. 2021. Henry Kaufman with David B. Sicilia. Matt Holt Books.
The title of Henry KaufmanKaufman’s latest book focuses on a single date, August 17, 1982, however the content is far broader. Kaufman tells his personal story, from escaping Nazi terror together with his family in 1937 at age nine to his years as head of research at Salomon Brothers. Towards the tip of the amount, he discusses the impact of the COVID-19 pandemic available on the market.
Written in collaboration with the economic historian of the University of Maryland David SicilyKaufman shows that he was an innovator within the evaluation of monetary markets, as highlighted by his pioneering use of capital flow data to supply rate of interest forecasts.
Embedded on this narrative, Kaufman argues that Wall Street’s move away from partnerships and toward corporations has undermined the independence of research. He also laments the increasing concentration of the U.S. financial industry. Between 1990 and 2000, he reports, the share of monetary assets held by the highest 10 financial institutions rose from about 10% to no less than 80%. Other trends that worry him include the declining creditworthiness of firms and the widespread redefinition of liquidity from holding assets which can be easily convertible into money to the power to borrow. Along the best way, there’s a reckoning with the late Salomon Brothers chairman, John Gutfreund, and a prediction that rankings agencies will downgrade the U.S. government.
The heart of the book, nevertheless, is a recap of the day when Henry Kaufman’s revision to his rate of interest outlook sparked the largest one-day rise within the S&P 500 Index and the DJIA up to now. He had previously been dubbed “America’s Interest Rate Guru” by the American Journal of Investing and apparently “Dr. Doom” by the American Journal of Investing. Kaufman describes this nickname as “for those who don’t have the patience to work through one of the more comprehensive works.” The first nickname recognized his immense influence amongst institutional investors, while the second mocked him for stubbornly sticking to his view that growing government deficits would proceed to drive rates of interest higher. His determination also led to death threats. Kaufman’s name was on a listing of distinguished figures apparently targeted for assassination by a terrorist arrested by the FBI.
As Kaufman freely admits, the rate of interest trend had been positive for ten months before his change after all, sending the markets right into a frenzy. No other news on August 17, 1982 could explain the spectacular rally of that day. Prices rose essentially on the premise of nothing that might be called information within the strict sense of monetary economics. The only thing that modified was one man’s opinion on already known facts.1 In short, this event is an anomaly of the efficient market hypothesis (EMH).2
Die-hard EMH supporters might console themselves with the thought that each one this happened 4 many years ago and couldn’t possibly occur today. Kaufman suggests this:
“The way economic and investment information reaches Wall Street has already changed significantly over the past forty years. This may be another reason why no single private sector has since then caused markets to shake (or crash) to the same extent.”
However, at the extent of individual securities, it continues to be common today for prices to alter not because of recent fundamental information, but in response to individuals’ revised interpretation of previously disseminated information. To give a representative example, on March 25, 2021, Cisco Systems (CSCO) stock price rose 1.7%, while major stock indexes gained only 0.1-0.6% and technology stocks lagged. Several news outlets attributed CSCO’s outperformance to an upgrade from “Hold” to “Buy” by Goldman Sachs analyst Rod Hall. At least one reporter also noted that Evercore ISI raised its price goal on CSCO from $54 to $58, but this reviewer found no article mentioning any event on March 25, 2021 that promised a rise in the corporate’s future earnings.
It is rare to see a book published that doesn’t contain a single inaccuracy. erroneously lists Ayn Rand, who got here to the United States in 1926, among the many “European intellectuals … who emigrated to the United States during or after World War II.” In addition, a former chairman of the Federal Reserve is alternately referred to within the text as “banker G. William Miller” and (accurately) as “businessman G. William Miller.” (Incidentally, the previous CEO of Textron began his profession as a lawyer.)
Despite the book’s minor flaws, investment professionals can profit from this compelling book’s 60-plus-year perspective on the financial markets. As a bonus, the book offers an insider’s have a look at the history of Wall Street, a notable philanthropic interest of Kaufman’s. Particularly entertaining are the loving portraits of his famous mentors and partners at Salomon Brothers, in addition to a complete chapter dedicated to his colleague and friend Albert “Dr. Death” Wojnilower of First Boston.
1. Even more notable is that a couple of month before the day the markets were in turmoil, news got here that Kaufman had modified his rate of interest outlook, triggering a one-day rally in prices.
2. In “Do broker analysts’ recommendations have investment value?“Kent L. Womack summarized the argument previously made by Sanford Grossman and Joseph Stiglitz as follows: “Information processing is expensive. Brokerage firms spend a whole bunch of hundreds of thousands of dollars annually analyzing stocks, attempting to persuade investors that certain stocks are roughly attractive than others. … Market prices cannot perfectly reflect all available information, or the data gatherers wouldn’t be compensated for his or her costly activities.”
If you liked this post, don’t forget to subscribe.
