‘New Wave’ Economist a Bright Light on Often-Gloomy Wall St. : Investment: Although Prudential-Bache’s Edward Yardeni has begun sounding cautious, he still has a core of optimism.
Economists are reputed to be a gloomy lot. The standard economic essay today is more than likely to mention America’s fatal (fill in the blank: competitiveness, inflation, savings rates, cost of capital, etc.).
A notable exception has been Prudential-Bache’s Edward Yardeni, who has spent three years churning out one essay after another on “New Wave economics”--economics based on a premise that the business cycle, with its inevitable downturn, is no longer relevant.
And during the past three years, he has been right. America’s economy has shrugged off natural disasters, market meltdowns and government fiscal deceit without falling off a cliff.
Recently, though, Yardeni began sounding cautious. “I guess I’m more balanced now than I have been for the past two years,” he said during an interview at his office in lower Manhattan.
America’s messy financial system has become one major problem, he said, in an opinion shared widely by others. Another concern is the growing U.S. dependence on foreign oil. Energy anxiety has commonly been relegated to the storeroom of 1970s nightmares, along with discos and leisure suits. But Yardeni said that may be premature.
Domestic petroleum production has collapsed in the past five years, from almost 9 million barrels a day in 1985 to just above 1 million barrels a day currently, Yardeni said. That leaves the United States increasingly dependent on Middle East countries willing to ignore rational laws of economics and free trade in favor of political intrigue.
Despite these worries, Yardeni retains a core optimism. It is based on the premise that most of the world has become increasingly rational about economic demands. Markets have become more efficient and forced government to be more responsive. Even before the Berlin Wall came tumbling down, Yardeni had concluded that capitalism had won and, as a result, that self-repairing, growing economies were more likely both here and abroad.
His confidence stands out on Wall Street, where an optimistic forecast may cover the next few minutes or hours, but seldom years or decades. “Right now we are in the process of people giving up on the long term,” Yardeni said. But he has not. A 5,000 Dow Jones industrial index (it’s now just under 2,700) and 30-year Treasury bond yielding 5% (now about 8.6%) are feasible by 1993, he said. “I think the 1990s will be as good for investors as the 1980s were.”
In a report issued in late 1988 summing up many of his broader ideas, Yardeni wrote the “New Wave Manifesto,” a thesis based on the premise that certain trends in the economy were fundamentally both positive and powerful. He concluded that the harvest-drought theory of economic cycles dating back to Biblical times, along with the more modern corollaries like 50-year Kondratieff models and Elliott waves, are overly rigid and simplistic. They forecast predetermined time frames for success and failure, ignoring changes in the economy itself.
Moreover, he dismisses forecasts of American decline based on more fundamental problems, such as a shrinking industrial base, vast debt and unsustainable military obligations.
“The hysterics,” he said, are based “on backward-looking stuff. There are problems, but they are exaggerated.”
Of greater consequence, Yardeni asserted, are emerging demographic and sociological factors, including an aging population, diversifying economy and converging, market-oriented world. He was one the originators, if not the originator, of the rolling-recession theory, which contends that instead of a broad, 1930s-style Depression, different sectors of the economy decline and rise at different times.
Currently, for instance, Wall Street and Detroit are skidding -- an occurrence that in prior years would signal a general slowdown. But this time, a resurgence in agriculture and energy, the depressed sectors of the mid-1980s, have rebounded, helping to push the overall U.S. economy toward modest growth.
Not everyone on Wall Street believes that problems in one area or sector of the country will be offset by another. Said economist and unrepentant bear A. Gary Shilling: “Some believe that we will have a rolling recession. . . .But the many problems may now be rolling downhill into one big snowball.”
Even in acknowledged disasters, Yardeni has tended to discern elements of promise. For instance, although the deregulation of the financial markets has caused vexing problems, he contends that it has also done some good. In the past, recessions would often be preceded by a credit crunch, as rising rates would draw deposits outside of the banking system. That ceased to be true in 1980, with the elimination of interest caps. Recent problems notwithstanding, credit continues to be available to high-quality borrowers, he said.
Meanwhile, American demographics have begun to change, transforming a population of young spenders to older savers. That will likely reduce the rate of growth in debt, as well as improve funding of existing obligations. Evidence of this idea, articulated by Yardeni several years ago, has finally emerged. Aggregate U.S. savings began rising in late 1987, reversing a decade’s decline.
Industrial management has spread internationally, diluting any one country’s advantage. The U.S. auto industry is losing market share, but the successful Japanese companies are building plants here, and have already begun exporting back to Japan, helping the trade deficit. Congress may fight to protect U.S. aerospace interests by limiting a cooperative Japanese-American fighter jet program, but at the same time Boeing and other foreign companies are striking deals to jointly develop new-model planes.
The result, Yardeni said, is that the next century will not belong to any country, as eras did in the past. Some countries will begin to save more, others spend more, depending on what they require. Trade will expand worldwide, and with it worldwide affluence, he said. Adam Smith, from whom Yardeni openly borrows, will finally come into his own as global self-interest stimulates a pervasive wealth of nations.
“It will be the New Wave century,” Yardeni asserted in 1988, and continues to believe today. “There won’t be one pre-eminent economic superpower. Rather, the world will include many highly competitive capitalist economies, all prospering together.”
