My Amazon Review of Henry Kaufman's "The Day the Markets Roared"

 

Kaufman Ignites the 1980’s Bull Market

 

August 17, 1982 marked the crowning achievement of Henry Kaufman’s long career on Wall Street. On that day, in a Memorandum to Portfolio Managers, the Salomon Brothers economist reversed his long-standing bearish position on interest rates and forecast a drop in 10-year U.S Treasury yields from 12 ¼% to 9%-10% and a drop in the federal funds rate from 10% to 6%-7%. The stock market roared in response advancing 4.7% on the day and 10% for the week as a whole. Of a sudden his call turned him from “Dr. Gloom” to “Dr. Boom.” (my characterization). Kaufman changed his view because he no longer believed in a second half recovery and that the financial system was getting ever more fragile becoming in need of a substantial reliquification.

 

His book is part autobiographical and in part a financial history of the 1960’s to the 1980’s. He gives credit to Albert Wojnilower of First Boston who was known at the time as “Dr. Doom” for writing the day before that interest rates were about to fall in a more hedged manner, and he noted that interest rates had already peaked in the previous Fall and that President Reagan said over the prior weekend that he was open to tax increases. Thus, the kindling was already there, and Henry lit the match.

 

I also would note how depressed stock prices were in August 1982. At the market bottom of 777 on the Dow Jones Industrial Average was back to where it was in 1964. Further in real terms the Dow was selling at the same level it was at its 1937 high. Simply put stocks were dirt cheap.

 

I remember that day all too well. That summer I was at the UCLA Business Forecasting Project (now UCLA Anderson Forecast) and were on our way to winning the Lawrence R. Klein Award for the most accurate economic forecast for 1982. The title of our December 1981 forecast report was “How do you Spell Disinflation: PAIN.” At the time we had the most bearish forecast for the year, and we were debating (with Bob Williams and Larry Kimbell) whether or not to ratch it down another notch. The market response to Kaufman’s forecast, for all practical purposes, ended our debate and we stood pat. Little did I realize that within 3 ½ years I would be working for him at Salomon Brothers.

 

Kaufman stressed the importance of research independence at Salomon Brothers. I remember one event all too well. Early in my career Kaufman received a letter from an irate investment banking client who pretty much wanted me to be fired for writing an unfavorable research report. Henry’s response was to have me draft a letter for his signature, which I did. That was the end of the matter.

 

I would recommend this book for all those interested in what the economy and markets of the 1970’s and early 1980’s was like. My one critique of the book is that Kaufman overdoes the press coverage of his change of view.

For the full amazon URL see: Kaufman Ignites the 1980's Bull Market (amazon.com)