Paul points us to this Bloomberg interview with ISI economist Ed Hyman. Funny, we were just discussing Ed in the office yesterday. He sees the economy slowing, but does not forecast a recession; Hyman also expects the Fed to eventually take rates down to 4%.
That is not quite our forecast. We see the economy continuing to slow, and a better than even money chance that we slip into a recession (How mild or strong is anyone’s guess).
However, given Hyman’s historical track record — he’s been the #1 ranked economist by Institutional Investor for the past 23 years — he is not a guy you really want to bet against.
click for video
Nassim Taleb would say that he has merely been lucky for the past 23 years :-)
That’s the problem with the efficient market hypothesis, or Fooled by Randomness — it simply does not allow for outlier performance by guys like Hyman, or Warren Buffett or George Soros or Jim Simons.
…or Ed Seykota.
On what are the Institutional Investor rankings based?
Bloomberg does a ranking based on forecasting accuracy for growth, inflation and (I think) interest rates. There are repeat winners, but never a string as long as in the II series.
Which makes me think that it is some more consistent difference between Hyman and others that has allowed him his magnificent string. Like clarity of presentation, for instance. Now, clarity of presentation serves to make one’s errors unambiguous, so Hyman must be doing more than just presenting clearly, but the odds are very much against him having the best forecast of anything but his own vacation plans for 23 straight years.
If the II result is a popularity contest, not an accuracy contest, then Hyman’s strign does nothing to undermine the efficient markets hypothesis. I’m not entirely sure that Buffet, Soros or Simon provde serious problems for the weak form of efficient markets, either.
Though the odds against any one person are many millions to one; some poor, beer-swilling, slack-jawed yokel has to win every lottery.
I guess I’d rather be lucky than good…
I’ve known Ed Hyman since 1978. He is simply the best. I had the misfortune of ‘betting’ against him on two occasions, 1982 and 1990. I lost both times! Ed is not a hard money man as he realizes the game is rigged. My opinion of his view is that in the long run, stocks are a hedge against the deflation of buying power in whatever currency.
Hyman’s position seems to be that the US business cycle will prove more influential and force the credit cycle to resynchronize. I’d agree except I think the credit cycle is now globally hinged so if other economies cool the US is not going to do well either. Ah well, that’s what makes horse races; thanks for providing the video.
PS: While I am hardly a devote I don’t think the efficient market hypothesis, in its weak form at least, forbids outliers even for extended periods of time; as I understand it at least, it essentially states there is no evidence that could reliably confirm any person or trend will remain in a particular outlying position.
Ed Hyman has called it right numerous times, so I certainly agree that this forecast is noteworthy. He has built up a reputation for being good at this, and it isn’t all luck.
What happens to the dollar ? That seems to be the wild card.
Even the greats can be wrong.
“We will not have any more crashes in our time.”
– John Maynard Keynes in 1927
Thanks for posting – very well worth listening to as he’s very calm and judicious. The important thing though is not the non-R outlook but the sustained slowing going to 2% to 1% or less with a possible/probably pickup late in ’08. That’s a growth recession and Ed is now one of the first headline economists to make that call (notice that prior to mid-Jul it was all Goldie all the time). Also notice that his forecast (the vid is kinda long but the keys are covered early)matches Roubini’s from much earlier this year as well as Kasriel’s. Nouriel is a great canary but Paul is very well grounded. IF you’d care to see the slowing in chart form may I point you to some of mine ala Ellis’ “Ahead of the Curve” approach: http://llinlithgow.com/bizzX/2007/07/reality_checks_the_latest_gdp.html and http://llinlithgow.com/bizzX/2007/07/foggy_market_breakdown_gdp_com.html
The other interesting thing is his take on the market picking up which requires that a) the market be a leading indicator and b) no more structured debt problems. But we’re just starting into the ARM resets and sub-primes are not the only asset class likely to be in trouble.
Housing, housing, housing, housing, housing…
That is the biggest risk to the economy.
So for crying out loud why didn’t they ask him about housing?
Hyman’s interview caused me to seriously re-evaluate my own feeling that there will probably be a recession. I don’t see how you can have the destruction of so much real estate wealth and not have an impact on consumer spending. I also notice that the yield curve has moved from flat / slightly inverted to upward sloping. That is also foreshadowing stronger growth.
Off-balance sheet sewage is slowly and insidiously backing up the world’s financial toilet. It’s as simple as that. Watch and wait.
Also notice that his forecast matches Roubini’s from much earlier this year
Not even close. Roubini predicted we’d be in a recession by Q1 of 2007, Q2 at the latest.
“Nassim Taleb would say that he has merely been lucky for the past 23 years”
Having read Taleb’s books, I’m not sure he would necessarily make that statement. I think, more likely, it would be “it’s possible he has merely been lucky for the past 23 years”. People like to ascribe skill to outlier outcomes when, in reality, blind luck is often the driver behind them (but, perhaps, not always!). In other words, outlier performances always happen for a reason, except when they don’t.
The problem, of course, is how do you know which is which, and can you even know that?
The catch in the EMH is that it contends there is no “systematic” way to outperform the market averages. Numerous academic studies have shown this to be unambiguously true. But that doesn’t mean the market can’t be beaten…you just have to continually come up with new “systems.” In other words, you have to be able to adapt to different market environments.
FED cuts and money moves into the stock market creating the wealth effect, seems pretty straight forward. J6P is betting on his house which is in a deflation mode, and further this is not the 70’s or 80’s boomers are hitting 55 in large numbers not 35, creates a completly different economy.
OT: If anyone has the slightest inclination, I’d be interested in a deconstruction of the reported decrease in poverty in the U.S. announced a couple of days ago.
Excellent interview, smart feller. Interesting that he has the fed funds down to 4 but the ten year yield only falling to 4.3, undoing the ongoing condundrum. With respect to housing, makes for building a nice rebuild with lower rates. All in all a pretty Rosey Scenario, which is likely to happen unless we all happen to spot a black swan….
Barry, any comment on Bernake’s new mortgages commment? Seems he wants a backup plan of throwing mortgage loans out of the helicopter to supplement the money he’ll throw……
Lewis
“That’s the problem with the efficient market hypothesis, or Fooled by Randomness — it simply does not allow for outlier performance by guys like Hyman, or Warren Buffett or George Soros or Jim Simons.”
Barry, the efficient market hypothesis allows for outliers. It just would say you can’t predict which people are going to be the outliers ahead of time.
The only question I have is how many recessions has Hyman accurately predicted over the last 23 years?
“I also notice that the yield curve has moved from flat / slightly inverted to upward sloping. That is also foreshadowing stronger growth.”
it’s also foreshadowing multiple rate cuts in the fed funds rate-
That entire interview and not a single mention of housing and it’s impact on the consumer? The Fed will just cut rates and everything is off to the races after a couple more months of a slowdown?? I think he is being way too optimistic IMHO….
I’ve known Ed since 1974 when he first came on the street peddling linked earnings models.
His reputation is not based on his forecasting record alone — although it is as good or better than anyone else. But he has never seen an interest rates that wasn’t about to fall. Rather his reputation is based on his unique chart package that provides so many different ideas and discussion points. He will be the first to admit that what he is doing is looking for ways to tease extreme ideas out of the data — but taking that the second step and using these insights to understand the economy is what makes him unique.
the Institutional Investor ranking is largely a popularly contest not a review of actual records. Many people will vote for him without knowing what his detailed forecast actually is.
4-percent GDP; “Core” inflation CPI still well above the 1 to 2 percent target traditionally seen as within the Fed’s comfort level. The stock market is near its “all-time high.” Lower dollar and large national debt. The unemployment rate near “all-time lows.” Productivity is lower and wages are rising, it all spells; Inflation- Inflation- Inflation- Inflation.
If The Fed Cuts Interest Rates, They Will Be Doing It For Kudlow & Kramer.
“If thou wilt lend this money, lend it not
As to thy friends; for when did friendship take, A breed for barren metal of his friend?”
The Merchant of Venice- William Shakespeare
I have followed Ed Hyman since the late ‘90s and have met with him on several occasions. He is great at sizing up the current economy. His projections have always left something to be desired. ISI used to be strictly a bond management firm. They have gotten into the stock side. Hyman sounded more like a market strategist like Abby Cohen than an economist calling for the stock market to rally sharply. He may be right but stock market calls are certainly not his domain. Even Warren Buffett is smart enough not to make stock market calls.
zero529,
While not a thorough deconstruction, here is an interesting take on poverty from a couple days ago which incorporates the effect of anti-poverty programs:
http://tinyurl.com/yvvf5r
Interestingly enough, when Census Bureau data is considered, the poverty rate is actually lower than reported.
If the economy’s slowing but not going into a recession, then why the hell would the Fed cut the rate 1.25%? What’s Hyman’s rationale for that?
Bill Gross, in his roundtable appearance in Barron’s at the end of 2006, predicted rates were going to go down drastically for 2007. At the time I knew very little about Bill Gross, but what I did know was that rates were NOT going to go down. I called shenanigans on Bill Gross last year, and I’m calling shenanigans on Hyman now (a person whom I know of only by you’ve told me about him thus far in this article).
My humble prediction: Bernanke either leaves rates unchanged through the end of the year, or he capitulates ever-so-slightly down to 5% – and not a quarter point more. The only way I see Hyman’s prediction coming through is from what Pool Shark said in an earlier comment – the game is completely rigged. Even so, to lower rates now is to lose an incredible amount of credibility with too many important people – namely, those who buy our debts…
Isn’t the change in the yield curve being driven by short-term panic pushing down short-term yields? How do you justify claiming that such an environment is forecasting growth? An upward sloping yield curve normally means that banks can make money by making long-term loans (which provides the capital needed for growth). Right now it means the banks are scared to make loans of any sort. The drop in short-term rates is forecasting serious economic problems. The slower dropping of long rates is forecasting inflation.
There is no way the Fed can cut rates without creating massive amounts of inflation. We are too dependent on imports. If the Fed cuts, it drives down growth (at least in the short run) because nobody will have free money to spend and it also drives up inflation. It is a lose-lose proposition.
He may have a great track record, but what happens when he’s finally wrong?
You guessed it.
He’ll be nothing more than a broken Hyman.
Sounds very similar to the ERCI guys.
Bullish.
So, Ed Hyman agrees that the economy is slowing. I think he is saying “”Stagflation”” is in the outlook!
“Stagflation” occurs when the economy isn’t growing but inflation is. Hyman agrees this situation is similar what occurred during the 1970s, when gas prices rose dramatically, and its spillover inflationary effects.
Thus, I concure that “stagflation” will emerge. This poses a tough challenge to the Fed bankers as they consider how not to ‘lower’ interest rates.
“What’s in a name? That which we call a rose; By any other name would smell as sweet.” Shakespeare
The point: “Stagflation that’s put to use more stagflation begets.”
David…are you familiar with TIPS?
They are projecting a 2.19% 10 year CPI.
eponymousLTC,
You are so right! I’ve bookmarked your blog, btw; good luck!
His call seems to be that the Fed cuts rates to 4% to save the market. How does he square this with his call that inflation will be tame for 2 to 3 years even while growth is picking up?
I find it hard to believe a forecast that pins everything on the Fed. The Fed has much less power than it is given credit for. It can not solve an insolvency crisis through lower rates.
“Hyman, the top-rated economist on Wall Street by Institutional Investor for the past 27 years, predicted a “better economy next year,” with stocks and Treasury yields rising. In the meantime, slacker growth will “put inflation aside” as a concern for the Fed, he added.”
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aYmu27w3_3aM