June 19, 2003
Searching For Irving Fisher
Professor Irving Fisher was revered as a financial authority during the boom years leading into 1929. Furthermore, his insights – albeit to dwindling fanfare – carried weight during the initial bust years following the Crash of 1929. Yet to anyone who has taken to the task to writing about the great depression, Mr. Fisher’s quotes are subject to intense ridicule.
Of the endless quotes supplied by Fisher both before and after the crash, one is most frequently referenced. This quote is not only used to point out Mr. Fisher’s phenomenally bad sense of timing, but also as a gauge for comparing the mania of 1999: what are we to make of the market prognostications that came from the likes of Glassman, Cohen, Cramer, and Kudlow:
“Stock prices have reached what looks like a permanently high plateau”
Irving Fisher, Oct. 17, 1929
Fishing for the next Fisher
Although we are in the early years of the U.S. stock market bust (and, for the moment, this ‘bust’ is in pause mode), there are some candidates vying for Fisher’s crown of notoriety. And even as Abby remains blindly bullish, it is Lawrence Kudlow that is vying to be king.
Before looking at what Kudlow is saying today consider some of his historical witticisms, a handful of which can be considered ‘Fisheresque’.
1999
“Think of the Internet as an economic-freedom metaphor of our time.”
“I believe the future economy will outperform all expectations. The Dow Jones Industrial Average will reach 15000, then 30000, then 50,000 and higher.”
“We have become the global buyer of last resort. This is good…This helps finance our technology investment and our growth. So, the trade deficit is unimportant to me. As an identity - it just shows you are in a prosperity”
2000
“…it was the Fed that killed the market…by too much prosperity...too many investors creating too much wealth. But the underlying forces driving the New Economy are real and not easily suppressed.”
2001
“Had Washington moved earlier, the demoralizing $5 trillion stock market wealth deflation, a crippling manufacturing recession, tens of thousands of job layoffs in technology and service industries, and a general rollback of risk-taking animal spirits all could have been avoided.”
2002
“To strengthen the outlook for economic recovery, government should do nothing right now. And Alan Greenspan should lock his hands behind his back.” Jan 30, 2002
“For those pessimists who say that the two-year stock-market decline signals the end of U.S. prosperity, it's time to think again. Now, if you really want to know the biggest reason for the stock-market-led business recession that came to an end last October, look no farther than the Federal Reserve. The central bank's excessively tight policy in 2000 launched a brief deflationary recession the following year. Fortunately, the Fed has since loosened up, replenishing the liquidity base of the economy and putting us back into growth mode.” March 6, 2002
“The world economic recovery is unfolding, and more stock-market gains are to come.” May 3, 2002
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Extrapolating from above, you can narrow Kudlow’s take on the economy and stock markets from 1999 to today into 3 simple points. These points, expressed in the first person, are highlighted below:
1) The United States was in, and remains in, a technology-led period of perpetual prosperity.
2) When anything goes wrong I will blame the Fed.
3) When things seem to be turning around I will claim that things are improving because the Fed and/or government finally followed my recommendations.
Suffice it to say, Kudlow’s steadfast ability to ignore reality makes him a viable candidate for Fisher’s title. Yet to qualify for Fisher status a permanent state of denial is needed. Kudlow has this covered…
Kudlow’s Current Outlook
On March 3, 2003 Kudlow argued ‘Now is the time for investors to get active’, and on March 10, 2003 he said that ‘Bush’s dividend solution fixes our deflationary problem’. Regardless of the fact that tech, not dividend paying stocks, have been leading the markets higher since March, and that deflation has yet to be beaten, Kudlow’s claim that ‘The Bush tax-cuts have set the stock market on fire’ can be argued as accurate.
Furthermore, while it is now generally accepted that the United States could benefit from a weaker dollar, Kudlow seemingly beat most to the punch on May 6, 2003:
“Not one reporter in a thousand understands that the current rising price of gold and falling dollar signal the end of deflation…an easier greenback will help exporting businesses, but it will also aid domestic companies that have been crushed by deflationary drops in their pricing power and profits.”
Before applauding Kudlow’s recent comments as prescient, it is worth noting that nearly everything he says is suspect when you take into account his previous platforms. To be sure, Kudlow’s ‘now is the time to buy stocks’ - referenced in an article entitled ‘Buy, Buy, Buy’ – comes from a man who has never said to ‘sell’ stocks. Does Mr. Kudlow simply add another ‘buy’ for every year that he is wrong about the stock markets direction?
Moreover, given previous comments Mr. Kudlow’s attack on the ‘thousands’ of reporters that failed to recognizie the wonderful attributes of a falling dollar, is, quite frankly, baffling:
“Various short-sighted Wall Street economists — along with a bunch of whining U.S. manufacturing companies and a flock of European Union central planners whose sole desire is to take America down a peg — want to see the American currency devalued. It's a terrible vision, one that must be devoutly opposed. Fortunately, the Bush administration has thus far stayed with a strong-dollar policy.” July 2001
As Mr. Kudlow conveniently morphs into a ‘short-sighted’ economist that lauds the anti-deflation advantages of a falling dollar, does anyone hear?
Notwithstanding Kudlow’s devout ability to contradict himself and make preposterous statements - perhaps being the global buyer of the last resort and/or running a massive trade deficit is important? - Larry’s current outlook is backed by everything he has dreamed for.
Mr. Supply-side Gets What He Wants
Larry Kudlow has consistently lobbied for tax cuts; he applauded Bush’s first tax cut package and now argues that Bush’s latest tax cut package is the reason why the stock markets have rallied, and one of the major reasons why stocks will continue to rally. In short, and given that US government’s precarious deficit situation, it is unlikely that even Kudlow can whine for more fiscal stimulus in the near term.
As for monetary intervention, in July 2001 Kudlow said that “the Fed must make money-market fund rates less competitive” so that “cash will be put back to work in the stock market and the economy.” Again, with the Fed likely to cut interest rates next week, Kudlow has gotten what he wanted. In fact, if the Fed cuts by 50bps it is estimated that 424 money market funds would fall into the red, and if the Fed eventually cuts interest rates by 75 bps nearly the entire money market industry would be yielding a negative return.
Are More Loans Possible?
It is becoming increasingly clear that Kudlow’s supply-side creed is nearing an endgame.
Kudlow believes fiscal and monetary stimulus actions will unite and continue to propel the stock markets higher as the economy rebounds. His sole caveat if the economy doesn’t rebound - a nonsensical caveat given that everything is yelling supply-side louder than ever before - is that the Fed didn’t print enough money:
“We must not risk another disappointment in the stock market or the economy. That would be devastating. Mr. Greenspan and all his little maestros need to pour it on. This is no time to take chances. Add more money. Do whatever it takes to get America humming again....it's up to the Fed to show us the money.” June 17, 2003
How is it possible that a supply-side utopia wields stock market ‘disappointment’? . Ironically, an obscure and insightful Kudlow quote – not Larry’s pedantic ‘the Fed must print!’ mantra - provides the answer:
‘The true cause of the recession was the stock market collapse...Companies used their share prices to back their heavy debt. However, when the stock market crashed, and their loan collateral was eviscerated, they were in big trouble. No more loans were possible, and the debt became more burdensome …collapsed stock prices gave firms nothing to fall back on.”
No more loans were possible? How can this be? Why didn’t the Fed just print more money? How is this possible Mr. Kudlow???
Suffice it to say, rather than comment on ‘no more loans possible’ (a question better left to a serious supply-side/Austrian debate) Kudlow is entranced by the quick fix. Although Kudlow begrudgingly admits that rising stock prices helped support a burgeoning, unsustainable corporate debt load yesterday, he now argues that rising stock prices are needed to add to/sustain this debt load today:
“Few people understand that the 11,000-odd publicly owned U.S. companies desperately needed a rising stock market to rebuild their credit quality and funding capabilities in order to expand operations, invest, produce more, and hire new workers…new tax cuts are combining to give investors plenty of reasons to buy shares and replenish business capital.” June 6, 2003
Has Larry been drinking again? Does Kudlow not understand that a burgeoning stock market rally also gives non profitable companies that are undeserving of capital (i.e. the latest convert craze) a lease on life which ensures the current overcapacity glut will remain? If a business can’t stay afloat and/or grow with profits (as opposed to adding more debt) how sustainable is that business?
Suffice it to say, in Kudlow-land a rising stock market cures all.
Is The Search Over?
Is Kudlow really the next Fisher – is he destined to be mocked and ridiculed by future generations once the 1990s stock market debacle has become a lesson of history rather than a grim reality of yesterday? A lot may depend on what the markets do in the coming years. However, given that his 1999 ramblings were more contrived than any in history, and that he conceives the current economic malaise not in terms of the reality that it is, but only as a symptom of interference with the future that should have been, I would speculate yes.
“…in the next ten or twenty years, the greenback — and its values of free-market economics and democratic human freedoms — could become the currency of choice throughout Russia and China, both of whom are currently linked to the dollar. This kind of dollarization would promote world peace and prosperity in ways never envisioned by even the greatest practitioners of statecraft.” Lawrence Kudlow
BWillett@fallstreet.com
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