Who is the real “Doctor Doom?”

Henry Kaufman, President of Henry Kaufman and Company, Inc., speaks at the December 10, 2008.
REUTERS/Brendan McDermid

Why, it is none other than Henry Kaufman, former chief economist at Salomon Brothers, after a long repose out of the limelight. Not only is he back, but he is loaded for bear … he ”…Sees Danger in the Markets and Economy.” (you need WSJ or Barron’s subscription to view). Who better than Barron’s columnist Randall Forsyth to point out this old, but not forgotten market maven. My guess is most people reading this post will not remember Kaufman. I was 29 in 1975. Kaufman had been an investment fixture since early in the 70s … prominent as a forecaster of much higher inflation and interest rates. The Street absolutely hung on his every word. He was the original Dr. Doom, not to be confused with his more contemporary namesakes, Marc Faber or Nouriel Roubini.

The secular bear market that took hold of the index in 1966  (near  DJIA 1000) bottomed in the fall of 1974 breaking below 600 on the industrials for a brief period. The Dow over the next five years gained more than 50%, closing 1980  at 963.59. This was all during a period of rising inflation and interest rates. The ‘bond vigilantes,’ because of inflation and government deficits (minuscule compare to anything we are experiencing today), were constant sellers of fixed income securities. Henry Kaufman was leading the posse. Inflation kept running in part due to exogenous factors, in particular sharply rising energy prices and concomitant rising inflationary expectations. Even though the market had risen 50% off the lows the bearish narrative continued loud and clear.

Paul Volcker, 1986
M. Reinstein, Almay

That bearish narrative never vanished but the interest rates and inflation expectation did when the Fed chair Paul Volcker took rates thru the roof. The 10 year Treasury traded to a 15.84% yield in 1981. The US entered a recession  because the Fed aggressively move to slow the economy by raising rates. Inflation fever broke and the 10-year began the long and arduous path to the 4/10 of 1 percent yield that we saw last spring. Henry Kaufman turned positive on bonds August 17, 1982.  That day the Dow surged 28.81 points to close at 831.24.  The rest is history.

Since then it’s been crickets from Dr. Doom until recently. He has written a book, The Day the Markets Roared. BTW Kaufman said to buy BONDS (not stocks) in his 1982 epiphany while stocks were at the beginning of 18 year run that would eclipse the bond market completely. At the time the 10 year US treasury note was still trading with a yield above 12% (obviously not a good time to buy stocks).

This is where the good news story ends. The rest of the article gets back to Forsyth’s stock and trade …  making investors fearful. He quotes the 93-year-old economist ticking off a list of things that Mr.Kaufman is worried about (obviously, things Mr. Forsyth thinks should be concerning to you and me) including:

”...Kaufman sees a dangerous dependency on the Fed in financial markets, economic policy, and politics.”

 Actually, this kind of worries me too. I just don’t know when the right time is for this to be an overwhelming concern.

What would worry me more?–the return of irrational exuberance.

Yes, there are pockets of this in today’s market but most investors are nowhere near to drinking the Kool-Aid by broadly embracing the stock market. There is broad skepticism afoot. Just looking at the reader comments to Forsyth’s article (I went through about the first 10. Most were in line with the author) there was no push back on the negatives.

A look backward … my advice at the bottom of the Covid-19 Crash - March 19, 2020

The goal of my articles is to provide perspective and common sense reasoning as a balance against the continuing media/ pundit flood of hype, fear and uninformed (or self-serving) opinion. Take a look back at what I wrote last March in the midst of the panic in my article “A Postcard From The Bunker.”

Did we deliver?