany and Corinthian leather commercials about listening to clients and the fundamentals of investing that were popular in the 1990s. That’s good, because now (especially now) what the bespectacled and bow-tied Blitzer exudes, more than anything else, is reassurance.

He’s seen it all before and doesn’t get rattled by talk of “cliffs,” “battle lines” and other loaded terms cavalierly thrown about at the point where politics and economics intersect. It makes him perfectly suited for his role as managing director and chairman of the index committee at S&P Dow Jones Indices. 

His academic style probably has something to do with it. He earned a bachelor’s in engineering from Cornell University, a master’s in economics from the George Washington University and a doctorate in economics from Columbia University. His widely-read books, most notably “What’s the Economy Trying to Tell You? Everyone’s Guide to Understanding and Profiting from the Economy,” seem to arrive in times of turmoil and are surprisingly easy reads for someone with such a pedigree. We’ll leave the hokey horse-whisperer analogies aside because he’s not an advisor, so he’s not listening to clients; but he most definitely is listening to the economy, or more specifically, the reams of data it produces.

Is it any wonder we chose him for this year’s outlook? His cautious optimism for the new year is something about which we’re happy to report, but give credit where credit is due: His academic and professional achievements are impressive, but his prominence is also due to the corresponding prominence of Standard & Poor’s as a whole. As CEO Alex Matturri noted, part of that proud history means avoiding the recent Libor scandal and so many others that have cast a shadow on the integrity of the indexing industry as a whole.

“We’re not product issuers,” Matturri explained. “We’re not the providers of the inputs in the index itself, so we’re unconflicted in that sense. We don’t have a vested interest in the input, and we don’t have a vested interest in the output. Our role is strictly to develop and publish these indexes on an ongoing basis.”

So where did other companies go wrong in their handling of Libor?

“It gave rise to a situation where you had banks that were providing the inputs in the Libor calculation that also had a vested interested in the output,” he responded. “Libor was used as a basis for swaps and other products and strategies that impacted the input of index calculations. This was done to suit other parts of their business. That’s a natural conflict.”

With that out of the way, it’s back to Blitzer. As we said, we like his cautious optimism. Here’s why.

“Finally, after three or four years housing is turning around,” he said. “Housing is definitely coming back. Housing starts are up. We’ve seen existing sales go up. Every housing statistic has turned positive, and housing will make a contribution to the economy next year. This year it’s probably about neutral. The previous few years it was a negative contribution.”

As for the stock market, it’s “sitting on two or three contrasting forces”: impressively strong earnings (at least until the latest round), and in some cases record levels.

“We have corporations sitting on huge quantities of cash, and we have bargain basement interest rates,” he added. “So I think the outlook for the market is reasonably good, but not gangbusters.”

Does the fact that the last round of earnings was a disappointment point to a slowdown, and something about which to be concerned?

“The fact that earnings have a disappointing quarter or maybe a couple of quarters I don’t think is a major concern for the market,” he reassured us. “There are plenty of times [when] the market goes up and earnings are flat to down.”

More interesting is the cash issue, which he feels could point to renewed interest in acquisitions and expansion.

“They’ll have absolutely no difficulty financing. Even if they want to borrow the money instead of use what’s in the till, they’ll have no difficulty in financing.”

Part of the reason, of course, is Fed policy, which Bernanke promises will remain constant though 2014. That’s the sort of consistency Blitzer, and by extension the broader market, likes.

As for inflation concerns, he’s not about to get ahead of himself.

“You know, the inflation rate doesn’t concern me at all,” he bluntly stated. “It’s in the neighborhood of 2%. When you get the unemployment rate down to 6% and GDP growth over 4%, I’ll be happy to worry about inflation because I’ll be very happy when all that happens.”

He quickly tempered our excitement over 4% GDP growth and 6% unemployment happening anytime soon. (Excited by 6% unemployment? What’s become of us?)

“I wouldn’t hold my breath if I were you,” he cautioned. “Certainly not in the next year or so. I think you could do it over the next four years. It really depends on the unwinding of the fiscal cliff and what gets done with taxes and so forth. I believe we need fundamental tax reform and that kind of thing and so on.”

As to the specific sectors in which he sees promise, there are both intermediate and longer-term positives being missed.

“One, ironically enough, is energy. And this is not renewables; this is gas and oil.”

Arguing natural gas is at “absurdly low prices,” he believes it should be four times or five times more expensive than it currently is “if you use the energy or heat value of a barrel of oil compared to a thousand cubic feet of gas. It’s completely misaligned because we have huge quantities of cheap natural gas.” It takes time to figure out how to use those most effectively, he noted, adding some municipalities have converted their car fleets to run on natural gas because it’s cheaper and cleaner than gasoline.

“Even with all the arguments about fracking and about environmental issues related to getting it out, I think we’re still going to have large quantities. Behind that, we’re producing a lot more oil than we have anytime in the last 10 or 15 years.”

One important topic, Europe, hasn’t received as much attention in the run-up to and immediate aftermath of the recent presidential election, but it will be back in force in 2013.

“I think the euro survives,” Blitzer bluntly stated. “I think the political cost to any of the leading politicians in Europe in or out of office, the political cost of seeing the euro destroyed, is just too big for them to stomach.”

Even though one could make a reasonably good argument that on one end Greece would be better off if it got out, and Germany would be better off if it got out on the other, neither country is willing to take part in the destruction of the euro.

“I think they will move toward some kind of unified banking regulation because it’s almost a necessity to have in order for the euro to survive. Whether they ever get to true fiscal policy union is much less clear. If the euro is still around in four or five years and nothing’s completely collapsed, the pressure will fade. I don’t think anybody wants to give their neighboring countries taxing power or rights to their tax revenue. So a fiscal union would be very difficult, if not impossible. But I think politically the euro will survive.”

No outlook would be complete without a discussion of China, a topic Blitzer called “a bigger puzzle than anything else.”

“They’re going to have huge productivity problems,” he warned. “Their strategy for decades was to find a lot of rural performers whose productivity was pretty close to zero and move them into some factory, even if it was 10 or 20 years out of date by western standards. Their productivity still looks like it just went to the moon.”

When they run out of zero-productivity “labor-in-waiting,” he concluded, they’re going to have a problem.

“It seems they’re approaching that point now. They’ll have to re-scramble their economy, which may mean that they would be more interested in buying and less interested in selling than they are today.”


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