WEBVTT NOTE The Art of Forecasting: Great Expectations, Small Triumphs 1 00:00:00.000 --> 00:00:06.120 I'm sure that by now you in the audience know a little bit more about bubbles and business 2 00:00:06.120 --> 00:00:09.920 cycles than I do. 3 00:00:09.920 --> 00:00:15.160 I regard it as a special privilege to be participating in this conference. 4 00:00:15.160 --> 00:00:20.760 That was, you just heard the official biography of my career. 5 00:00:20.760 --> 00:00:26.120 The unofficial story is that I owe a great deal to the Austrians. 6 00:00:26.120 --> 00:00:32.280 I was working on my PhD in economics at the New School, teaching economics in college, 7 00:00:32.280 --> 00:00:39.120 and then I quit. I didn't see much of an intellectual point to it all. I went to Wall 8 00:00:39.120 --> 00:00:46.600 Street, started working in commodities, and then I began to read the Austrians, in particular 9 00:00:46.600 --> 00:00:54.360 the work of Murray Rothbard, and then I began to see that there was such a thing as economics, 10 00:00:54.360 --> 00:01:02.280 Such a thing as probing intellectual truth about the economy. 11 00:01:02.280 --> 00:01:08.240 My own talk is a little icing on the cake for you. 12 00:01:08.240 --> 00:01:11.560 It's just reflections on the forecasting game. 13 00:01:11.560 --> 00:01:17.320 I, in my position as a columnist, see a lot of forecasters. 14 00:01:17.320 --> 00:01:22.040 Thankfully, I don't have to do too much of it myself. 15 00:01:22.040 --> 00:01:30.320 What I'm going to do is comment on some of the efforts that have been made at forecasting 16 00:01:30.320 --> 00:01:36.640 and some of the small triumphs that have been made, and I emphasize small. 17 00:01:36.640 --> 00:01:40.920 Well, hopefully you have my exhibits. 18 00:01:40.920 --> 00:01:48.960 They would have been displays on the screen, and I would like you to take a look. 19 00:01:48.960 --> 00:01:52.040 Before we do anything else, I noticed that there was a mistake. 20 00:01:52.040 --> 00:01:58.800 You'll notice that the exhibits are numbered in the right-hand corner. 21 00:01:58.800 --> 00:02:05.240 Before you would even take a look at the first exhibit, take exhibit five, that's exhibit 22 00:02:05.240 --> 00:02:12.960 five, and put it between exhibit two and three, and then with a pen in the lower right-hand 23 00:02:12.960 --> 00:02:42.960 June 8, 1998 June 8, 1996 24 00:02:42.960 --> 00:02:49.640 For approximately 45 minutes, I might not be able to go through all my displays, but 25 00:02:49.640 --> 00:02:51.520 I'll be able to go through most of them. 26 00:02:51.520 --> 00:02:58.280 I will leave 15 minutes for questions, and then, as was noted, I do answer my email, 27 00:02:58.280 --> 00:03:03.720 and I would be happy to get into a correspondence with any of you. 28 00:03:03.720 --> 00:03:12.720 Well, Forecasting Prosperity, take a look at my second slide, is my first topic. 29 00:03:12.720 --> 00:03:21.720 And the good news, bad news joke is relevant to the issue, and it goes this way. 30 00:03:21.720 --> 00:03:30.720 God gets so angry about the way crony capitalism is messed up in Asia that he decides to end the world in three days. 31 00:03:30.720 --> 00:03:38.720 So he calls Yeltsin, Clinton, and Kim Dayoung up to his office in the sky and gives them the news. 32 00:03:38.720 --> 00:03:46.720 Clinton goes back to his Oval Office, calls Gorin, and tells him there's good news and there's bad news. 33 00:03:46.720 --> 00:03:53.720 The good news is that God exists. The bad news is that he's going to end the world in three days, so let's party. 34 00:03:53.720 --> 00:04:01.720 Yeltsin appears before the Russian Parliament and he tells them there is bad news and there is bad news. 35 00:04:01.720 --> 00:04:06.720 The first bad news is that contrary to what we believed, God exists. 36 00:04:06.720 --> 00:04:11.720 The other bad news is that the tyrant will end the world in three days. 37 00:04:11.720 --> 00:04:22.720 Kim Dae-young appears on national TV and declares, people of Korea, there is good news and there is good news. 38 00:04:22.720 --> 00:04:33.720 The first good news is that God called me, among all the other leaders of the world, with Yeltsin and Clinton, to share his thoughts with us. 39 00:04:33.720 --> 00:04:37.720 The other good news is that in three days, the Asian crisis will be over. 40 00:04:37.720 --> 00:04:44.720 Well, I appreciate that laughter. It did come through. Thank you. 41 00:04:44.720 --> 00:04:55.720 Well, there has been good news in the U.S. economy over the past two years and a lot of it has been missed. 42 00:04:55.720 --> 00:05:06.720 I first want to take a look at what the consensus has been saying about these prosperous times since early 1996 43 00:05:06.720 --> 00:05:12.720 and then get to a forecast that's actually been pretty accurate. 44 00:05:12.720 --> 00:05:24.720 Take a look at that slide five and page five I should call it. That's the summary from the Wall Street Journal. 45 00:05:24.720 --> 00:05:37.720 The Journal does a poll of 50 to 70 economists, mostly street economists, the first of the year and the middle of each year. 46 00:05:37.720 --> 00:05:47.720 and actually that should be called, I'm sorry, June 8th, 1998, it should say January 8th, 1996. 47 00:05:47.720 --> 00:05:51.720 So what was the consensus saying in January 8th, 1996? 48 00:05:51.720 --> 00:05:55.720 Well, economists forecast slower economic growth. 49 00:05:55.720 --> 00:06:03.720 The economy's expansion will move into its sixth year this spring, but the pace of growth will be slower than in 1995. 50 00:06:03.720 --> 00:06:09.960 That's the consensus of 64 economists participating in the Wall Street Journal's semi-annual survey. 51 00:06:09.960 --> 00:06:20.960 Annualized growth after inflation in gross domestic product savings economists will range between 1.8% and 2% for each of the four quarters. 52 00:06:22.960 --> 00:06:31.960 I mention the consensus because the consensus, I cite the consensus because the consensus is supposed to be more accurate than any individual forecast. 53 00:06:31.960 --> 00:06:40.040 Well, the consensus was wrong, but in early 1997, now take a look at page three, slide 54 00:06:40.040 --> 00:06:46.000 three, the U.S. economy is heading into its seventh straight year of expansion, but it 55 00:06:46.000 --> 00:06:50.440 will be coasting at a slower growth rate than at the previous 12 months. 56 00:06:50.440 --> 00:06:54.640 Slower growth rate because the growth rate in the previous 12 months had been pretty 57 00:06:54.640 --> 00:06:55.640 rapid. 58 00:06:55.640 --> 00:07:01.720 That is the consensus of 57 economists participating in the Wall Street Journal's semi-annual survey. 59 00:07:01.720 --> 00:07:07.360 For 1997, the economists were looking for only a modest slowdown in GDP growth to an 60 00:07:07.360 --> 00:07:13.200 annualized rate of 2% in both the first and second halves of this year. 61 00:07:13.200 --> 00:07:19.320 Once again, the consensus was calling for modest growth, and once again the consensus 62 00:07:19.320 --> 00:07:20.320 was wrong. 63 00:07:20.320 --> 00:07:28.720 Early January 1998, now take a look at page 4, the consensus was saying the same thing. 64 00:07:28.720 --> 00:07:32.800 The U.S. economy will continue to expand for the new year, although the pace of growth 65 00:07:32.800 --> 00:07:39.760 will be slower than in 1997. Same refrain. As the Asian financial turmoil, rising wages 66 00:07:39.760 --> 00:07:45.420 and leaner corporate profits put a check on growth. The economy will grow at a 2.4% clip 67 00:07:45.420 --> 00:07:52.400 in the first half and 2.1% in the second half, the economists say. Well, at that point, the 68 00:07:52.400 --> 00:07:57.920 consensus was indeed worried about the Asian financial turmoil, and they sort of split 69 00:07:57.920 --> 00:08:11.920 June 8, 1998. Page 6. Same thing. Just when it looked as if the U.S. economy may have 70 00:08:11.920 --> 00:08:16.560 escaped serious harm from the one-year-old Asian financial crisis, economists see trouble 71 00:08:16.560 --> 00:08:22.400 ahead. They say the brunt of the crisis will hit the U.S. during the next six to nine months. 72 00:08:22.400 --> 00:08:27.440 The consensus estimate of the economists put gross domestic product growing at an annual 73 00:08:27.440 --> 00:08:32.440 and a rate of 2.29% during the second half of 1998. 74 00:08:33.760 --> 00:08:35.880 Once again, moderate growth 75 00:08:35.880 --> 00:08:39.480 and we'll be done with this in a moment. 76 00:08:39.480 --> 00:08:44.000 January 4th, 1998, even though growth 77 00:08:44.000 --> 00:08:46.480 had again been way above trend, 78 00:08:46.480 --> 00:08:50.040 the consensus was saying the same thing. 79 00:08:50.040 --> 00:08:52.640 The economy is expected to continue growing this year, 80 00:08:52.640 --> 00:08:55.440 but at a slower pace than in 1998, 81 00:08:55.440 --> 00:08:57.920 according to a majority of 54 economists 82 00:08:57.920 --> 00:08:59.620 who participated in the Wall Street Journal's 83 00:08:59.620 --> 00:09:02.480 latest semi-annual forecasting survey. 84 00:09:02.480 --> 00:09:04.040 I won't read the rest. 85 00:09:04.040 --> 00:09:09.040 Notice 2.1%, 1.8%, 2.2% and 2.4%. 86 00:09:09.720 --> 00:09:12.440 All moderate rates of growth. 87 00:09:13.740 --> 00:09:16.000 Well now take a look at page eight. 88 00:09:16.880 --> 00:09:20.840 That's what growth in gross domestic product actually did. 89 00:09:21.980 --> 00:09:24.900 This has been a time of prosperity. 90 00:09:25.440 --> 00:09:47.440 1996, the economy grew at 3.9%, 3.8% in 1997, 3.7% in 1998, and there was a bit of a slowdown in 1999, but it was still quite healthy, the growth ran 3.1%, has run 3.1% in the first half of 1999. 91 00:09:47.440 --> 00:10:00.320 Well, after all this better than expected news, now take a look at page 9, the consensus finally 92 00:10:00.320 --> 00:10:08.240 changed its tune, and who knows, maybe this should be taken in a contrarian way. 93 00:10:08.240 --> 00:10:12.480 Perhaps the boom is finally coming to an end. 94 00:10:12.480 --> 00:10:14.640 What was the consensus saying? 95 00:10:14.640 --> 00:10:19.320 Economists see blue skies ahead for the U.S. economy for the remainder of this year. 96 00:10:19.320 --> 00:10:25.880 I'm bowing to reality, says Maureen Allen, Chief Economist at Scudder Kemper Investments, 97 00:10:25.880 --> 00:10:26.880 Inc. 98 00:10:26.880 --> 00:10:33.680 Ms. Allen revised her growth forecast for the second year to 4.3% from 1% six months 99 00:10:33.680 --> 00:10:34.680 ago. 100 00:10:34.680 --> 00:10:39.480 It appears that economists have decided it's time to stop betting against the economy. 101 00:10:39.480 --> 00:10:49.480 Indeed, of the 54 Economist Survey, all but three believe that the economy will grow at a moderate or strong pace for the remainder of this year. 102 00:10:49.480 --> 00:10:57.480 There's nothing that can break this economy's back, says Diane Swank, Senior Economist at Bank One in Chicago. 103 00:10:57.480 --> 00:11:05.480 Well, my problem with the consensus forecast and with most of these economists is not just that they're wrong, 104 00:11:05.480 --> 00:11:32.480 But they're wrong for the wrong reasons. By that I mean I have had difficulty discerning anything systematic in their forecast, anything beyond the simple idea that either that the economy is going to sort of revert to moderate growth, which is a constant refrain over the past few years, I'll find a reason or two for it. 105 00:11:32.480 --> 00:11:46.480 But really, the core idea is that trend growth of 2% is about right, and then after having been battered by all that better expected news, they suddenly change their tune. 106 00:11:46.480 --> 00:11:58.480 However, there is one forecaster who actually doesn't even participate in the Wall Street Journal survey. 107 00:11:58.480 --> 00:12:08.480 His name is Jason Benderly. He has his own consulting business based in Vail, Colorado, called Benderly Economics. 108 00:12:08.480 --> 00:12:15.480 He is an economist. Everything he does is based upon the data. 109 00:12:15.480 --> 00:12:21.480 And over the past few years, beginning in 1996, he's been right. 110 00:12:21.480 --> 00:12:26.480 And I think he's been right for almost the right reason. 111 00:12:26.480 --> 00:12:43.480 And what I want to do after that once-over lightly about the consensus forecast is to walk you through some detail about the nature of his forecast. 112 00:12:43.480 --> 00:12:47.480 Some of this might look a little bit intimidating, but we'll go slow. 113 00:12:47.480 --> 00:12:58.240 Hello. Now take a look at page 10. That's a scattered diagram. And what you see in the 114 00:12:58.240 --> 00:13:10.440 vertical axis is wages and salaries as measured by the employment cost index. And on the horizontal 115 00:13:10.440 --> 00:13:17.440 The married male unemployment rate is a fairly easy one to talk about. I would really call it the core unemployment rate, not because I'm a sexist, but only because there probably is such a thing as a core unemployment rate for which the married male unemployment rate is a priority. 116 00:13:40.440 --> 00:13:51.480 Proxy. Now, what's true about married males? Married males tend, more than most groups, 117 00:13:51.480 --> 00:13:59.680 to be stable in their work habits. When they lose a job, they actually do make a great 118 00:13:59.680 --> 00:14:07.200 deal of effort to find another one. Some of us don't, even though we might be listed 119 00:14:07.200 --> 00:14:17.440 is Unemployed. Because of this, they've accumulated a large inventory of job skills, so that they're 120 00:14:17.440 --> 00:14:27.320 sought after, they tend to be sought after. Now obviously, over time, the labor market 121 00:14:27.320 --> 00:14:34.560 has changed, and there are many more women in the labor market. For instance, there in 122 00:14:34.560 --> 00:14:51.560 In fact, there's also been men have dropped out of the labor market. Unmarried men have done so, and for that reason, the headline unemployment rate might be a little bit misleading about what's going on. 123 00:14:51.560 --> 00:15:00.560 But the married male unemployment rate, which is, again, a proxy for the core rate, might be telling us something. 124 00:15:00.560 --> 00:15:05.760 I say a proxy because I'm sure that there are a lot of other people who are core workers 125 00:15:05.760 --> 00:15:12.880 in that sense. In particular, a lot of women who are core workers, who seek a job energetically 126 00:15:12.880 --> 00:15:19.720 if they lose one, who have developed a huge inventory of job skills and who are for that 127 00:15:19.720 --> 00:15:25.360 reason sought after. It's just that we don't have any figures for that particular group 128 00:15:25.360 --> 00:15:28.320 and for that reason we use the married male unemployment rate. 129 00:15:29.760 --> 00:15:33.960 Now, the thesis is that the married male unemployment rate 130 00:15:35.560 --> 00:15:40.560 tends to determine the course of wage rates decisively. 131 00:15:43.960 --> 00:15:46.480 I'm gonna change my terminology and just call it 132 00:15:46.480 --> 00:15:49.120 the core unemployment rate 133 00:15:49.120 --> 00:15:53.080 tends to determine the course of wage rates decisively. 134 00:15:53.080 --> 00:16:04.080 In other words, if the unemployment rate for core workers is quite low, that means that they are sought after. 135 00:16:04.080 --> 00:16:09.080 And for that reason, wage rates are going to explode. 136 00:16:09.080 --> 00:16:16.080 I shouldn't say, perhaps I shouldn't say explode, I should use the milder term accelerate. 137 00:16:16.080 --> 00:16:25.080 Now, all I've been doing so far is talking about the horizontal axis, I haven't talked about the vertical axis. 138 00:16:25.080 --> 00:16:31.080 The vertical axis is the change in the wage rate. 139 00:16:31.080 --> 00:16:42.080 What do I mean by change? Turn for a moment to page 11, and there we're looking at the year-over-year increase in wages. 140 00:16:42.080 --> 00:16:53.080 In 1999, so far this year, the increase has been 3.7%. In 1998, it was 4.0%. In 1997, the increase was 3.5%. 141 00:16:53.080 --> 00:17:00.080 Now, underneath that, on page 11, we're looking at wage acceleration and deceleration. 142 00:17:00.080 --> 00:17:07.080 Now, in other words, from 1998... I'm sorry, that's drawn wrong as well. 143 00:17:07.080 --> 00:17:17.920 And that 1999 to 1998 should mean, of course, 1998 to 1999, and that shows a 0.3% decline 144 00:17:17.920 --> 00:17:23.840 in the increase, in other words, a 0.3% deceleration. 145 00:17:23.840 --> 00:17:32.400 And you get that, of course, from subtracting 4.0% from 3.7% in 1999, 1998. 146 00:17:32.400 --> 00:17:51.640 In fact, that 0.3% may not be true. It may well be that the official wage rates are a 147 00:17:51.640 --> 00:17:57.200 bit inaccurate. I could go into that, but let's just take those numbers literally and 148 00:17:57.200 --> 00:18:11.200 We can now look back on page 10. On page 10, we're looking at the acceleration and deceleration of the wage rate. 149 00:18:11.200 --> 00:18:23.200 And what does it show? It shows that when the married male unemployment rate cuts below about 3.2%, wage rates generally start to accelerate. 150 00:18:23.200 --> 00:18:37.200 They started to accelerate in 1996. In 1999, we're looking at a deceleration. However, as I say, that may not be true. 151 00:18:37.200 --> 00:18:46.200 The acceleration is probably continued. I could go into reasons why the acceleration happens. 152 00:18:46.200 --> 00:19:09.200 In other words, it's not just, generally speaking, that wage rates grow at a rapid clip when the married male unemployment rate, that is the core unemployment rate, cuts below 3.2%, it's that they accelerate and this might remind you of what's called the narrow, the non-accelerating inflation rate of unemployment. 153 00:19:09.200 --> 00:19:16.720 The non-accelerating inflation rate of unemployment, in this case, looks like a 3.2 percent. 154 00:19:16.720 --> 00:19:23.600 At 3.2 percent, it neither accelerates or decelerates, but below 3.2 percent wage rates 155 00:19:23.600 --> 00:19:24.600 accelerate. 156 00:19:24.600 --> 00:19:35.040 Now, this is something that Banderley has uniquely understood with his econometrics. 157 00:19:35.040 --> 00:19:43.000 And what he realized in early 1996 is that the married male unemployment rate had gotten 158 00:19:43.000 --> 00:19:53.920 low enough to bring about a consumer-led expansion, a rapid consumer-led expansion that would 159 00:19:53.920 --> 00:20:04.280 push GDP growth to the three and a half to four percent level. 160 00:20:04.280 --> 00:20:33.280 Now take a look at page 12. There we're looking at the married male and the plumb rate. I said 3.2% was neutral, it's actually 3.6%. All this it tries to show is that the rate tends to move in fairly stable cycles. It takes a long time for it to move up or down. 161 00:20:33.280 --> 00:20:43.280 It took a long time for it to move down, but once it did move down in 1995, there was a tendency for it to stay there. 162 00:20:43.280 --> 00:20:58.280 And it's possible to track it by looking at other indicators to help want to index the number of unemployment insurance claims, the survey of jobs hard to get. 163 00:20:58.280 --> 00:21:28.280 And so it was possible to, first of all, have confidence that the married male unemployment rate, once it had hit this zone, where it was going to cause wage rates to accelerate, it was likely to stay there, and then it was possible for Vandalik to chart it, to track it, by looking at those variables which are advanced indicators of where the unemployment rate is going to be, and he then was able 164 00:21:28.280 --> 00:21:35.280 to put together a forecast that this economy had gotten to a point where it was going to 165 00:21:37.600 --> 00:21:44.600 be difficult to stop prosperity in its tracks. Finally, take a look at page 13. That has 166 00:21:51.440 --> 00:21:57.840 a few lines. Let me walk you through those. All it shows, what it shows first of all is 167 00:21:57.840 --> 00:22:05.240 is the increase in real average hourly earnings, which is the broken line, and then it shows 168 00:22:05.240 --> 00:22:14.240 real consumer spending, and the bottom line takes the growth of real consumer spending 169 00:22:14.240 --> 00:22:20.200 minus the real increase, minus the increase in real average hourly earnings. 170 00:22:20.200 --> 00:22:47.200 and what it shows is that spending always increases faster than real average hourly earnings with the exception of recession and those recession periods, for instance, the early 90s, the early 80s, when spending increases at the same rate as real average hourly earnings. 171 00:22:47.200 --> 00:23:01.200 What is this caption? It really says that average hourly earnings, which are paid to the bottom 80% of the population, tend to understate the increase in spending. 172 00:23:01.200 --> 00:23:13.200 They understate the increase in spending, and there's sort of a floor, because they're a proxy for the spending of people who do not save a great deal. 173 00:23:13.200 --> 00:23:22.200 People who don't have a whole lot of money to invest, people who live from hand to mouth. 174 00:23:22.200 --> 00:23:35.200 In the earlier graphs, we showed that once the Maryland unemployment rate had hit below a certain level, 175 00:23:35.200 --> 00:23:56.200 Earnings were going to explode. Now we have another approximate law of the way markets behave, that when earnings explode, real consumer spending tends to increase at an even faster rate, and we begin to have the makings of a forecast that worked. 176 00:23:56.200 --> 00:24:09.200 A Forecast that called for growth in gross domestic product between 3.5% to 4%. 177 00:24:09.200 --> 00:24:12.200 Now, there are some other factors, obviously, at work. 178 00:24:12.200 --> 00:24:14.200 Real average hourly earnings aren't the only factors. 179 00:24:14.200 --> 00:24:18.200 The three other factors are, of course, the number of hours worked, 180 00:24:18.200 --> 00:24:24.200 and the total number of hours worked multiplied, of course, by real average hourly earnings 181 00:24:24.200 --> 00:24:37.200 in order to get you an idea of how much money is going into the hands of those people who tend to consume a very high percentage of their income. 182 00:24:37.200 --> 00:24:48.200 And hours worked, again, could be tracked through help wanted, through unemployment insurance claims, through the number of people who said that jobs were hard to get. 183 00:24:48.200 --> 00:25:05.200 In addition, a second factor is home purchases. When people buy homes, and that's a factor that could be tracked through the mortgage bankers index, when people buy a lot of homes, they buy a lot of consumer durable. 184 00:25:05.200 --> 00:25:15.200 They tend to save less out of their income because they think of buying a rug or buying an appliance as an investment. So consumption rises that way. 185 00:25:15.200 --> 00:25:23.040 Survey, and thirdly, there's expectations. Expectations are tracked by the Michigan University 186 00:25:23.040 --> 00:25:30.040 Index Survey of Consumer Sentiment and also by the Conference Board Survey. When expectations 187 00:25:30.040 --> 00:25:43.840 are high, people will spend a lot. Well, Benderly was right about the prosperity 188 00:25:43.840 --> 00:25:50.800 of the past few years, and the consensus was wrong, and as I've suggested, the consensus 189 00:25:50.800 --> 00:25:58.320 was wrong for the wrong reason, and Benderly was right for something approaching the right 190 00:25:58.320 --> 00:26:05.460 reason. What is he saying now? Well, he now agrees with the consensus, the consensus now 191 00:26:05.460 --> 00:26:34.460 He now agrees with him. He believes that the factors that could bring this economy down are still not strong enough to stop the consumer-led expansion because, again, the core rate of unemployment is so low that wages are going to continue to rise rapidly, 192 00:26:34.460 --> 00:26:41.980 in fact continues to accelerate, at some point the process will be stopped, certainly something 193 00:26:41.980 --> 00:26:50.980 is going to happen around the turn of the year with Y2K problems, but he I guess has 194 00:26:50.980 --> 00:26:57.820 tunnel vision because he recognizes, well he recognizes that there are factors that 195 00:26:57.820 --> 00:27:04.180 could stop the expansion the weakness of the dollar and other factors that I'm 196 00:27:04.180 --> 00:27:09.980 sure you've learned about over the course of yesterday and this morning but 197 00:27:09.980 --> 00:27:18.820 still this this is a powerful influence that for which he had a small triumph in 198 00:27:18.820 --> 00:27:26.500 isolating well enough of that for the moment take a look at page 14 in which 199 00:27:26.500 --> 00:27:50.660 Einstein dies and goes to heaven, God calls him into his office and says, Al, it's a pleasure 200 00:27:50.660 --> 00:27:56.100 We're here to have the smartest man who ever lived with us at last. 201 00:27:56.100 --> 00:28:02.100 We're opening up a new wing for the next year, but for the time being, you're going to have 202 00:28:02.100 --> 00:28:05.980 to share a suite with three other guys. 203 00:28:05.980 --> 00:28:11.780 Einstein says, well, I'm very particular about the company I keep, and God says, Al, speak 204 00:28:11.780 --> 00:28:12.780 to these guys. 205 00:28:12.780 --> 00:28:16.220 If there's any problem, talk to me. 206 00:28:16.220 --> 00:28:21.720 So, Einstein goes up to the first gentleman and says, I'm Albert Einstein, the smartest 207 00:28:21.720 --> 00:28:24.660 man who ever lived, who are you? 208 00:28:24.660 --> 00:28:34.460 The guy says, I'm, in my life, I was an astrophysicist and I have 180 IQ, and Einstein says, well, 209 00:28:34.460 --> 00:28:38.620 terrific, we'll talk black holes, we'll talk big bang, we'll have a great time. 210 00:28:38.620 --> 00:28:44.100 He goes up to the second gentleman and says, I'm Albert Einstein, the smartest man who 211 00:28:44.100 --> 00:28:45.100 ever lived, who are you? 212 00:28:45.100 --> 00:28:56.100 Well, I was a concert pianist in my time, I have a 160 IQ, but Einstein says, terrific, we'll talk Brahms, we'll talk Beethoven, we'll enjoy ourselves. 213 00:28:56.100 --> 00:29:01.100 Goes up to the third gentleman, says, I'm Albert Einstein, the smartest man who ever lived, who are you? 214 00:29:01.100 --> 00:29:08.100 Well, the gentleman says, well, Dr. Einstein, the first thing I have to say is that I have only a 60 IQ. 215 00:29:08.100 --> 00:29:13.100 Einstein says, terrific, tell me what interest rates are going to do next year. 216 00:29:13.100 --> 00:29:20.600 Well, that really does relate to forecasting interest rates. 217 00:29:20.600 --> 00:29:40.100 Take a look at page 15, and that shows where the 30-year T-bond rate and where the Moody BAAA rate stood at the end of each year. 218 00:29:40.100 --> 00:29:52.300 For 1999, it's as of last week. First, rates rose, and then through the prosperity, rates 219 00:29:52.300 --> 00:30:03.260 fell from 96 through 97 through 98, and they've only begun to come back in 1999. Now, what 220 00:30:03.260 --> 00:30:05.220 What was the consensus saying? 221 00:30:05.220 --> 00:30:15.940 The consensus looking for moderate economic growth in each year since late 1995. 222 00:30:15.940 --> 00:30:22.940 It said that interest rates were going to be unchanged consistently, that the long-term 223 00:30:22.940 --> 00:30:25.860 interest rate, I should say, the long-term interest rate, they were saying other things 224 00:30:25.860 --> 00:30:31.500 about short-term rates, but that the long-term interest rate was going to be unchanged. 225 00:30:31.500 --> 00:30:40.500 and of course they said this because a moderate rate of growth generally would call for unchanged 226 00:30:40.500 --> 00:30:41.500 interest rates. 227 00:30:41.500 --> 00:30:48.460 That going into why rates actually increased in 96, they actually, they increased in 96 228 00:30:48.460 --> 00:30:59.740 primarily because growth was rapid but in 1997 and 1998 the reverse happened and of 229 00:30:59.740 --> 00:31:07.740 Of course it happened because of all kinds of unexpected factors, oil prices falling, 230 00:31:07.740 --> 00:31:13.500 food prices falling, general recession around the rest of the world so that commodity prices 231 00:31:13.500 --> 00:31:23.180 were weak and then of course going into 1997 and 1998, the Asian crisis hitting causing 232 00:31:23.180 --> 00:31:31.180 and even further disinflationary and deflationary factors which tended to weigh on interest rates. 233 00:31:31.180 --> 00:31:38.180 None of it was expected, and for that reason the consensus simply got it all wrong. 234 00:31:38.180 --> 00:31:51.180 And into 1999, the consensus was expecting moderate interest rates because even though they were looking at a high rate of growth, 235 00:31:51.180 --> 00:32:01.180 They began to look at a high rate of growth in mid-99, they simply extrapolated the same trend, they were looking for unchanged interest rates. 236 00:32:01.180 --> 00:32:13.180 I'm sorry, I made a mistake here, I'm being unfair, the consensus actually is looking for higher interest rates and they were only looking for unchanged interest rates in early 1999 237 00:32:13.180 --> 00:32:18.180 because they were looking at a moderate, they were forecasting moderate rate of growth, so strike that. 238 00:32:18.180 --> 00:32:29.180 They were consistently wrong and consistently looked at unchanged interest rates because they were consistent in thinking that the rate of growth would be moderate. 239 00:32:29.180 --> 00:32:42.180 But the Benderly forecast was also wrong. Benderly was looking at, was forecasting prosperous times, and of course he said, well, if that's going to happen, then interest rates are bound to rise. 240 00:32:42.180 --> 00:33:09.180 and he also got it wrong, so no small triumphs there, I think I have only a few minutes to just discuss forecasting recession and then I'm going to stop, once again no triumphs, page 16, forecasting recession, let's start with the economist, 241 00:33:09.180 --> 00:33:14.940 I enjoy this quote because perhaps I have a personal vendetta against the economist. 242 00:33:14.940 --> 00:33:20.060 I think it's a very overrated paper, overrated weekly. 243 00:33:20.060 --> 00:33:27.180 What were they writing on April 15, 1989 about the Japanese stock market? 244 00:33:27.180 --> 00:33:32.180 What Japanese investors have become aware of is the dramatic way Japan's blue chip companies 245 00:33:32.180 --> 00:33:35.220 have changed the sources of their earnings through restructuring. 246 00:33:35.220 --> 00:33:40.020 This has made their profits too erratic to give any meaning to rigid measures such as 247 00:33:40.020 --> 00:33:41.740 the P-E ratio. 248 00:33:41.740 --> 00:33:46.020 Instead, investors have started to assess the company's future stream of earnings 249 00:33:46.020 --> 00:33:49.380 by looking at the total value of a firm's assets. 250 00:33:49.380 --> 00:33:52.460 The implication is that shares may be underpriced. 251 00:33:52.460 --> 00:34:04.300 Well, that was written, of course, about eight months before the NICA hit a high of $39,000 252 00:34:04.300 --> 00:34:11.740 and then crashed, and even today, last I checked, and this day was trading under $18,000. 253 00:34:11.740 --> 00:34:18.180 I don't know what it's done over the last couple of days, but it didn't work out. 254 00:34:18.180 --> 00:34:24.740 Now take a look at the consensus forecast in early 1990. 255 00:34:24.740 --> 00:34:33.380 That was six months before the official start of the 1991 recession. 256 00:34:33.380 --> 00:34:41.300 They were seeing danger signs, but of course it was difficult to forecast that a recession 257 00:34:41.300 --> 00:34:43.220 was actually going to happen. 258 00:34:43.220 --> 00:34:48.340 Despite recent danger signs, the U.S. economy will continue expanding for its eighth consecutive 259 00:34:48.340 --> 00:34:53.140 year, helped by lower interest rates, according to a survey of 40 economists by the Wall Street 260 00:34:53.140 --> 00:34:54.140 Journal. 261 00:34:54.140 --> 00:34:58.600 By far the gloomiest of the 40 economists surveyed is A. Gary Schilling. 262 00:34:58.600 --> 00:35:03.400 He now has predicted three of the last recessions that never happened. 263 00:35:03.400 --> 00:35:09.040 Now Schilling was right at that point, but unfortunately Schilling is indeed a stopped 264 00:35:09.040 --> 00:35:10.040 clock. 265 00:35:10.040 --> 00:35:13.020 He's always forecasting recession. 266 00:35:13.020 --> 00:35:20.160 He never saw an expansion he didn't dislike, and for that reason he does indeed have weak 267 00:35:20.160 --> 00:35:24.560 credibility. 268 00:35:24.560 --> 00:35:35.920 Now cut to July 5, 1990, that's page 19, and there again, even though the recession 269 00:35:35.920 --> 00:35:46.760 actually began that month, actually officially began in June of 1990, just the month before, 270 00:35:46.760 --> 00:35:53.160 the consensus was mentioning recession, but they thought that Chairman Greenspan would 271 00:35:53.160 --> 00:35:58.020 does save the day. Falling interest rates will bolster the sagging U.S. economy, helping 272 00:35:58.020 --> 00:36:03.120 to avert a recession for at least another year, according to a survey of 40 economists 273 00:36:03.120 --> 00:36:12.920 by the Wall Street Journal. Then in January of 1991, six months into the recession, the 274 00:36:12.920 --> 00:36:18.960 economists finally got it right. They were closing the barn door after the horse had 275 00:36:18.960 --> 00:36:26.160 The party is over. Now comes the painful cleanup. That's page 20. This grim New 276 00:36:26.160 --> 00:36:29.800 Year's forecast is the consensus view of 40 economists and the Wall Street 277 00:36:29.800 --> 00:36:34.200 Journal's semi-annual survey. Most predict the U.S. economy will shrink for 278 00:36:34.200 --> 00:36:38.360 at least the next six months, driving the jobless rate sharply higher by mid-year. 279 00:36:38.360 --> 00:36:43.320 We're in a very severe recession, contends Philip Braverman, chief economist 280 00:36:43.320 --> 00:36:47.920 of DKB Securities Corp. In terms of bankruptcies and financial pain, this 281 00:36:47.920 --> 00:36:52.600 This recession could well be the most severe since the 1930s. 282 00:36:52.600 --> 00:37:02.320 Well, I cite Phil Braverman, who was actually recently retired, only because he was another 283 00:37:02.320 --> 00:37:12.480 Cassandra, another stopped clock, always calling for slowdown and for recession, totally blind 284 00:37:12.480 --> 00:37:22.480 and the prospects of prosperity and the forecast that the recession could be as bad as the 1930s was certainly misplaced. 285 00:37:22.480 --> 00:37:32.480 The worst recession since the 1930s still remains the one in the early 80s and this recession was comparatively mild. 286 00:37:32.480 --> 00:37:49.480 I mentioned that the consensus was looking for Alan Greenspan to save the day in 1990 and 1991 and he was unable to do so. 287 00:37:49.480 --> 00:38:00.480 Page 21, here's a depressing quote from Chairman Greenspan about his inability to forecast bubbles. 288 00:38:00.480 --> 00:38:05.560 History tells us that sharp reversals in confidence happen abruptly, most often with 289 00:38:05.560 --> 00:38:07.040 little advance notice. 290 00:38:07.040 --> 00:38:10.920 What is so intriguing is that this type of behavior has characterized human interaction 291 00:38:10.920 --> 00:38:13.960 with little appreciable difference over the generations. 292 00:38:13.960 --> 00:38:20.080 Whether tulip bulb or Russian equities, the market price patterns remain much the same. 293 00:38:20.080 --> 00:38:25.560 We can readily describe this process, but to date economists have been unable to anticipate 294 00:38:25.560 --> 00:38:28.720 sharp reversals in confidence. 295 00:38:28.720 --> 00:38:40.720 That's too bad that Chairman Greenspan is as befuddled as the rest of us in timing the breaking of market bubble. 296 00:38:40.720 --> 00:38:48.720 I have a few minutes. I want to end on an upbeat note. I'm going to skip the Harry Cone joke and get to the substance. 297 00:38:48.720 --> 00:38:53.720 That's page 22, Forecasting Markets. Here's something. 298 00:38:53.720 --> 00:39:03.160 That's page 23, shifting ground altogether and getting back to my commodities background. 299 00:39:03.160 --> 00:39:09.920 This is the trading record of a company called Wizard Trading. 300 00:39:09.920 --> 00:39:17.360 They manage something like 70 to 80 million dollars and they trade commodities. 301 00:39:17.360 --> 00:39:20.520 It's purely computerized. 302 00:39:20.520 --> 00:39:24.800 The system was developed, as a matter of fact, by somebody who used to work for me in commodities 303 00:39:24.800 --> 00:39:33.240 years ago, who at that point didn't believe in technical analysis, but then had a conversion. 304 00:39:33.240 --> 00:39:43.360 And amazingly enough, what he did was he programmed his computer to recognize various chart formations. 305 00:39:43.360 --> 00:39:51.080 And since 1991, if you notice this track record, he's managed to eke out a profit. 306 00:39:51.080 --> 00:39:54.440 It's not a very impressive profit. 307 00:39:54.440 --> 00:39:58.040 Those profits would unfortunately be taxed at ordinary income rates. 308 00:39:58.040 --> 00:40:01.280 But to my mind, it's a real pebble in my shoe. 309 00:40:01.280 --> 00:40:06.920 As somebody who can only believe in fundamental forecasting, who doesn't believe in the power 310 00:40:06.920 --> 00:40:35.920 and the power of charge formations, here in what is essentially a zero-sum game, trading futures contracts, after commissions and after fees, he's made an average of 14%, one down year in 1997, that was 11% loss, and his gross, using about 35% leverage, has been 18%. 311 00:40:35.920 --> 00:40:43.800 When I ask him why do chart formations make sense, he tells me that it's something like 312 00:40:43.800 --> 00:40:48.680 a seaman checking signs about what the weather is going to be. 313 00:40:48.680 --> 00:40:54.720 If there are certain patterns, then if the wind's blowing, he determines it's going 314 00:40:54.720 --> 00:40:55.720 to rain. 315 00:40:55.720 --> 00:41:03.040 It's possible to look at a chart according to him and have a better than even chance 316 00:41:03.040 --> 00:41:09.240 and that you're going to be right about the direction of prices and what I find a little 317 00:41:09.240 --> 00:41:16.240 bit intimidating is that he has managed to make a profit in the use of these chart formations. 318 00:41:19.600 --> 00:41:25.040 As I say, this is a completely computerized system. The computer recognizes various chart 319 00:41:25.040 --> 00:41:32.040 patterns, trends and counter trends and makes its decisions accordingly. The last trading 320 00:41:32.040 --> 00:41:37.000 Trading Markets, page 24. 321 00:41:37.000 --> 00:41:43.040 I just wanted you to know that Chairman Greenspan, who can't forecast, is at least on record 322 00:41:43.040 --> 00:41:53.040 as saying that the bull market is coming to an end, the bull market in stocks is over. 323 00:41:53.040 --> 00:41:58.600 In his Humphrey Hawkins testimony, he lets the following statement, consumption growth 324 00:41:58.600 --> 00:42:06.840 should slow some if it seems most likely outside gains in share values are not repeated. 325 00:42:06.840 --> 00:42:14.960 And actually I think that he hopes to bring about a trading range market. 326 00:42:14.960 --> 00:42:22.880 He dearly prays that he's not going to be responsible for a market crash. 327 00:42:22.880 --> 00:42:29.720 I'm going to end there, because I have taken a fair amount of time. We have a few minutes 328 00:42:29.720 --> 00:42:42.720 for questions, so let me open it up to you. Thank you. 329 00:42:42.720 --> 00:42:48.360 I'm going to have to repeat your questions, so bear with me and keep them relatively short, 330 00:42:48.360 --> 00:42:58.360 Can you say something about the methodology that long-term capital management used? 331 00:42:58.360 --> 00:43:04.360 Well, I can't say anything very good about their methodology. 332 00:43:04.360 --> 00:43:15.360 I asked those guys in the show, and I forget the other guy's name, to give back their Nobel Prize. 333 00:43:15.360 --> 00:43:24.960 Clearly the mistake they were making was really very similar to the fundamental mistake that 334 00:43:24.960 --> 00:43:32.640 has been made in understanding rational options pricing. 335 00:43:32.640 --> 00:43:39.480 The options model gives you an edge, and a lot of arbitrageurs have been very happy about 336 00:43:39.480 --> 00:43:44.360 that edge, but it should have been recognized a long time ago that, for instance, when it 337 00:43:44.360 --> 00:43:52.640 When it comes to stocks, that model has certain assumptions in it that are not quantified. 338 00:43:52.640 --> 00:43:57.880 Number one, it assumes it knows what's going to happen to dividends, what's going to happen 339 00:43:57.880 --> 00:44:06.200 to interest rates, and more importantly, it assumes it knows the shape of the curve of 340 00:44:06.200 --> 00:44:07.200 market volatility. 341 00:44:07.200 --> 00:44:15.040 So all these guys did was calculate a few things and then say, hey, well, look, let's make 342 00:44:15.040 --> 00:44:21.440 assumptions for the rest. And they put on their war paint and they had a model. And 343 00:44:21.440 --> 00:44:32.080 this same mistake was carried through to arbitraging in world markets. They wished that there were 344 00:44:32.080 --> 00:44:38.840 One of the assumptions built in to these models, one of the assumptions being, for instance, 345 00:44:38.840 --> 00:44:43.680 that the Russians wouldn't shut down their bond market unexpectedly. 346 00:44:43.680 --> 00:44:52.120 So, clearly, it should have been understood that these models give you an edge, but you 347 00:44:52.120 --> 00:44:58.800 have to be very careful to understand what's going on in the real world, lest you become 348 00:44:58.800 --> 00:45:17.280 He asks, if you were to look at the minutes of the Fed, how does their record compare to 349 00:45:17.280 --> 00:45:19.520 those of the forty Wall Street Journal economists? 350 00:45:19.520 --> 00:45:26.920 Oh, yes, well, thanks, I should have mentioned that the Fed has been tracking the consensus 351 00:45:26.920 --> 00:45:27.920 almost exactly. 352 00:45:27.920 --> 00:45:53.920 The Fed was anticipating moderate growth since 1996. It's been consistently wrong, and that's the reason why Mr. Greenspan did not tighten, because he thought that he's always been behind the curve. 353 00:45:53.920 --> 00:46:03.240 He's only beginning to respond in the same way that the consensus is responding, by assuming 354 00:46:03.240 --> 00:46:11.640 that he might once again be surprised on the upside by an economy that expands at a faster 355 00:46:11.640 --> 00:46:15.780 rate than he imagined it could. 356 00:46:15.780 --> 00:46:24.380 And what he's done, of course, is helped the expansion along by holding the line on interest 357 00:46:24.380 --> 00:46:25.380 rates. 358 00:46:25.380 --> 00:46:34.040 And, of course, last year, because of the fact that markets seized up, as he put it, 359 00:46:34.040 --> 00:46:36.900 he even eased interest rates. 360 00:46:36.900 --> 00:46:47.060 But had he agreed with Benderly that the economy was going to grow at 3.5 to 4 percent, had 361 00:46:47.060 --> 00:46:55.340 he understood that the unemployment rate had gotten so low that wage rates were going to 362 00:46:55.340 --> 00:47:04.340 accelerate, then he probably would have tightened far more than he ever thought he should, and 363 00:47:04.340 --> 00:47:08.700 I believe he's still behind the curve. 364 00:47:08.700 --> 00:47:12.540 Gene, shouldn't we be skeptical, this gentleman asks, of the whole idea of predicting national 365 00:47:12.540 --> 00:47:20.180 recessions, since some parts of the economy can be doing very well while others do badly? 366 00:47:20.180 --> 00:47:26.940 Oh sure, that's absolutely so. 367 00:47:26.940 --> 00:47:37.940 I guess the reason, well, all right, now I see, I think I see what you're saying. 368 00:47:37.940 --> 00:47:38.940 Excuse me. 369 00:47:38.940 --> 00:47:41.380 I was about to say another point. 370 00:47:41.380 --> 00:47:49.940 I do believe that there's a reality to recession because a lot of the economy is not doing 371 00:47:49.940 --> 00:48:08.940 I think that there's a reality to the unemployment rate. When the unemployment rate rises toward 10 percent, it does mean that there's a lot of pain out there. 372 00:48:08.940 --> 00:48:25.940 But I think that simply because some of the economy is always doing well, even in the recession, isn't necessarily the reason why we don't seem to be able to forecast recession. 373 00:48:25.940 --> 00:48:41.940 I think that the term recession does describe something about reality, high unemployment rate, a number of industries doing poorly, laying off their workers, not investing. 374 00:48:41.940 --> 00:48:49.500 I think those things do happen, but unfortunately, what seems to trigger a recession, which as 375 00:48:49.500 --> 00:48:56.060 Mr. Greenspan correctly notes, is a break in confidence. 376 00:48:56.060 --> 00:49:03.100 That break in confidence is very difficult, if not impossible, to forecast. 377 00:49:03.100 --> 00:49:04.100 Very hot. 378 00:49:04.100 --> 00:49:09.460 Jean, comment please on your second prediction, exactly why you think the Federal Government 379 00:49:09.460 --> 00:49:12.460 is going to do this, and also how will they proceed to do it? 380 00:49:12.460 --> 00:49:13.460 Oh, thank you. 381 00:49:13.460 --> 00:49:19.460 Oh, actually, you looked ahead in my last chart where I actually made a couple of predictions. 382 00:49:19.460 --> 00:49:30.460 Sorry I published that, but I think the government will do it for a couple of reasons. 383 00:49:30.460 --> 00:49:43.460 First, they will do it because there is a bipartisan consensus about this issue. 384 00:49:43.460 --> 00:49:52.460 Clinton has already said that, as I'm sure you know, that he thinks it's a good idea to invest some money in the stock market. 385 00:49:52.460 --> 00:50:09.460 Clearly, the Republicans aren't averse to the idea. In particular, they aren't averse to bailing out the stock market. And for that reason, if there is a bear market, it's going to make perfect sense. 386 00:50:09.460 --> 00:50:30.460 First of all, some smart guy, maybe Larry Summers if he's still around, is going to say hey look, people at Barron's were pointing out that we in the government are so stupid that we only know to buy at the highs, we only know to buy when the market has been soaring 25-30 percent. 387 00:50:30.460 --> 00:50:35.420 What we're going to do is take advantage of this big market dip, because we're investing 388 00:50:35.420 --> 00:50:37.740 for the long term. 389 00:50:37.740 --> 00:50:40.980 So that circumstance will be very propitious. 390 00:50:40.980 --> 00:50:44.860 Secondly, Washington likes the stock market. 391 00:50:44.860 --> 00:50:50.740 They recognize that there's an enormous constituency that also likes the stock market. 392 00:50:50.740 --> 00:50:55.300 And thirdly, they will probably keep the faith. 393 00:50:55.300 --> 00:51:08.300 and the faith that stock prices yield a better return than bonds do. 394 00:51:08.300 --> 00:51:15.300 Now, as for exactly how it's going to be implemented and when, I'm not sure. 395 00:51:15.300 --> 00:51:22.300 I don't know whether it's going to take a 30 percent bear market or a 25 percent. 396 00:51:22.300 --> 00:51:30.300 I'm sure that a number of philosopher kings will be appointed to manage this portfolio. 397 00:51:30.300 --> 00:51:37.300 It's probably a perfect job for Alan Greenspan to do once he retires. 398 00:51:37.300 --> 00:51:44.300 No doubt he will enlist the services of Robert Rubin to help him out. 399 00:51:44.300 --> 00:51:48.300 I don't know if that answers your question. 400 00:51:48.300 --> 00:51:51.300 It's the best I can do, but if you want to press me, that's fine. 401 00:51:51.300 --> 00:52:01.560 Do you agree with Alan Greenspan, as quoted on page 21, that the market bubble is driven 402 00:52:01.560 --> 00:52:08.500 by animal spirits, as Cain said, or is it simply a rational response to government intervention 403 00:52:08.500 --> 00:52:10.540 and regulation of the economy? 404 00:52:10.540 --> 00:52:19.740 No, I don't agree with that statement that the market bubble is solely driven by animal 405 00:52:19.740 --> 00:52:41.740 I tend to associate myself with the Austrian theory of the business cycle, and strangely if you look at some of Alan Greenspan's statements, he's got a lot of ambivalence about that himself. 406 00:52:41.740 --> 00:52:52.140 He, as some of you may know, he once taught human action at the Nathaniel Brandon Institute 407 00:52:52.140 --> 00:52:56.020 prior to going into politics. 408 00:52:56.020 --> 00:53:04.740 So he is very aware of Austrian theory and every once in a while he makes an allusion 409 00:53:04.740 --> 00:53:05.740 to it. 410 00:53:05.740 --> 00:53:27.740 A couple years ago, he spoke about inflationary imbalances, and that's not a literal Austrian statement, but it's certainly an Austrian concept that the inflation of the money supply brings about imbalances. 411 00:53:27.740 --> 00:53:37.740 I also noticed, by the way, that in a recent speech, Greenspan spoke about time preference, which is right out of human action. 412 00:53:37.740 --> 00:53:46.740 That's by Ludwig von Mises, as I imagine most of you know, who is, to my mind, the father of the Austrian School. 413 00:53:46.740 --> 00:53:54.740 So, no, of course, I don't agree that it's purely animal spirits. 414 00:53:54.740 --> 00:54:04.740 I tend to agree that the breakdown in confidence is what seems to precipitate the bursting of the bubble. 415 00:54:04.740 --> 00:54:12.740 But as I say, it's not just that I don't agree with it. I'm not sure that Alan Greenspan agrees with it either. 416 00:54:12.740 --> 00:54:21.580 I think if you read his speeches, by the way, you'll see that he's often very confused 417 00:54:21.580 --> 00:54:26.820 and very ambivalent about what's been going on in the economy. 418 00:54:26.820 --> 00:54:35.140 He has spoken humbly about all the on-the-job training he has received over the last few 419 00:54:35.140 --> 00:54:36.140 years. 420 00:54:36.140 --> 00:54:42.260 And as I say, I think that he's a bit behind the curve even now about what's likely to 421 00:54:42.260 --> 00:54:54.260 Jean, back to your prediction number two. Since in the next fair market and recession, government revenues are going to collapse. What are they going to use to buy the stocks? 422 00:54:54.260 --> 00:55:18.260 Well, government can always find something. They will sell treasury bonds and that's what they invariably do. That's what's often called fiscal stabilizers. 423 00:55:18.260 --> 00:55:36.580 The government sells treasury bonds by printing money and then with that money it's going 424 00:55:36.580 --> 00:55:42.900 to buy stock which of course is roughly similar to buying stock on margin. 425 00:55:42.900 --> 00:55:48.400 and not, I shouldn't say roughly similar, it's identical to that. 426 00:55:48.400 --> 00:55:56.900 So they, as a matter of fact, you know, if we have the same smart guys in government running the economy 427 00:55:56.900 --> 00:56:02.400 as we have, like Summers and like Rubin, they might be fairly explicit about this. 428 00:56:02.400 --> 00:56:09.400 It's a leveraged play. They're taking in money at, you know, 5% and they're buying stocks with it 429 00:56:09.400 --> 00:56:36.400 Will Greenspan retire or be reappointed? 430 00:56:36.400 --> 00:56:45.000 I'm talking about small triumphs, about forecasting. That isn't going to be one of my small triumphs 431 00:56:45.000 --> 00:56:51.720 predicting whether he's going to retire or not. I will go out on a limb only in this regard. 432 00:56:51.720 --> 00:57:00.440 I just imagine that a man in his early seventies who's fairly vigorous and who has a relatively 433 00:57:00.440 --> 00:57:08.440 I have a young wife. He's married to Andrea Mitchell, who was in her early 50s and quite vigorous. 434 00:57:08.440 --> 00:57:22.440 He can get some other jobs, but it's probably more appropriate in terms of his relationship with Andrea to keep at his really important day job. 435 00:57:22.440 --> 00:57:32.520 And so my prediction, even though this forecast is worth very little, is that he will indeed 436 00:57:32.520 --> 00:57:35.960 want to be re-nominated and that he will be re-nominated. 437 00:57:35.960 --> 00:57:44.200 Certainly he will be because he's got enough clout to be re-nominated. 438 00:57:44.200 --> 00:57:50.240 The question of whether he wants it, and as I say, a man with a young wife really will 439 00:57:50.240 --> 00:58:06.680 I just discovered a couple of days ago that Alan Greenspan's father-in-law lives in my 440 00:58:06.680 --> 00:58:07.680 building. 441 00:58:07.680 --> 00:58:15.000 Somebody in the building told my wife that he saw Alan Greenspan walk into the lobby 442 00:58:15.000 --> 00:58:20.260 and we later found out that he was visiting his father-in-law 443 00:58:20.260 --> 00:58:24.120 with Andrea, of course. 444 00:58:24.120 --> 00:58:26.660 Given the Fed's record of forecasting, 445 00:58:26.660 --> 00:58:30.360 what's your explanation for why Wall Street and the public have such 446 00:58:30.360 --> 00:58:35.840 tremendous confidence in Greenspan and the institution? 447 00:58:35.840 --> 00:58:41.520 I have to think a moment. 448 00:58:41.520 --> 00:58:44.040 I guess 449 00:58:44.040 --> 00:58:55.320 I guess you can, you do have to agree that this is now becoming one of the longest expansions 450 00:58:55.320 --> 00:59:08.160 on record. It's been a relatively stable expansion and for that reason Alan Greenspan is getting 451 00:59:08.160 --> 00:59:15.160 There is a tendency on Wall Street for people to believe that simply because relatively good things have happened, they should credit it to the only man who's seen it. 452 00:59:38.160 --> 00:59:57.160 The blinders that they wear about his poor forecasting record may be determined by the fact that his poor forecasting record has been identical to their poor forecasting record. 453 00:59:57.160 --> 01:00:09.160 So for that reason it may well be that smart fed watches are going to overlook his obvious problems in this regard. 454 01:00:09.160 --> 01:00:14.160 The investing public listens of course to the economists. 455 01:00:14.160 --> 01:00:21.160 The public at large always likes to look up to a father figure. 456 01:00:21.160 --> 01:00:44.160 He speaks with a great deal of humility and calm. That helps also. And so as I say, it's probably only that things have been good and when things are good, we will credit it to whoever seems to be running the show. 457 01:00:44.160 --> 01:00:51.200 What's your view of the effect that the perhaps hundreds of billions of dollars that's come 458 01:00:51.200 --> 01:00:58.240 in from Russia into the market has had on the market and what might happen if those 459 01:00:58.240 --> 01:01:02.640 flows cease because of the money laundering investigations and all? 460 01:01:02.640 --> 01:01:19.640 I mean, in general, of course, the trade imbalance is the hot money that could potentially destabilize this economy. 461 01:01:19.640 --> 01:01:27.640 If it does turn out to be hot money, hot money not just from Russia, from all sources, 462 01:01:27.640 --> 01:01:38.720 Then, the one thing we can be relatively sure about, which is that abrupt changes are very 463 01:01:38.720 --> 01:01:44.560 difficult to deal with. 464 01:01:44.560 --> 01:01:58.640 If there is a rapid exit from our markets by foreign money, then that rapid exit could 465 01:01:58.640 --> 01:02:07.560 set off a decline in confidence that Mr. Greenspanning won't be able to stop by rapidly cutting interest 466 01:02:07.560 --> 01:02:24.560 The Capital Markets could once again, as he puts it, seize up and even the powerful force that Bentley has isolated could be wrecked and we could be in a recession. 467 01:02:24.560 --> 01:02:34.560 But I always pray for the expansion to continue. I would like to see a trading range market in stocks. 468 01:02:34.560 --> 01:02:42.560 I'd like to see them just, you know, a market that ranges from 8,000 to let's say 10,000 the next few years, 469 01:02:42.560 --> 01:02:47.560 so that earnings can be given a chance to grow and catch up with those high prices. 470 01:02:47.560 --> 01:03:01.560 And I hope that if and when there is an exit from the U.S. markets by foreign money, that it happens slowly enough for the economy to adjust to that process. 471 01:03:01.560 --> 01:03:12.560 But I think certainly that when you look at the dangers to the U.S. economy, sooner or later, one or more of those factors are going to do us in. 472 01:03:12.560 --> 01:03:26.560 Floyd? When he asked us what to comment on Greenspan, February before last, saying that if the entire international financial structure was not entirely Y2K compliant, it would come down. 473 01:03:26.560 --> 01:03:40.560 Comment please on Greenspan's statement of February last, that if the entire international financial and banking system wasn't Y2K compliant, that it could all come down. 474 01:03:40.560 --> 01:03:54.560 Did he say that? Well, gee. I admit I've been impressed by others who have said that, and unfortunately I can't say too much about it. 475 01:03:54.560 --> 01:04:08.560 I wrote at one point about the Y2K problem. Certainly you can paint some pretty dire scenarios about what could happen 476 01:04:08.560 --> 01:04:19.560 There are all kinds of obvious interdependencies, not just in banking, but in manufacturing and embedded systems. 477 01:04:19.560 --> 01:04:33.560 I have to admit that I just reverted to prayer about Y2K nine months ago because it's such an impossible topic to cover. 478 01:04:33.560 --> 01:04:38.560 It would be more than a full-time job for two or three journalists. 479 01:04:38.560 --> 01:04:47.560 I only wish that some of the dailies had put two or three reporters on the Y2K problem 480 01:04:47.560 --> 01:04:56.560 to actually find out what's been happening among the industries and in banking. 481 01:04:56.560 --> 01:05:01.560 But I guess I could hazard a couple of guesses. 482 01:05:01.560 --> 01:05:12.560 It does appear that our own financial system, the U.S. domestic financial system, is probably Y2K compliant. 483 01:05:12.560 --> 01:05:23.560 I don't know about all of the rest of the economy, but assuming the rest of the economy is more or less going to muddle through, 484 01:05:23.560 --> 01:05:41.560 Then what I'm skeptical about is what's going on, and worried about I should say, is what's going on in particular in Asia, Japan, and maybe a little even a bit in Europe. 485 01:05:41.560 --> 01:05:59.560 On the other hand, just like the Asian crisis did the U.S. economy a lot of good by bringing about cheap oil prices, cheap commodity prices, cheap imports. 486 01:05:59.560 --> 01:06:10.560 It's very possible that the way the Y2K will play out is that there will be a flight to the U.S. 487 01:06:10.560 --> 01:06:27.560 because we seem to be more Y2K ready than other economies. But as I say, that's been very daunting. It's been very daunting to try to predict what Y2K will do. And so those statements are made with all due modesty. 488 01:06:27.560 --> 01:06:39.560 Prediction number two comes true, whether it's through the Fed or the Treasury or the Social Security system. Is it ever going to be possible to put that socialist genie back in the bottle? 489 01:06:57.560 --> 01:07:26.880 and then if we're also lucky and if the market does well, then we might be encouraged to allow 490 01:07:56.880 --> 01:08:09.880 I think we offer people a great deal of flexibility about when they want to retire, when they want to retire early, or whether they never want to retire and simply leave that money to their kids. 491 01:08:09.880 --> 01:08:12.880 But I think that's only an outside chance. 492 01:08:12.880 --> 01:08:28.880 The way I read the political situation, most likely we will have perhaps an even more pernicious form of socialism in the sense that government will begin to invest in the stock market. 493 01:08:28.880 --> 01:08:38.880 And my fear is that at some point down the road, that process will become politicized. 494 01:08:38.880 --> 01:08:51.880 At some point it's very possible that, you know, a Democratic Senator might say why are we investing in cigarette stocks when we have a policy towards cigarette stocks. 495 01:08:51.880 --> 01:08:53.880 I think that's a real risk. 496 01:08:53.880 --> 01:09:06.880 On the other hand, it is also possible to imagine a bunch of high priests who are given the power to invest and who don't have to tell Congress where that money is invested. 497 01:09:06.880 --> 01:09:09.880 I'm just a little skeptical that that will happen. 498 01:09:09.880 --> 01:09:14.880 As I say, I think the individual retirement accounts are an outside chance. 499 01:09:14.880 --> 01:09:20.880 I think, unfortunately, the greater likelihood is that the government will invest directly in the stock market 500 01:09:20.880 --> 01:09:23.880 with some of the perils that that involves. 501 01:09:23.880 --> 01:09:25.880 Jean, thank you very much.