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Tue December 31, 2013

2013: The Year of Risk?

Originally published on Tue January 14, 2014 4:15 pm

It’s hard to imagine the market collapse of 2008 when looking at today’s numbers.

The S&P 500 is up 29 percent for the year, it’s best since 1997. The NASDAQ has been trading at its highest levels since 2000, and the Dow is up more than 20 percent, it’s best rally since 2003.

Low-rated “junk bonds” have had a record year, and Facebook is worth more than Disney.

How is this possible five years after the financial collapse?

Roben Farzad joins Here & Now’s Meghna Chakrabarti to discuss the year at the stock market.

Guest

Copyright 2014 WBUR-FM. To see more, visit http://www.wbur.org.

Transcript

MEGHNA CHAKRABARTI, HOST:

From NPR and WBUR Boston, I'm Meghna Chakrabarti. This is HERE AND NOW.

Well, it has been a banner year for the stock market. The S&P 500 is up 29 percent for the year. Its best since 1997. The Nasdaq has been trading at its highest level since 2000. And the Dow, well, it's up more than 20 percent. Its best rally since 2003. And yet, hey, people were darned bullish at the end of 2007, weren't they? And then the 2008 financial collapse happened. So what have we learned?

Joining us for more is Roben Farzad, contributor at Bloomberg Businessweek. And, Roben, OK, first of all, break this down for us. Going into that economic crisis, Wall Street sold us the idea of, hey, securitize it, spread the risk. Now, that seems to be back. So what's happening?

ROBEN FARZAD: Oh, yeah. I remember Wall Street was rolling all sorts of subprime falafel. It was unreal. I mean, risk was overrated. You could securitize things. I mean, this is what AIG was selling to other people effectively. We will a counter-party. We will ensure these risks because real estate prices won't fall. Of course, you can...

CHAKRABARTI: Never.

...buy things with multiples of leverage. And look what happened. There was one of these 500-year floods - or pick your metaphor - the next year. And risk was really not overrated. The whole system collapsed like it hadn't done so in a generation.

Risk is risk no matter how it's spread out through the system. So what have learned? What has this year been telling us?

FARZAD: Risk is back wholeheartedly. You know, this has been a snapback from the panic of five years ago. The end of 2008 leading to the markets' low in the spring of 2009. And had you bought any sort of risk asset, pretty much anything back then, whether, you know, it was a condo in Miami - I remember when the skyline, it looked like a war zone. And some places were so empty, they were lending their places out to adult filmmakers. It was that bad. It was that apocalyptic.

And the stock market hit this low. Junk bonds, nobody would touch them with a 10-foot pole. But then you had vulture investors kind of nibble at the scene. And then after that, the Federal Reserve follows on with several rounds of qualitative easing, about $3.5 trillion worth. And suddenly, risk is all the rage all over again.

CHAKRABARTI: OK. So tell me a little bit more about this because parts of the business press, not all of it, but parts of it tend to hyperventilate when the market rallies the way it has been this year. And it's telling the people, get into the market now. I mean, however, it seems a bad idea when things are going up, up, up, up, or is it?

FARZAD: Yeah, individual investors start with had a penchant for buying high and selling low, and they've done this. The last time they really got in whole hog was towards the end of 2007, just ahead of an epic collapse. And the last time - before that that they got in truly was the end of 1999 and spring 2000. And we haven't seen in-flow numbers like what we're seeing now for the better part of 13 years. So that's a cautionary tale. But on the flipside of it, you hear all this stuff about all of the zero-yielding cash on sidelines. And that could take on a life of its own.

If people find that their money is not doing anything for them, if they feel like, suddenly, they want to take more risk, they can end up piling it into securities. They can end up piling it into junk bonds or real estate. And this whole - if you want to think of it as a bubble, it can take on another life of its own.

CHAKRABARTI: OK. So you talked about that zero-yielding cash, which leads me - I've got to ask you about the Fed. Because now that Janet Yellen is going to be at the head of the Federal Reserve, what do you - what effect do you think that might have in going into 2014?

FARZAD: Well, for starters, tomorrow night, before you kiss your sweetheart, make sure you raise your flute to Mr. Ben Bernanke if you have a 401(k), if you didn't have to liquidate it in '07 or '08, because he's done you a major steady by keeping interest rates at zero for five years now and then throwing nearly $4 trillion of conjured money at risk assets to help real estate, to help the stock market, to help the bond market. Huge debt of gratitude to that guy. Now, Janet Yellen, I don't envy her task because she's going to have to pull away this punch bowl at some point.

CHAKRABARTI: All right. "Auld Lang Syne" for Ben Bernanke.

(LAUGHTER)

CHAKRABARTI: Roben Farzad is a contributor to Bloomberg Businessweek. Roben, thank you so much.

FARZAD: Happy new year, Meghna. Thank you.

CHAKRABARTI: Happy new year to you as well. You're listening to HERE AND NOW. Transcript provided by NPR, Copyright NPR.