Ed Yardeni

Ed Yardeni
Ed Yardeni is one of the most prominent economists in the industry, both in terms of his acute analysis and his provocative manner. We highly recommend that Briefing.com readers take advantage of any possible opportunity to hear him speak. Whether you agree with his analysis or not, we think you will find his analysis stimulating and his style enjoyable.

Mr. Yardeni spoke to the Boston Economic Club on October 31, 2007. On the morning of that day, it was announced that third quarter GDP grew 3.9 percent, but the Federal Reserve Board had not yet made its policy decision public.

The topic of the luncheon was "Gloom or Doom?" Mr. Yardeni began his speech by stating he would choose "gloom," given this choice, but the overall tone of his talk was extremely positive.

Here is a brief summary of some of the points made by Mr. Yardeni in his talk. Statements in quotation marks are exact quotes from Mr. Yardeni, to the best of our note taking ability.

Doom is not imminent because the end of a bubble is always marked by excesses.
We are currently experiencing the peak of a great boom, and there are issues, since much of the boom has been financed by too much liquidity, too much debt, and too much borrowing. There has been a bubble in asset prices, but prices paid by markets for securities have not risen to levels of excess necessary to categorize current conditions as a "bubble" about to burst.

Mr. Yardeni felt strongly that the current expansion in the U.S. economy, and the global economy, is likely to be sustained for "some time." Severe economic collapse is not around the corner.

The subprime housing crisis is not a significant issue in the long term.
16 million homes have been built since 2000, about 14 percent of total stock, with one-quarter of them (4 million) financed by subprime no-doc loans, with half of those likely to default. This totals only 2 million homes across the country and is not a large enough factor to draw the entire economy down.

In fact, the homeowners who lost their homes will simply go back to being renters, which benefits landlord-homeowners. "Housing will hit a bottom, but who cares?"

The economic boom of the last 20 years is directly related to the end of the Cold War and the resulting increase in free trade.
The Cold War, like all wars, can be viewed economically as "trade restrictions," since enemies do not trade with each other. With the collapse of the Soviet Union, free trade between the West and countries previously behind the Iron Curtain has had a significant impact on increasing the standard of living for both the West and former communist countries.

An additional factor in the global 20 year boom is the increase in productivity, from technological and efficiency advances.
Advances in technology and efficiency techniques have had a dramatic impact on economic growth. Where emerging countries used to grow by supplying cheap labor, emerging countries will continue to grow by applying productivity and technology advances. The productivity advances in developed countries have been significant in the past 20 years, but they haven't even begun in many emerging economies.

Energy stocks have been the best performing stocks over the past 20 years as a result of the global boom.
The simple reason: as people prosper, they consume more gasoline and energy. As substantiation, Mr. Yardeni pointed to the fact that there are no more bicycle factories in China. They have been converted to manufacturing scooters and motorcycles.

Inflation is virtually dead, with the exclusion of food and energy.
While food and energy are experiencing strong inflationary pressure, there is virtually no inflation in other sectors. Mr. Yardeni declared inflation "dead." Emerging countries embracement of productivity advances will be the driving force keeping inflation low.

Recessions are not inevitable. They are generated by policy and the current Federal Reserve will prevent recession.
In the past, recessions were engineered by central banks to quell inflation. He saw no meaningful reason for the U.S. to want a recession anytime soon. In fact, he stated that the pattern of the Bernanke Federal Reserve makes it clear that their intent is to avoid a recession. The Fed "has decided that we just cannot have a recession."

Tax cuts by the current Bush administration have had a significant positive impact on the U.S. economy in the past seven years.
Mr. Yardeni faulted the current administration for not promoting this achievement more significantly, but he praised them for the positive, unheralded positive impact they have had. He also strongly criticized the recent tax proposals put forth by Representative Charles Rangel.

Earnings growth over the past several years has not been given its proper attention.
"If you take out homebuilders and financial stocks, earnings are up 10 percent." Adding to growth in earnings-per-share has been the substantial buyback programs over recent years. Total shares outstanding (of all companies) is down 2 percent (the time period for this decline was not clear).

The consumer is alive and well and not likely to stop spending anytime soon.
Mr. Yardeni spent a great deal of time debunking the idea that consumer spending will lose its strong growth rate. Such an argument is usually based on the idea that consumer spending is entirely based upon the idea that the consumer has borrowed heavily to finance spending and is near the end of their borrowing ability.

Mr. Yardeni attributed consumer spending strength to productivity enhancements. His focus is on the "real pay-for-work" metric, which is part of the consumer spending analysis. This metric measures after-inflation payment received by workers on a unitized basis. The trend in real pay-for-work since 1995 has been 3 percent annual increases, exactly matching the 3 percent trend in productivity over the same time period.

Mr. Yardeni advocates continued economic growth, but his views are based upon the idea that economic growth comes from free trade, low taxation, and an embrace of open market philosophies. While not explicitly expressing a caveat that his positive outlook was based upon continued expansion of free trade and an environment without raised taxes, it was clear that Mr. Yardeni would likely change his optimistic view if the legislature moves to restrict free trade or increase taxes.

Mr. Yardeni also predicted (correctly, it turned out) that the Federal Reserve would cut rates by 25 basis points later that day. If not, he said, the markets would force them to cut rates by 50 basis points by Friday (today).

Mr. Yardeni also expressed an opinion that he felt Mrs. Clinton's campaign for the presidency would not be successful.

On political issues, however, it pays to be a little more cautious with Mr. Yardeni's views. He stated that his approach to dealing with Iran was simple: destroy their gasoline refineries with a single preemptive strike. The refineries in Iran create gasoline for their own internal use and without this key energy resource, the Iranians would be forced to negotiate with Western nations on any and all other subjects, including nuclear arms.