Earnings Watch: Big Banks You Own

>> Dan: Welcome to EconWatch I'm Dan Farber, Editor in Chief of CBSNews.com; this is our weekly show on Monday to talk about what's coming up in the world of finance and money and I am joined, of course, by Jill Schlesinger the Editor-at-Large at MoneyWatch.com. Jill, so what do we have to look forward to this week?

>> Jill: Well, as taxpayers we are gonna be very interested in Earnings Season this week. We have 4 different financial service companies reporting, two of which we own a nice big stake in, Citi Group and Bank of America. So we're gonna look to see whether these financial companies are back on their feet again. Also this week we've got some economic data points. We have retail sales and we have some inflation readings, so those are gonna be the biggies for the week.

>> Dan: Well let me start with these financial companies you're reporting. As you said the United States government and the taxpayers own a big chunk of them. What if their reports come out and we're not happy? What recourse do we have to make any changes to have a better outcome in the next quarter?

>> Jill: Well the problem with the tarp plan and a lot of these emergency measures is they didn't give us the taxpayer or the government a real hand to hand combat mentality. In other words we pushed the money in but we don't have the ability to make changes in the executive suite. We don't get to tell them how to run their businesses. So really we're somewhat hopeful that we -- our fate is in their hands. We're hopeful that they will come out and pull out some good numbers. Two areas of concern, one is consumer credit and the other is commercial real estate. All of these companies have big exposures to those areas and we're a little worried that that's not quite back in recovery mode yet.

>> Dan: Now, I've heard that commercial real estate specifically is the next big shoe to drop. Is that just kind of shouting in the dark or is there some real affect that could come from that probably in 2010?

>> Jill: Well there is some data to indicate that commercial real estate could come under pressure. Again, these big companies if they're not selling more stuff to us, if their earnings don't improve they don't need more office space and that will limit commercial real estate. I think it's a little early to sound the alarm. Actually I think that it may be surprising to people that the recovery actually turns out to be okay.

>> Dan: Now, you've mentioned some indices the retailing index, the consumer price index what do these really mean to kind of a normal mere mortal who's out there just trying to save some money or figure out, you know, how they can get ahead.

>> Jill: Well, if you look at retail sales this is the one that makes most sense to people. How much are we spending in the nation's big stores? And that can go anywhere from WalMart to a department store even to a high-end retailer. And what we're trying to determine is whether consumers, all of us, are feeling confident enough in the economy to open up our wallets and spend some money. So far the only way we spend money is if we get a nice incentive like the cash for clunkers. So keep an eye on retail sales because that will help inform us about where we are in the recovery whether consumers will spend. Now, inflation is a really kind of scary topic for people. We talk about inflation which is just the general rise in crisis for goods and services. So far in this recession we've actually experienced deflation, prices have gone down. When we had the last report we found that prices were 1 1/2% lower than they were a year ago. What's interesting about that is the fear is that if the Federal Reserve keeps pumping lots of money into the system all of that money will chase prices higher. So far there's no evidence of that. But that's what's always on the back burner especially for the Federal Reserve and why we care about inflation.

>> Dan: Now when we talk about inflation it seems to be tied to the dollar, it's tied to gold so what's the relationship there because we hear a lot about gold today?

>> Jill: And I'm wearing some just to honor that gold prices have actually reached new highs in nominal terms, meaning the price. If you actually use inflation adjusted numbers we have to get to about 2,300 in today's dollars to reach where we were back in 1980. So gold used to be used by investors as a hedge against inflation. In other words prices would go up. That means there was inflation in the system. That meant your dollar was worth less than it was maybe a year ago, a month ago. The hedge against that the corresponding way to kind of break that cycle would be to own something that is, basically, solid in value like gold. So that's why inflation and gold used to be inversely related, opposites of one another. However, gold has not traded based on inflation in a long time. Why is gold going up right now has more to do with the dollar value going down. Gold is priced in dollars and so, therefore, when the dollar is worth less gold is -- it takes more dollars to buy a bar of gold. And that's kind of the whole shooting match relationship. Be very careful though especially if you're an investor right now a lot of people jumping into the gold market. There is a big concern among the investment community that gold prices have gone up too far too fast.

>> Dan: Alright so we've talked about gold, we've talked about inflation what about deflation?

>> Jill: Ah, deflation is sort of the opposite problem of inflation, it's prices going down. So why is deflation bad? You might think to yourself prices going down is a good thing. Well, the problem is that when you see prices go down you're reluctant to spend money on anything. In other words you wait for the price to keep going down so you delay a purchase; this is very symptomatic of what happened to Japan in the 90's, it's a big fear of the Federal Reserve, it's why they think that they can keep interest rates lower for a longer period of time.

>> Dan: And one final point, joblessness, it's still a big number and, in fact, I saw a recent study that for 16 to 24 year olds, in other words, mostly, let's say, the college-aged kids coming into the workforce 46% of them can not find a job or haven't had a job in the last several months. So how does the job outlook play into all of the discussions of the numbers we've been talking about so far?

>> Jill: I think the job outlook has the most direct correlation with those retail sales and with company earnings. If you don't have a job or you fear that your job is going to be lost or you can't get a raise you're not gonna buy as much stuff, you're not gonna spend as much money so retailers won't do as well. As the retailers don't do as well then the corporate earnings are not going to be very strong, so then their stock prices go down. If you're not buying as much you could actually see prices going down overall a little deflationary width and that, actually, would be bad for gold. So you can see how joblessness becomes the key to so much here. And frankly there aren't a lot of great options on the horizon especially for the young workers; this may be the one time where a recession is actually better for older employees than younger employees.

>> Dan: Jill thanks so much for explaining all that. I felt like I just got out of a calculus class and I'm still a bit mystified.

>> Jill: Well, just wait there's always next week. We'll do the second semester next week.

>> Dan: Perfect. You've been watching EconWatch with Jill Schlesinger the Editor-at-Large at MoneyWatch.com and for EconWatch I'm Dan Farber.

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