Wells Capital’S Paulsen Makes It Two Out Of Three.
Paulsen made his rate calls (see chart) at the beginning of 2000 based largely on the fact that he did not see the ability for companies to pass on substantial price increases for goods and services. "We would have seen some of that in the CPI reports going back at least to mid- to late-1999, and what we saw was actually deflationary," says Paulsen. He admits to a concern that he had guessed wrong about mid-year when the price of a barrel of oil started to spike but he relaxed when he realized it was merely a distribution problem, more than a structural disturbance in the supply-demand equation. He notes that going forward, the price of a barrel of oil was likely to settle into a range between the mid- and upper-$20s, placing it right where it was in the middle of the last decade, when oil fears were practically non-existent. Paulsen sees it as ironic that the one sector of the economy that is arguably most responsible for the white hot GDP growth of the past several years-high-tech-is largely insulated from interest rate gyration, keyed as they are to issues like bandwidth capability and international chip demand. He anticipates it will be "perhaps two, maybe three years" before tech firms will begin to grow again, but until then, he notes, "all the easing in the world won't jump start revenue growth."
Paulsen's 2000 rate calls were helped largely by the Fed missing the logical consequences of what Paulsen terms "the biggest economic story of the last decade," namely the astounding leap in personal economic productivity afforded by technology. He argues that the Fed was right to look for inflation, since under "ordinary economic models," GDP growth of five to six percent would cause the scarcity value and pricing leverage in goods and services necessary for inflation to rear its head. But what it failed to take into account properly was the fact that personal productivity gains were outstripping inflation-in this case-5% vs. 21/2%-by a factor of two to one.
Paulsen says that what he could not foresee was the market's interpretation of relative value in the face of consistent Fed tightening. "I had no way of calling the Nasdaq and broader equity market pullback, which routed billions into the fixed income area." Nor did he see the technical and flight-to-quality trades that sustained the Treasury, agency and MBS markets in 2000. Going forward though, Paulsen reasons that he and the rest of his forecasting peers will have to take into account Treasury bond scarcity value when predicting future rate levels.
|2000 Predictions Vs The Actuals|
|Actual 2-year Rate||6.5||6.38||5.98||5.09|