Irwin Kellner Alert

The Marketwatch website provides a lot of useful basic information and commentary from various sources.  You can get email updates — a nice feature.

In a break from my travels, I see updates on Irwin Kellner’s commentary, articles widely read by individual investors.

The startling news in one of his columns is that we face hard times even if we have a "soft landing" referred to at "A Dash" as the Glide Path.

I do not know why Kellner’s mission in life is to scare the daylights out of investors, but let’s take a look at his analysis.  It is typical of the kind of "research" that we think needs some peer review.

He makes this statement about Fed tightening cycles:

All recessions that have occurred since 1970 followed periods in which
the Fed was actively tightening money. And all tightening cycles except
two have produced a recession within at least two years after they
ended.

Please note that he does not provide information on the following:

• How many Fed tightening cylces there have been since 1970.
• What the stock market returns have been after these cycles.
• Why the two that he views as exceptions might be exceptions.

There have only been five recessions in that period, which you can verify easily from the National Bureau of Economic Research.

You can look at the Fed tightening cycles from our earlier posts, and check the market returns.  Please look carefully at the table.

Kellner says that the two "soft landings" in 1983-84 and 1994-95 led to "plenty of pain."  His evidence for this is a laundry list of crises and bankruptcies.

This technique of listing crises and saying they happened "after a Fed tightening" or some other event is one of the worst logical fallacies.  Post hoc ergo propter hoc.  You could just as well list sunspot activity, Yankee pennant victories, or U.S military interventions.  There is no effort at doing a careful causal analysis.

If you look carefully at the table of Fed tightening cycles since 1970, a logical conclusion might be that when the Fed increases rates to 13 or 14% it is not a very good situation for stocks.  Otherwise, it has been, on average, an excellent investment chance when the cycle ends.

If you worried about the Kellner warning after the Glide Path results in 84-85 or 94-95 you would have been sitting out the best bull market runs.

If you look carefully at the NBER recession data, you will see that recessions have been shorter and growth periods have been longer in recent times.  Perhaps we are doing something right with the economy.

Readers of popular market pundits need to have an independent source of checking facts and interpretation.  The laundry list approach looks scary, but is rarely helpful.