AOL Chat: Gaffen Addresses Readers' Recession Depression

Dave Gaffen chatted on AOL's MarketTalk, hosted by Sage, on Wednesday, Aug. 8 at 11 a.m. EDT.

Comment: Live from New York, N.Y., please welcome Dave Gaffen, senior markets reporter, TheStreet.com. Dave can answer questions about the markets and investing.

Tscnygaff: Hey there. I'm happy to answer all your questions.

Question: The much anticipated "second-half recovery" has been given up on. Has that been fully priced into the markets yet?

Tscnygaff: Hmm. I'm not sure. Third quarter is a definite give-up. That's priced in. I don't think investors are expecting much earnings improvement in the fourth quarter, but still hoping for some sort of sign that economic conditions are turning. And the real earnings improvement -- hoped for, anyway -- I'm guessing would be the first quarter 2002.

Question: So, with Europe breaking down, South America, Japan, third quarter worse than second, layoffs, decreasing productivity, bad back to school and dwindling hopes for a strong Christmas, and only hope for an improvement, what are the chances of worldwide depression?

Tscnygaff: Worldwide depression might be putting it a little strongly. A synchronized global recession is more likely. We had one of those in the early 1990s, though Germany followed a bit later, having gotten a boost from the recombination of East and West Germany.

However, we are in a period where a good number of the world's economies are trending down -- Japan, Germany, other parts of Europe. But this doesn't seem any more serious than what I've just described; certainly not as grave as a potential worldwide depression.

Question: Do you think the tech sector is not the place to invest right now, and people should look elsewhere?

Tscnygaff: I think waiting around for the magical day when technology recovers its earlier glory is not a smart strategy. I think the best thing is to continue to look at all groups to find what suits your investing style.

That doesn't mean technology doesn't have a place in one's portfolio, but it's not the raging tiger it was in earlier years. I think the other thing, as always, is to try and diversify in terms of assets -- not just stocks, but bonds and cash as well.

Question: What are your thoughts on the Microsoft situation? Do you think they will get their way with their latest?

Tscnygaff: I'm not sure they will. They did manage to get rid of some of the rulings by Judge Jackson, but they may be stepping out there too far now.

Plus, Microsoft's gone back to some of its old tactics, with insisting on their icon on the desktop if a manufacturer has other icons there as well. So no, I don't exactly think they will.

They won't be broken up, but the other predatory practices ruled against them aren't necessarily going away.

Question: With the increasing use of credit cards as a convenient form of payment, how much of a concern is the increased debt load of consumers?

Tscnygaff: It's not just credit card debt. It's whether people are using that debt and those other loans to finance investments in the stock market. That's a concern. And yes, the risk is a greater concern -- household debt is at its highest since the government started keeping the data 20 years ago.

Mortgage debt is at its highest in 20 years -- credit card debt about 15 years. That may not rear its ugly head for a long time, but it will at some point.

Question: Not grave? What is there to support recovery? The strong response to the Fed staying behind the curve? The rest of the world is going to accelerate to the downside.

Tscnygaff: I didn't say it's not a serious situation. But "depression" implies several years of economic nothingness, for the entire world.

That's a grave scenario you're putting out there, and I don't think it's what's going to happen now. The U.S. will probably suffer from subpar growth for a few years, with a recession included.

Europe has similar issues, as does Japan. Global recession is certainly a possibility as companies continue to work off debt and cut costs. I agree with all of those notions. I just don't see a depression-type atmosphere, though.

Question: Do you recommend someone pay off their mortgage?

Tscnygaff: Why? If there's a good kind of debt to have, provided it isn't too onerous, it's mortgage debt. The resultant tax break from having a mortgage is ultimately a good thing; it protects some of your money, even though it seems like you're paying Peter to avoid paying Paul, the IRS agent.

However, if you've got the dough to do it, sure, why not? Pay it off, and then buy another property -- a smaller one -- and take a small mortgage on that. That's tax-protected money.

But sure, if you don't want the big monthly expense, OK, fine. I'm not a real estate lawyer or tax attorney, so you'd have to contact someone like that. I just know that having a mortgage, as types of debt go, isn't a bad thing. It's much preferable to car loans or credit cards.

Owning property is great. You get an asset that appreciates, and you get to live in it.

Question: Do you think real estate is ready to weaken further. REITs have been a great counterweight to tech in my portfolio.

Tscnygaff: Hard to say, again. The consumer's been so darn resilient, and calling the end of the real estate boom has been folly for several months now. I can't make any sort of recommendations in this regard, of course.

So far, housing is holding up well.

Question: What about a tax deficit now that Greenspan has found a way to "take care of" the tax surplus?

Tscnygaff: I'm not sure what you mean by "Greenspan" taking care of the tax surplus.

A budget deficit is certainly likely in Washington now. That's not necessarily the wrong thing now.

A bit of government stimulus, where the government runs a deficit, would be a better move while the private sector suffers from having taken on way, way too much debt over the years.

Question: How soon will the government have to bail out the banks?

Tscnygaff: There's really no issue with the banks right now, as far as I know. Because so many more companies have been getting financing through the venture capital, bond and equity markets, that risk has been distributed in the last few years in a way that it wasn't in the 1980s or early 1990s.

So the risks are there, but they're distributed differently. I'm not sure how this will play out.

It may involve a bank or two going down, some funds getting squashed, and for the individual, dealing with some lousy returns for a few years if equities go nowhere, defaults rise and loan payments are missed. But it's not balanced on the banks at this time.

Question: Do you think this new move by record companies to make CDs uncopyable to personal computers will be a success?

Tscnygaff: With the exception of Philip Morris, I can't think of a more tin-eared industry than the record companies. Way to declare war on your own consumers.

The technology will eventually work, but the resentment they foster will eventually bite them in the rear end.

Comment: A tax deductible 6 1/2% mortgage isn't a bad thing to have but the peace of mind is worth something and it's hard to make 5% in the money market account.

One can place the money in the stock market and lose.

Tscnygaff: Again, of course, I've gotta defer to a trained professional on this one, but yes, you have a point. Making money isn't easy at this time in the investment markets. I'd consider your time horizon, what the tax breaks are on that 6.5% mortgage, and how all the payments shake out.

Question: Analyst always panic about these things but I have to think a year from now you would be kicking yourself for not buying Cisco at these prices?

Tscnygaff: Maybe so, but people were saying that in January, with the stock at $36.60.

Question: What is the reason for the continuing drop in gas prices?

Tscnygaff: It's a few things. Demand has dropped as the economy has slowed -- oddly, partially due to the drop in energy prices. How's that for circular logic?

Second, refining capacity increased, even if only slightly, and that was enough to meet demand this summer.

With summer gasoline demand not as high as expected, refiners have been able to increase capacity and reserves have also increased, as supply is already being built up for the winter. Those are the main reasons.

We may see some renewed issues in the winter, but overall, energy costs may have peaked a couple months ago.

SageSonata: Thank you very much for joining us today, Mr. Gaffen!

Tscnygaff: Thanks for all your questions! Keep reading TheStreet.com!

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