The link below presents my talk at the UCLA Anderson Forecast discussing the outlook for the financial markets in 2025. The link opens with my talk, but you can scroll to the beginning to view the entire forecast program.
https://www.youtube.com/live/rbpRv5pt5OE?feature=shared&t=3075
Bagehot on Steroids
Nick Timiraos, the chief economics correspondent of The Wall Street Journal, has written a hagiographic account of Fed Chairman Jay Powell’s role in saving the economy from the lockdowns associated with the COVID-19 pandemic. Hagiographic or not, Powell does deserve kudos for the way he acted with alacrity and boldness in stemming the steep economic decline that the economy faced in March-April 2020. Further, he continued his stimulative policies by making full employment a higher priority than combating inflation. In other words, his goal was to create a high-pressure economy(Shulmaven: The Fed and the High-Pressure Economy) which in combination with highly stimulative fiscal policies brought the unemployment rate down from its peak of 14.7% in April 2020 to the current 3.8% rate.
My title comes from one Timiraos’ chapters where he
invoked the central banking policies enunciated by Economist editor Walter
Bagehot. According to Bagehot the role of a central bank in a crisis was to
lend aggressively against good collateral at a penalty rate. In this case
Powell received U.S. Treasury guarantees to lend on practically any and all
collateral. That policy along with $120 billion/month of quantitative easing
rescued the economy.
Timiraos gives credit to Powell for understanding faster
than most government officials how devastating the pandemic would be. He was
way ahead of a hostile Trump Administration and its public health authorities.
In March 2020 I was responsible for the U.S. forecast for the UCLA Anderson Forecast. On March 16, 2020, we published the first interim forecast in the history of the project under the title “The Sum of All Frears,” where we made the case that the U.S. economy was already in recession.(Shulmaven: "The Sum of All Fears," UCLA Anderson Forecast March 2020 Interim Forecast ) We were the first or very near first among the major economic forecaster to make the recession call. However, we were very wrong as to the steepness of the economic decline and the steepness of the subsequent recovery. The combination of very aggressive monetary and fiscal policies did, indeed, save the day.
Nevertheless, by January 2021 we were worried about the inflationary consequences of the all-out policies. I published a UCLA Economic Letter entitled “Is the Pandemic Hiding Future Inflation” where I outlined the case that the Fed’s highly stimulative polices ignited an asset price boom which would lead to consumer price inflation. ( Shulmaven: "Is the Pandemic Hiding Future Inflation," UCLA Economic Letter, January 2021) That is exactly how it played out and the Fed with all of its Ph.D. economists were asleep at the switch. It is here where I am critical of Timiraos’ account. He should have had a chart highlighting the Fed’s balance sheet expansion and the extraordinary growth of the money stock. At its peak the growth of M2 reached 28% year-over-year in February 2021 and a still high 11% as of February 2022. I know it is not fashionable to talk about money growth and inflation, but with current inflation running at 7.9%, you can’t really avoid it.
Timiraos talked to all of the major players and senior
staff officials. My guess is that he talked extensively to Powell, Treasury
Secretary Mnuchin and White House economics advisor Kudlow. There is a great
deal of detail in the book, sometimes too much that it reads like a very long
Wall Street Journal article. That said, Timiraos has written an important
history of a truly epochal time that we are still living through.
*-Amazon has yet again had a problem in posting reviews.
The review was just posted on Amazon 3/17. The full URL is : Bagehot on Steroids (amazon.com)
Below is a YouTube of a panel discussion where I was a member on the outlook for the office market presented on the June 2nd UCLA Anderson Forecast.
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)
