3 questions for Ernie Ankrim, chief investment strategist for Russell Investment Group

David Milstead, Rocky Mountain News

Published September 14, 2007 at midnight

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Ernie Ankrim, the chief investment strategist for Russell Investment Group, was in Denver on Wednesday and Thursday, speaking to clients of Peak Capital Investment Services. He talked to Rocky Finance Editor David Milstead on Monday about the markets.

1 Give me your quick take on the markets right now.

The market's suffering from fear and uncertainty. Fear about the possibility of bad outcomes in the economy and the prices we pay for assets. Uncertainty about how subprime mortgages have invaded portfolios in ways we just don't know about. It's quite a challenging time.

But the comparisons I've heard from (Alan Greenspan) to 1987 and 1988 don't fit well here.

While the world is a less-safe place to live, the run-up in stock prices we've seen, relative to the increase in earnings, shows me the price we're paying for stocks now is not comparably high. . . . There is downside risk in equities, always, but I think the downside risk is distinctly different than in the late 1980s.

2 Commentators suggest a rate cut at the Fed's Sept. 18 meeting is inevitable. Do you agree?

The markets have priced a zero probability of the Fed not cutting on Sept. 18. I can make an intellectual argument the Fed might not cut rates, and it's based on what the Fed focuses on, inflation, and how any move (on rates) comes when the data tell them to. The inflation numbers are at the high end of their acceptable range.

Having said that, it's almost inconceivable they'd ignore the pressure from business, from senators, from the markets, that tells them the economy is slowing. Therefore, the Fed will probably cut, I think 25 basis points (0.25 percentage points), which is less than the market is assuming.

The markets are assuming about an 80 percent probability of a 50-basis-point cut.

3 An untold number of people are going to have greater trouble paying their mortgages, and even those who do will have less money each month to spend. How are we going to get out of this situation without a slowdown or recession?

Are we going to escape this without a slowdown in spending? No. But there's a big difference between that and a recession.

We will see a decline in the growth rate this year. The possibility our spending will slow to produce a dramatic decline in GDP, increase in unemployment and lower personal income - I think there's a lower probability of that. The job numbers last Friday showed the market that chances of a recession are higher than was thought, and that drove the market to the terrible Friday that it had.

But if companies make money and then make more money for their shareholders, their stock prices will go up.

There are a lot of companies who rely not just on the U.S., but on international customers, and they're somewhat protected. (As a consumer), I haven't bought a Boeing jet or equipment to extract oil from the oil sands. The global economy is still healthy, and I think that'll keep the U.S. economy from tipping into recession.

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