Investment strategist and prognosticator Ed Yardeni is forever on the alert for signs of weakness in the economy: They could signal a recession and bear market looming. Here’s his bullish news: There’s no such sign, as he tells ThinkAdvisor in an interview five days before the bull market set a record for the longest run in history.
“Dr. Ed,” as Yardeni is known (he has a doctorate from Yale), consults mainly to institutional investors, as well as to financial analysts and RIAs with large portfolios who subscribe to his service (www.Yardeni.com).
“Don’t underestimate” Trump has been his optimistic mantra ever since Donald J. Trump was elected president. In the last year and a half, he has not wavered from that faith. For example, he believes that Trump’s trade war could very well result in less protectionism as opposed to more.
In the interview, the independent strategist, 68, discusses how inflation, the Trump tax cuts stimulating corporate profits and real GDP growth, and the gradual rise in interest rates point to a continuing strong economy and bull market.
In Yardeni’s autobiographical “Predicting the Markets” (YRI Press, December 2017), he unpacks his 40-year career in financial services, which has included forecasting everything from Federal Reserve moves to corporate earnings to global synchronized booms, busts and stagnation. He also reveals some of his forecasting techniques.
In 25 years on Wall Street, Yardeni was chief economist at EF Hutton, Prudential Bache Securities and C.J. Lawrence, and chief investment strategist at Deutsche Bank’s U.S. equities division. Earlier, he was with the Federal Reserve Bank of New York and the U.S. Treasury.
A separate web site, www.Yardenibook.com, contains the 700 charts he references in his book. “A simple well-constructed chart can be worth a thousand words,” the forecaster says.
ThinkAdvisor recently conducted a phone interview with Yardeni, whose firm is based in Brookville, Long Island, New York. A longtime film buff, he peppers the book with references to movies — from “Wall Street” to “The Wizard of Oz “ — chiefly to illuminate a financial or economic point.
“Life is like a box of chocolates. You never know what you are going to get,” he says, quoting “Forrest Gump’s” title character. “Markets are like Forrest’s box of chocolates. You need to think outside the box when it comes to predicting them.”
Here are highlights from our conversation:
THINKADVISOR: You focus on predicting how long U.S. monetary policies will remain bullish and when they’ll turn bearish. What’s your stance right now?
ED YARDENI: I’m bullish. I’m still using 3,100 for the S&P 500 by the end of the year. I’ve been carrying that forecast since the beginning of 2018. So far, so good.
How does the economy look exactly?
Clearly, growth picked up in the second quarter; and the statistics for the third quarter are on track for another 4% increase. So the tax cuts certainly have given a lift to consumer spending, which is the biggest component of economic growth.
What about the Trump factor in predicting the stock market? He’s so unpredictable.
We’ve got a president who’s probably the president that’s the most bullish and bearish for the market simultaneously that I can recall. Deregulation and tax cuts are obviously very bullish for earnings. But then, a month after the tax cuts were passed, he turned right around and moved to escalate a trade war.
What’s the upshot?
On the face of it, that shouldn’t be bullish for stocks, unless it ends well with less protectionism rather than more. That’s my working hypothesis. I don’t think Trump is going to upend and destroy the global trade system. The fact that the market remains near an all-time record high tells me that investors are giving him the benefit of the doubt in all sorts of areas.
But he opposes globalization. How can the U.S. emerge with less protectionism?
What’s the point of globalization if it raises a lot of political resentment and then a counterrevolution throwback to outright protectionism? Ironically, Trump might actually save globalization from itself. The stock market is confirming that view. But the jury is still out.
Well, Trump claims he’s a free-trader.
Trump is more in line with Ronald Reagan’s approach. He believed in free trade but he also insisted on fair trade. Trump is controversial, but I’ve been telling people since he was elected president: “Don’t underestimate him.”
So you haven’t doubts about the way he’s handling the trade issue?
The only question is: Will moving the world away from a multilateral trading system to a bilateral trading system end up in an escalating trade war that puts the global economy into a recession? Or will there be bilateral agreements that, when all of them are added up, will lead to freer trade?
Why else are you bullish about the economy and stock market?
Fed chair Jerome Powell is on a set course of gradual normalization of monetary policy. That’s a good thing. The Fed has enough confidence in the economy to push interest rates back to normal levels: 3% is closer to where it should be. That augurs well for stocks. Investors are concluding, on balance, that fiscal monetary policies will continue to promote U.S. economic expansion.
Your blog of Aug. 11 poses the question: “Is the economy slowing?” You said you were on the lookout for signs of weakness. Do you see any?
I want to make sure I’m not surprised. Recessions cause bear markets. That’s why I’m looking out for weaknesses in the economy — not because I expect any. If I catch the next bear market and recession, and conclude [they] will be short and present a buying opportunity, that’s worthwhile information to provide to my accounts.
Turning to inflation: Where is it going?
To be blunt, inflation is dead. I’m not saying zero inflation; the rate could remain around 2%, which the central bankers have pegged as the ideal.
What leads you to think that inflation is “dead”?
Globalization and global competition remain intense. The productivity revolution remains fundamentally deflationary. Aging demographics are another source of disinflationary, if not deflationary, pressure.
Are you wary of anything at all in the economy right now?
The question is whether the supply-side analysis of the tax cuts will turn out to be correct. The supply side has been arguing that tax cuts would revive animal spirits. But the evidence is that things are working out pretty well.
You’re fact-based and empirical in your approach to forecasting. What actually drives the business cycle?
The profit cycle — in terms of businesses’ decisions to expand or reduce productive capacity and labor force. If you want a good economy from a policy standpoint, don’t get in the way of profits. Certainly the tax cuts have been very stimulative for corporate profits, and the immediate impact is that it’s stimulating real GDP [growth] so far this year.
You write that the market discounts the consensus expectations of industry analysts. What’s your technique for analyzing earnings?
I’m a big fan of using forward earnings, which is a time-weighted average of expectations for this year and the next. The value of that model is it incorporates optimism and gives less weight to next year and more weight to this year. During good times, it pays to be optimistic on earnings because earnings grow with the economy.
Many say that analysts’ forecasts are typically too bullish. What do you think?
They do tend to be too optimistic the further out the actual results occur, but they [usually] lower their numbers over time. What analysts miss are recessions. Fortunately, though they can be deep, they don’t last very long. History shows that the U.S. economy has a consistent track record of growing and that stock markets recover from bear markets and make new highs. In the 40 years that I’ve been in the business, bear markets have been buying opportunities rather than reasons to get out of the market.
Early this year the Fed said it would be raising interest rates, and the impression was that they would do so aggressively. Now that doesn’t seem to be the case.
Right. Jerome Powell has continued to follow [predecessor Fed chair] Janet Yellen’s script closely — transitioning the ultra-easy policies toward normalizing monetary policy. Going from zero to a 3% interest rate is a big increase, but it’s being done over several years in a way that’s not creating tantrums in the financial markets. You could argue that some of the recent unsettling developments in emerging markets may have something to do with [interest rate increases]. But, on balance, it remains so far, so good.
What are your thoughts about the yield curve’s starting to invert? Some believe it’s a signal that a recession is on the way.
The yield curve is one of 10 components of the Index of Leading Economic Indicators, which continues to rise to all-time record highs. So even with one component raising some alarm bells, the broader index is still very upbeat on the U.S. economy.
Technology indeed has been transformative; and you give it a great deal of thought, so you write. Yet economists, in general, “especially pessimistic ones,” rarely pay attention to technology, you write. Why do you?
There’s been a technology revolution. Technology is evolving at a faster and faster pace, is more powerful; and it’s cheaper. Tech applications are proliferating throughout our economy. One example is 3D printing. With Trump’s upsetting the apple cart on global supply chains, one of the ways companies may respond is to use 3D printing to make parts. We [should focus on] how to overcome scarce resources using technological innovations to increase prosperity.
You wrote that some people think that, in situations where robots displace workers, business owners should be taxed and the government should provide people with a universal basic income stipend. Agree?
Bill Gates came up with the idea of taxing robots. Then someone came back with: “Shouldn’t we be taxing software producers as well!” I’m not a fan of a universal basic income subsidy. We’re more in need of a universal fertility subsidy: Demography is leading to collapsing fertility; so we’re going to need automation and robots. What we really need to focus on is having more children as opposed to subsidizing people with a universal basic income [stipend].
Why has the fertility rate plummeted worldwide? At the same time, there are more older people in the world now.
[The fertility collapse] has never happened before. Urbanization accounts for a lot of it. When people move from villages to urban areas, they don’t need kids to help them on farms; instead, kids become an economic cost.
What does the future hold vis-a-vis fertility?
We don’t know exactly where [the trend] is going. But we can see what’s going on in Japan. The future is very visible.
What’s happening there?
They have a geriatric society and probably one of the most automated robotized economies. Yet their unemployment rate is below 3%. So workers haven’t been displaced by automation. Japan and China are trying to get couples to marry and have children. It’s not clear if that’s succeeding. But the big picture is that fortuitously, robotics and automation are occurring at a time when globally we’re not replacing ourselves. Still, we need to focus on having more children.
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