Wall Street Bubble? Jude Wanniski February 12, 1997

Memo To: Jonathan Fuerbringer, NYTimes financial reporter
From: Jude Wanniski
Re: Your 2/11 stock market story

Congratulations on your piece, "New Era For Taking Market's Pulse," in Tuesday's Times. It doesn't have all the answers, but it is the first serious effort in the popular press to get a handle on the debate over stock valuations between the New Era group and the traditionalists. It was especially smart to focus on Byron Wien as the traditionalist, as the Wall Street universe is well aware of his problems in figuring out the market, and Byron has been humbled enough to now tell you publicly that the world may have passed him by. I've known and liked Byron for all the years of his traditionalism, but it has long been obvious to me that his trusty old model was obsolete. The same thing happened to Henry Kaufman in 1982, when he continued forecasting doom during the early stages of the market boom in stocks and bonds. A simple tradeoff between bond yields and equity values can only work 50% of the time at best. When you are in an environment characterized by a gradual reduction of risk in holding any dollar assets, the relationship becomes even more unreliable. At least you got Byron to tell you what goes on inside his head that has propelled him on the forecasting roller-coaster of the past year. You can see he is betting on a 1000-point drop in the Dow as soon as the Fed raises interest rates to slow the economy, which I've been advising my clients will not happen. A year ago, we forecast a DJIA over 6000 by year's end, simply based on our reading of the political dynamics of the year. This year, on January 2, we forecast a DJIA of at least 7400, on the assumption that the divided government would be harmonious enough to pass a budget with a capital gains tax cut — which would enable the economy to expand without an increase in interest rates. By the way, on Jan. 2, when the average forecast of the dollar/yen rate among blue-chip economists was 112 for the year, we said it would hit 130.

There is no model that enables a forecaster to be correct year in and year out. The only truth is that change is perpetual, and if you want to keep from being obsolete in your own life career, you have to tell yourself every morning, as you get ready for the day, that you have never seen the likes of what is coming. A stopped clock is right twice a day, which is how a lot of people made their reputations on Wall Street, until they could not even get it right that often. Did you ever read Chapter Seven of The Way the World Works? In it, I describe in detail how the market crashed in 1929 because of the switching of Senate votes on the Smoot-Hawley Tariff Act. Would the market crash now if tariffs were raised? That would depend on a lot of other things, but I would not be surprised under certain circumstances if the market found higher tariffs okay. I'm not arguing for them, understand, but just making the point that you can't count on any single thing being determinative in a world that changes every day. Dogma is death in financial analysis.