Fed: The Wayback Machine Birthday Tour by John Mauldin of Mauldin Economics
“Would you tell me, please, which way I ought to go from here?”
“That depends a good deal on where you want to get to,” said the Cat.
“I don’t much care where –” said Alice.
“Then it doesn’t matter which way you go,” said the Cat.
“– so long as I get somewhere,” Alice added as an explanation.
“Oh, you’re sure to do that,” said the Cat, “if you only walk long enough.”
– Lewis Carroll, Alice in Wonderland, 1865
Today, in the spirit of the wisdom the Cheshire Cat offers Alice, I would ask how you can know where you are now and where you’re going if you don’t know where you came from. You and I have lived through the first nearly 14 years of this topsy-turvy new century together, and many of its details as well as its overarching themes deserve to be recalled. But rather than offering you a dry, plodding recap of recent history, I’ve come up with a different and hopefully more fun way to revisit the past decade and a half.
I’ve been writing this letter for some 15 birthdays now, well over 10,000 pages of collected work. Every word is still at my website – a history, if you will, of what I was thinking at the time. I asked my longtime (and long-suffering) editor, Charley Sweet, to go back over this past decade and a half and give us a review of what I was saying my birthday week. When I perused what he came up with, a few things leapt out at me.
First, it turns out to be quite lucky that I was born in October, because when we assembled all the letters for the first week of that month, it turned out we hit on most of the big issues that came along in the first 15 years of the century: the tech-bubble collapse and ensuing recession; the actions of the Fed in the early ’00s, especially with regard to the housing bubble; the fundamental challenge – and promise – of accelerating change; the subprime collapse and Great Recession (including “the bailout”); the problems with Keynesian excesses at the Fed and other major central banks; the crisis in the Eurozone; and the healthcare crisis (and Obamacare).
Second, I could see my own thought process evolving and realized again how truly important it is to continually test your ideas in the marketplace.
The plan was to take a short stroll through the history of my letters to get a feel for how our world and my thinking about it have changed over time. As it developed, Charley presented me with a rather voluminous package of excerpts, one far too long to send out as a Thoughts from the Frontline letter. So I will have to viciously edit myself to make the retrospective more consumer-friendly for TFTF readers. But for those who are interested, we are posting the entire summary here (and it will remain available there).
As you read the entry for each year, think back on your own thought process and actions at the time. Surprisingly, as I did the same, it appeared to me that, more often than not, I “got it right” (even if I got it early). So let’s climb into the Wayback Machine and take a spin through the last 15 tumultuous years. We will begin with my call in October 2000 for a recession in 2001.
[Note: comments in brackets were written as we edited this. Everything else is verbatim from the original letters.]
The Probability of a Recession Grows
October 20, 2000
I get lots of mail from readers asking me to tell them if I think we will have a recession next year. I think I can say with some authority that making predictions can get you out on a limb. There are scores of variables that affect our economy. At any given time you can find trends that will seem to be pointing us to one conclusion, and other trends that might yield the opposite conclusion. It is only in hindsight that the pundits will tell us that we should have seen the most important trend all along. So instead of predicting a flat yes or no, I am going to assign some probability to the potential for a recession, and then as we go along I will either increase the probability or decrease it….
[If the yield curve is functioning as an accurate predictor of recession] we should be looking to see a recession next summer at the earliest and probably next fall. As I think back over the last few recessions, there were very few signs one year ahead that a recession was coming. For most economists and analysts, the recession was a surprise even one quarter out!…
Since the yield curve is an EARLY predictor, it would be more worrisome if we were seeing confirming signs in the economy now. That would mean the recession was probably going to be a very deep one. Thus we shouldn’t be surprised that we see no recession clouds on the horizon….
This year, the yield curve went negative for a few days in early April but has been decidedly negative since July 7. The worst the yield curve has been this cycle is a -.66, where it is today. The 90-day average is now -.40.
The Fed study says at this level there is approximately a 35% chance of a recession within four quarters. I would remind you that the study also says the probability should be raised somewhat due to the more fluid bond markets of today, so the number is probably around 40-50%….
That also means there is a 50% chance we won’t have a recession. But every time we have been at these yield curve levels for the last 40 years we have had a recession.
[A recession ensued in March 2001 and persisted through November.]
Rules of Engagement
[A month after 9/11 and a month before recession officially ended]
As far as the economy this week, not much has changed. Japan just gets worse and Europe is getting weaker, which means the US will have to lead the world out of a global recession. But our consumers are saving dramatically more and spending less, manufacturing is down, as is capacity utilization etc. etc. Long bonds are back to new highs. Same old, same old.
But the cavalry is on the way. The Fed cuts again and again and pumps $100,000,000,000 into the economy in a few weeks; Congress is likely to provide significant fiscal stimulus; and travel and business are starting to pick up again. I can hear the bugles, but I don’t see the troops yet. It is still not safe to get out of the fort, but it is time to make plans for the future….
We are now in a new type of war. The enemy is a few thousand individuals in 60 countries hidden in communities of millions, unknown to 99% of their neighbors, sympathized with and supported by nations and peoples