The Bubble Oracle

How much of all this is Alan Greenspan’s fault?

KT It was partially Alan Greenspan’s fault, but I put more of the blame on regulators in the financial industry and the banking industry. There were plenty of people talking and warning about all this creative financing going on in the mortgage market. It just got more and more ridiculous. First it was adjustable-rate mortgages with low teaser rates, then it was mortgages where [the buyer’s] income and employment weren’t checked, then it was interest-only loans, then option-arm loans, where you don’t even pay the entire interest you owe each month, but your principle goes up each month. This sort of thing was going on in 2005 and 2006. Where were the regulators in California, where a huge percentage of these option-arm loans were being given to people without the lender doing credit checks, and they were able to borrow 100 percent of the house’s value, and they weren’t even paying the interest they owed each month?

What are you telling your clients now in order to prepare them for any additional market dislocations?

KT I’m still nervous about the financial stocks. It’s very difficult to try to call the bottom in the financials. It’s still very unclear how much longer this may go, how much further this may spread. If the financial [stocks] have to raise additional capital, that’s going to dilute current shareholder [values]. In my portfolios, in the equity area, we’re leaning toward large-cap growth. And in the fixed-income area, I don’t see anything that’s terribly attractive right now. Treasuries are very unattractive, and I’m not trying to pick a bottom in mortgage bonds. Basically, I’m holding more cash rather than bonds. I think that cash and equities have a better outlook than bonds going forward.

What are you doing on the international side?

KT I still like international stocks, but we’re sticking with the developed markets. We’re avoiding the Chinese market, and we don’t have any exposure to emerging markets.

Are you trying to invest with an eye toward the end of a U.S. recession, assuming that we’re either in one now or in a significant slowdown?

KT Yes. I’m bullish on equities. I think equities are cheap and I think the market always anticipates and looks forward six to 12 months. I think 12 months from now, the U.S. economy will be better than it is today, and I think the markets are going to start discounting that in the very near future.

Archives Tony talks specifics with local investment fund managers about their strategies and stock picks. To read more, go to tcbmag.com/ideasopinions/portfoliopositions.