Forty years ago today, former Salomon Brothers economist Henry Kaufman helped start one of history’s great bull markets. Known then as “Dr Doom” for his bearish views, he roused investors by changing his stance and forecasting a fall in interest rates after a punishing Federal Reserve campaign to tame inflation.
Now 94, Kaufman remains focused on financial affairs and in a recent interview was sufficiently spry to hold forth at length on his book of last year, The Day the Markets Roared, which recounts his fateful rate call on August 17 1982. Asked how he was doing, he answered cheekily: “So far, so good.”
His views on US monetary policy are less sanguine. He fears that today’s Fed under Jay Powell is failing to combat inflation with the resolve displayed by Paul Volcker, who aggressively hiked interest rates while leading the central bank in the 1970s and 1980s.
“I am still waiting for him to act boldly — ‘boldly’ means he has to shock the market,” Kaufman said of Powell. “If you want to change someone’s view, if you want to change someone’s action, you can’t slap them on the hand, you have to hit them in the face.”
Kaufman said the Fed chair erred after he made his pivot on inflation last November. Months passed between the time Powell warned of “persistently higher inflation” and the start of Fed interest rate increases in March.
“His forecast was right, his inaction was wrong,” Kaufman said.
As a result, markets are facing a far different situation than they were when Kaufman distributed his legendary Salomon memo predicting that interest rates would head lower.
“Today, the inflation rate is higher than interest rates. Back then, interest rates were higher than inflation rates. It’s quite a juxtaposition,” he said. “We have a long way to go. Inflation has to come down or interest rates will go higher.”
Interest rates had already started falling before Kaufman issued his celebrated 1982 forecast, but it was his prediction of a sustained decline that moved the markets. His impact stemmed from his status as the late-20th century equivalent of a social media influencer. Kaufman was so renowned for his pessimism that once investors learned of his new view, stocks soared.
Having touched a cyclical bottom only days before, the Dow Jones Industrial Average rose 38.81 points, or 4.9 per cent, to 831.24, its biggest point gain in history at that time. The 1980s bull market followed and — with several notable interruptions — stocks have climbed higher in the decades since. The Dow closed on Tuesday at 34,152.01.
“I had bearish views for a long time . . . When I changed my mind, it induced a reaction,” Kaufman said, adding it was hard to imagine a private-sector forecaster having that kind of impact today. “There were not many economists around. That gave me a distinct advantage.”
Looking ahead, Kaufman’s inflation concerns make it harder for him to be as certain as he was in August 1982.
“I wouldn’t say I’m bearish,” he said, noting that US equity prices “are not really far away” from their peak of last year and could be buoyed by further progress in the global fight against Covid-19. Rather, he said, it was difficult to make predictions in such “diffuse” circumstances.
“Today, monetary policy is somewhat behind the curve,” Kaufman said. “Back then, monetary policy under Paul Volcker was ahead of the curve . . . He was in the process of turning around market expectations.”