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1997 Redux? Markets Slip After a Slide in Asia

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1997 Redux? Markets Slip After a Slide in Asia


1997 Redux? Markets Slip After a Slide in Asia

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  • <iframe src="" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
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Michael Farr is with us in the studio. He's president of Farr, Miller and Washington, an investment company here in Washington, D.C. Thanks for coming in.

Mr. MICHAEL FARR (President, Farr, Miller and Washington): Thank you for having me.

BLOCK: And what's your appraisal? Do you think this is a one-day event or the start of a major correction, as we just heard?

Mr. FARR: Yes.

BLOCK: Yes and yes.

(Soundbite of laughter)

Mr. FARR: It's certainly one or the other. I don't feel like it's the beginning of a major correction, and here's why. In 2001, which was really the last time we saw a drop of this magnitude.

BLOCK: After 9/11.

Mr. FARR: After 9/11 we saw a big drop like this. The market was much more expensive. In 2001, stocks were trading at 26 times earnings. Investors were willing to pay $26 a share for every single dollar in earnings. We've seen earnings increase over the past five years around 13.5 percent per year, compounded in each of the last five years. So we now have a market that's trading at 16 times earnings. It's much less expensive and it's not as inflated, and I think that the downside is limited.

Now, I don't think the market's going to fall out of bed. But on the same note, trends that start like this typically don't just stop dead. The old expression in the market is never try to grab or catch a falling knife. Wait until it hits the ground. Wait for it to bounce and settle in for a while. There's no rush here.

BLOCK: So it sounds like what you're saying, since this started overnight in the Chinese markets, that if the Chinese markets were to tumble again, we'd be seeing the same thing here again tomorrow.

Mr. FARR: I think we could see a continuation of what we've seen today. It's almost like 1997 redux. It was fall of 1997, November of 1997, when Greenspan let out this irrational exuberance phrase and it was Asia that dropped overnight, and it was from that event that we got the expression Asian contagion.

So really we're seeing a little bit of been there and done that before.

BLOCK: Now with the close today the Dow was down more than 400 points. This would be a time, I would imagine, when you'd be getting some phone calls from your own investors. You have both, what, individuals and institutions saying: Michael, tell me, what do I do tomorrow?

Mr. FARR: That's right. I would think I'll get a couple of those calls tomorrow, not many. Our investors tend to be long-term investors and will go through things like this. You know, markets do this. They really do. We've been through it any number of times. We've just seen a four percent correction. Markets are up 19 percent since July of last year, so this is kind of normal. As long as that long-term, sloping, upward trend continues, that's all that most investors are looking for. I think they're going to continue to get it.

BLOCK: Is that a hard message to get through to people, though?

Mr. FARR: It is if they're new, and it is if they're scared. It is if they haven't been through this before. It's hard to stay - everybody says they're going to be long-term investors until all of a sudden it drops 400 points and you hear, as we heard in the earlier story, people are clutching their chests. Markets do this. There is no reason to panic. The fundamentals underneath this market are much stronger than they were five years ago, and so I think there will be an opportunity here to buy before too long.

BLOCK: Have you seen something like this before, with that dramatic tumble so quickly? And were you grabbing your own chest?

Mr. FARR: I was not grabbing my chest, but at around 3:15 the market was down somewhere around 300 points, 295. I looked at the screen, and I turned away and looked back and it was down 500. It was the fastest 200-point drop I have ever seen. There had to be computer programs kicking in, program trading...

BLOCK: Toward the end of the day.

Mr. FARR: Right at around 3:15, and it rallied back from there. But it was really a fairly remarkable drop. It was kind of stunning, really.

BLOCK: Michael Farr, thanks for coming in.

Mr. FARR: Thank you so much for having me.

BLOCK: Michael Farr is president of the investment firm Farr, Miller and Washington.

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