For some of us of a certain age, an event from four decades ago often is recalled more vividly than what happened four weeks or even four days ago. Such is the case with Aug. 17, 1982. It arguably marked the birth of the great bull market in stocks, which stretched into the next century.
The catalyst came from a dramatic reversal by Henry Kaufman, then the chief economist of Salomon Brothers, perhaps the most powerful bond dealer at a time when interest rates had soared to previously unimaginable levels. Known as Dr. Doom for his influential and prescient forecasts of rising inflation and bond yields during the 1970s, Kaufman’s shift from making doleful predictions set off a bullish stampede.
When Barron’s caught up with him by phone this past week, the nonagenarian sounded as sharp as ever, recalling the markets and policies of the past and contrasting them with those of the present with equal candor.
As for 1982, Kaufman said he made his bullish call after assessing the changes in the economic and market environment during a trip to Europe. Interest rates had peaked the previous October, when long-term U.S. Treasury yields hit 15%. Inflation was abating and credit demand was slowing, while the economy remained in a recession, the second of the back-to-back downturns of the early 1980s.
Inflation remained high, however, and he characterized monetary policy at the time as “relatively tight,” which might strike current observers as understatements. The consumer price index had receded from its double-digit peak to around 7%. Core inflation, which excludes food and energy, was running at 8.5%.
But the Federal Reserve’s policies, which then aimed to control the money supply rather than interest rates, still resulted in a federal-funds rate well into the double digits, although it was in a downtrend from the midteens earlier that spring. Cracks also had begun to appear in the financial system, first with the failure of an obscure government securities dealer in May, then with a Mexican debt crisis in August.
Kaufman’s reversal—which he chronicled…
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