A Little Chest-Thumping

Having outlined the reasons I’m starting this blog, I suppose I should address the obvious question on the reader’s mind: Why should I read it?

I’ll get the chest-thumping out of the way. My profile gives the mundane credentials, so I’ll focus on my track record here:

· In 2001, I predicted that US equities would trade in an essentially flat range for ten to fifteen years, commencing in the second quarter of 2000. The S&P 500 was about 1,499 on March 31, 2000; it’s currently 1,395, and the record high, reached last October, was 1,576. So almost eight years into that period – at least half-way through – I’m looking pretty good. (This is documented in a presentation I made in Hawaii in October 2001, which I still have.)
· In April and May of last year, I predicted that based on several indicators – including the Index of Leading Indicators on a year-over-year basis, the Chicago Purchasing Managers’ Index, the National Association of Home Builders’ Housing Market Index, and the spread between the yields on the two- and ten-year Treasury notes – the US economy would be in recession around the beginning of 2008. Now it looks like we’re there. (This is also documented in articles in our company’s monthly newsletter, MarketCast, which is archived at https://www.cnbsnet.com/www/marketCast_archive.asp.)
· Note that back in April and May, virtually no one was calling for a recession, and most market observers were saying the worst for housing was behind us, while I was saying the worst is yet to come, and we may not see it until 2009 or 2010. Now, my bandwagon is as crowded as a Manhattan restaurant on a Friday night.
· On October 23, I moved my daughter’s college money (she’s a high school junior this year) from an aggressive stock fund to a bond fund. Stocks peaked on October 9, with the S&P 500 closing at 1,565 and the Dow at 14,165. By the 23rd, both indices were off just 3%. Now, they’re down 11% and 10%, respectively, and they’ve been off by as much as 16% from the October highs. Meanwhile, the two-year Treasury yield is down 172 basis points (bp), or 45%.

In short, my track record – both short- and long-term – is pretty good, especially compared to the herd. It’s not so much a matter of what I might know that other economists don’t. It’s more a matter of what I’m willing to admit that they’re not. You have to understand what motivates an economist, and to do that, it helps to know who his or her employer is.

Many economists are employed by big banks – B of A, Wachovia, Citigroup, etc. Banks make money by lending money. People and businesses are more willing to borrow when they feel good about future economic prospects. So it behooves bank economists to look at the world through rose-colored glasses. Among this camp, the "R" word is avoided at all costs. And they’re about as impartial as their colleagues over in the equity research division.

Then there are the government economists, like one I heard speak at a conference last week, one at which I also presented. This gentleman was with the US Chamber of Commerce, whose purpose is to promote business activity. That also produces a rose-colored glasses bias. Furthermore, as political economists, these folks tend to try to shore up their ultimate bosses’ positions. This economist in particular said his long-term outlook was not favorable, but that the threat of recession was unlikely until the next president took over, then – watch out.

Another camp is the "data extrapolators." They look at last year’s trends, and say that next year we’re in for more of the same. With each cyclical turn, they have merely to make one adjustment – albeit a major one – to the forecast. The rest of the time, they look pretty good, but on average, the correlation between their forecasts and the actual trends is virtually nil.

Finally, there’s the "herd" mentality. If you’re right with the herd, you gain nothing, but if you’re wrong with the herd, you risk nothing. If you’re wrong by yourself, on the other hand, you risk looking like a kook. I don’t mind that, since I don’t have to risk embarrassing some big bank’s reputation with my views. But careers are often built on being right by yourself – just ask Lacy Hunt or Elaine Garzarelli. In spite of that promise, most economists play it safe. So if the bank and political economists are all saying "no recession," the herd follows safely along.

I won’t claim to always be right, but I’ll put my track record up against just about any of the guys you’ll read on Bloomberg or the Wall Street Journal or watch on CNBC. And right or wrong, you’ll always get the unvarnished truth here, without political or employer bias.