Yardeni - Predicting the markets: a professional autobiography

PREDICTING THE MARKETS

PREDICTING THE MARKETS

A PROFESSIONAL AUTOBIOGRAPHY

EDWARD YARDENI

Copyright 2018 Edward Yardeni

All rights reserved. No part of this book may be reproduced in any form or by any electronic or mechanical means, including information storage and retrieval systems, without permission in writing from the publisher, except by reviewers, who may quote brief passages in a review.

ISBN 978-1-948025-00-3 (Hardcover Edition)

ISBN 978-1-948025-01-0 (eBook Edition)

Library of Congress Control Number 2017919714

The author has taken all reasonable steps to provide accurate information in this book. However, no representation or warranty is made as to the fairness, accuracy, completeness, or correctness of the information and opinions contained herein. Over time, the statements made in this book may no longer be accurate, true, or otherwise correct. Over time, the authors opinions as articulated in this book may change. This book should not be relied on for investment, accounting, legal, or other professional advice. If readers desire such advice, they should consult with a qualified professional. Nothing in this bookincluding predictions, forecasts, and estimates for any and all marketsshould be construed as recommendations to buy, sell, or hold any security, including mutual funds, futures contracts, exchange-traded funds, or any other financial instruments.

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Editing by Sandra Cohan and Dania Sheldon

Front cover image by Nathalie Schueller Photography

Book design by Alex Hennig, Clear Design

Printed and bound in the United States

First printing February 2018

Published by YRI Press, a division of Yardeni Research Inc.

68 Wheatley Road

Brookville, NY, USA 11545

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To my children
Melissa, Sarah, Samuel, David, and Laura

Problems, like puzzles, are meant to be solved.

Contents

Introduction

BOOKS DONT USUALLY come with theme songs. But if I had to pick one for my professional autobiography, it would be Dont Worry, Be Happy (1988), written and sung by Bobby McFerrin. During the 40 years that I have spent on Wall Street as an economist and investment strategist, investors benefited from great bull markets in both stocks and bonds. Yet instead of being happy, it seemed to me that most investors were worried for most of that time.

Many of them found it hard to enjoy the rally in the bond market because they recalled how badly bonds had performed during the 1960s and 1970s, when inflation raged. During the subsequent great bull market in bonds, they worried that inflation would make a comeback. Instead, inflation trended lower. Consequently, the US Treasury 10-year bond yield fell from a record high of 15.84% on September 30, 1981 to a record low of 1.37% on July 8, 2016. Along the way, there were plenty of backups in bond yields, but the trends were decisively downward for interest rates and upward for bond prices.

When I started my career on Wall Street during January 1978, the Dow Jones Industrial Average was around 1000. Forty years later, it is 26 times higher, having breached 26000 in early 2018. One would think that stock investors during those years would have been euphoric. Most seldom were, because four significant bear markets along the way triggered excessive pessimism. Many investors sold in fear at the bottom of the bear markets and ventured back into the stock market only after watching stocks ascend for sufficient time to repair their shattered confidencei.e., just in time for the next bear market! In the words of Bobby McFerrin:

In your life, expect some trouble;
When you worry, you make it double

Such emotionally driven market timing would surely cause one to conclude that investing in stocks is for suckers. However, when the pessimists sold near the bottoms, they created lots of buying opportunities for the optimists.

Fortuitously, during these two coincident great bull markets in bonds and stocks, I was bullish most of the time, especially when most investors and prognosticators were extremely gloomy. Admittedly, there were times when I should have been bearish, or more bearish. In my meetings with investors, I usually warned them that I tend to be an optimist, because I had a happy childhood. In any event, for most investors, getting the bullish long-term trend right and seizing opportunities to buy has been a winning strategy for many years. It certainly has been a long good buy for stock and bond investors, as I frequently predicted.

Will this strategy continue to work? If youre sitting on a pile of bonds and stocks, should you hang on? Or should you heed the warning included in every mutual fund prospectus and investment disclosure document: Past performance is no guarantee of future returns? In other words, extrapolating past happy returns into the future could be harmful to your financial health.

I hope that my experiences on Wall Street, which this book is all about, might help guide your investment decisions with a better understanding of financial markets. The first chapter is Predicting the Past, while the final chapter is Predicting the Future. In between, I discuss all the lessons I have learned over the past four decades about forecasting the economy and financial markets. My major conclusion is that while there will always be plenty of worries requiring our attention, the next four decades should bring happy returns to investors who correctly predict the major long-term trends and use any setbacks along the way as buying opportunities.

If you are an individual investor, professional money manager, investment adviser, financial analyst, business executive, or small business owner, you should find much of interest in my book. Students of economics, finance, accounting, and business will be able to apply many of the lessons Ive learned to their own careers. Anyone studying to become a Chartered Financial Analyst will find my book helpful as well. Academics should find value in my real-world analysis, which will stimulate a better understanding of economics and finance among their students. Ive written this book to be as relevant as possible to what most of you do or will be doing soon.

More broadly, though, Ive written this book for everyone. Economics professors teach their students majoring in the subject to be academics and policymakers who go on to formulate theories and make decisions that impact all of society. One of my aims with this book is to show how economics is vitally important to all of us, because we all are affected by the theories of professors and the decisions of policymakers. We can all benefit from a better understanding of the forces that shape our financial lives.

When Ben Bernanke was a Fed governor, he said, A part of monetary policymaking for which my background left me imperfectly prepared is what central bankers call current analysis...[which]...is not taught in graduate school, probably for good reason; it seems more amenable to on-the-job training.... It is, nevertheless, an intellectually challenging activity. He added that current analysis is about getting an accurate assessment of the current economic situation, requiring a deep knowledge of the data mixed with a goodly dose of economic theory and economic judgment.