Larry Kudlow Asks the Wrong Question
What questions are crucial for the individual investor?
My own nominations would emphasize long-term family needs, risk tolerance, and current asset allocation. These questions have a common theme — people know the answers from their own experience and they can answer intelligently.
Tonight I looked forward to a great Kudlow interview with one of my favorite sources, Laurence Meyer (former Fed Governor and author of one of our favorite recommended books).
I was swiftly disappointed when Kudlow asked the following question:
What one or two things should the average investor be focused on to make the recession call for themselves?
This is a loaded question for the guest who responded as follows:
Economists always should and usually do resist telling people there is one thing they should look at…..We are looking at things like a further flare-up in Europe… not just data.
Kudlow inquires about telltale signs — including more leading questions about weak data– and he seems to get an affirmative answer. Then Meyer surprises him. He explains the need for a counterfactual in analyzing the effect of policy and asserts that QE 1 and QE2 were very successful — creating three million jobs.
When asked for his own recession forecast, Meyer is pretty much in the mainstream.
It is a close call…The economy will rebound in the last half of the year, but grow very slowly…..below trend, not sufficient to reduce the unemployment rate. That is a grim forecast already, and there is a serious risk, maybe one in three, that we'll slip into a recession.
Is there an inflation problem?
Core inflation is up 2.5% over the first half of the year, taking room away from the Fed. It has reduced the potential for another QE.
The Meyer answers were honest — check out the whole interview — but the overall impression is misleading, especially for the average investor.
Regular readers know that I like the Kudlow show and I really like Larry Meyer. What went wrong?
The worst single question is the following:
What is the chance of a recession?
Here is why this is a bad question:
- The difference between "official" recession forecasts and the general perception is a "ratings question." Everyone already knows that average people think we are in a recession or never came out of one. Economists have a strict definition to assist reserach analysis. Asking everyone their odds on recession, whether they know anything or not, just fans the flames. Everyone knows that the economy has never recovered "trend growth" and that it feels bad for most. The average respondent enjoys saying that professors are stupid.
- None of the recession forecasts (including this one) have a time frame.
- The "perceived" idea of a recession invokes 2008 — not the typical setback, but an extreme case.
- Recessions are not properly linked to the equity market in terms of expectations. There is evidence that stock prices already incorporate some very pessimistic assumptions about earnings.
- Recession forecasts are only loosely linked to future earnings — nothing data-based.
Larry Kudlow had a great guest, who can help all of us understand the Fed and the likely path of the economy. Asking Meyer to provide an individual guide to recessions is a waste of a good expert.
One reason for pointing this out is that we see it over and over. Interviewers have a chance to elicit relevant new information, but instead ask tired and unhelpful questions.