A Bet with Mildred

It was a quiet Saturday at the office.  I was reading news and catching up on some
small things, until I got the call from Mildred. She’s a good person who worked many years in a job that helped
others. She is about to retire, and
wants to have a nice lifestyle. She does
not have enough to sit back and clip coupons, but she is also concerned about

After the initial greetings and small talk, she got around
to her reason for calling.

Mildred: I was
watching CNBC yesterday morning. Did you
watch that nice Liz Claman and her show? I really like her.

Jeff: I like her,
too. We have CNBC on one of the TV’s all
of the time. You have seen our office so
you know that. It is on “mute” with a
TIVO recorder. If there is anything
significant, we can review it. Usually
it is a distraction these days, but there are some good segments.

M: Well this show was
really good. They had on that really
smart young man, the one who talks fast and uses a lot of numbers…..

J: Lots of their
guests do that.

M: Well he was
talking about some myth – he called it the myth of the soft landing. I am really worried about what the Fed will

J:  Millie, we have gone over
this before. In twenty years, there have
been only two recessions. Meanwhile, the
GDP is up about five-fold and so is the stock market. The cold war has ended. We have free trade, helping to control
inflation. Corporate profits have been
on a tear for over three years, and the market does not reflect that. Interest rates, especially those that provide
a real alternative for your money, are still low, despite what the Fed has
done.  We like the market.

M: But this handsome
young man, Barry, explained that the Fed was trying to do the impossible. He said that a soft landing was a myth. Maybe I should be getting out of the market….

J: Do you remember 2000? We did get you out of most of your
stocks. You have been with me since 1998
and your account has nearly doubled, despite a “bubble” and a recession. The market is only up a little during the
same time.  We know how to spot trouble.

M: OK, but that was
before. You always tell me not to look
at past performance, but to look ahead. What about this soft landing? Barry was VERY persuasive. And
Liz agreed with him! She even talked
about his myth idea later. In fact, a
lot of people on CNBC talk about how the Fed will mess up the economy. Barry seems really smart.  I like him!

J: Barry is really
smart, and I like him, too. He is also a nice guy and very
hard-working. I am glad that he gets to
be on CNBC. He also got a nice mention
in Barron’s this week. He does a lot of
research and has many good ideas, but he is wrong about the “myth thing.”

M: Why do you think

J: Well first, he
said that there have been 16 Fed tightening cycles since WWII and there haven’t
been. You can count them in different
ways, using Fed funds or the discount rate, but I cannot figure out any method
that gets to 16 cycles in the post-war period. You have to go back to the Great Depression. Some of the so-called tightening cycles were
only a couple of small moves over multi-year periods. Some of them went to interest rates of 14% or
higher. Some were very fast and sharp
moves. There have been very few cases that anyone could call an attempt at  a soft landing. I
don’t know if the Fed will succeed this time, but it is not like Don Quixote.

M: That sounds so
complicated, and you won’t convince me by playing on my knowledge of literary
references. Besides, Barry explained
that on his website. He showed that the
one time it worked was really lucky. He
described it in detail — there were other factors…

J: Aha! So you do know who he is.

M: (pause) Well, yes…. I go to his website. I also read the comments. Almost all of the
people there agree with him. What does
“Booya” mean?

J: I think you might
be confusing Barry with someone else on CNBC.

M: OK, but what about
this myth?

J: How about making
one of our bets. Barry spends a lot of
time writing and he is an expert on the Fed and tightening cycles. This should be easy for him. He puts up a list of the Fed cycles,
describes each, and explains what it has to do with the later economy and the
stock market.  You will then have complete information. He has to do all three: describe, show
similarity, show results. If you are
convinced by this, you win the bet.

M: That seems like a
lot of work to ask.

J: He only has to
comment on the other Fed tightening cycles the same way he did on the one that
doesn’t fit his theory. It should not
take long for an expert.

M: What would I win?

J: I’ll play with you
in the Open Pairs at the next Regional bridge tournament, buy the entry, and
take you out for a nice dinner. [Note to
non bridge-playing readers: A lot of investors like to play  tournament bridge,
and they want to have good partners. Sometimes they hire them for a playing lesson.]

M: Hmm. That sounds good. What if I lose?

J: You have to quit
watching CNBC for a month, and also quit asking me about Barry and the other guy for
two months.

M: The other
guy? Oh, you mean that professor from
NYU who wears his tie in that stylish fashion? The one I asked you about last week?

J: I do not know if
leaving your tie undone is stylish. Sometimes
he doesn’t wear one at all. But yes, you
have to quit worrying about him for two months as well.

M: How will Barry
know that we have a bet?

J: Maybe he
won’t. That is part of your risk. He does look at my website sometimes,
stopping by to make comments. We always
appreciate it when he does that. Maybe
someone will tell him. Anyway, it is your
risk. If he does not respond and cover
all of the points, you lose.

M: What if he puts up
the list and I am convinced. Aren’t you
worried that I will move my account to him?

J: I’ll take my
chances. Let’s just focus on the bet.

M: Liz Claman thinks
he is right…..

J: I’ll take my

M:  OK.  We’re on.  Now what would you bid on this hand?  You hold Tx, AKQxxx, xxx, and KQ, both white at IMP’s.  It goes one diamond, pass, pass to you…[and thus a typical bridge conversation continued….]

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  • Barry Ritholtz September 24, 2006  

    Hey Jeff,
    Very amusing stuff —
    I didn’t say impossible, I said exceedingly rare: Over the past 16 Fed tightening regimes, there has been but one soft landing post WWII — that was in 1994.
    When asked if a recession was imminent, I also said I didn’t know — but what appears likely is a business cycle slowdown that will impact corporate revenues; Given that we are at a high in corp profits, will likely impact them also.
    PS: If Mildred thinks I”m handome — especially in the remote studio with no makeup and bad lighting — then she’s overdue for her visit to the opthamologist . . .

  • oldprof September 24, 2006  

    Thanks, Barry 🙂

  • kettle black February 21, 2007  

    i assume Mildred is a composite…but all too true depiction.
    “You have been with me since 1998 and your account has nearly doubled, despite a “bubble” and a recession. The market is only up a little during the same time.”
    I still manage my ex-gf’s 401k. When i first started July 1, 2004, it had less than $15,600. As of yesterday’s close 2/20/07 it had $48,269.92.