112 THE BiG DROP
enormous leverage in the stock market, enormous leverage in
various carry trades around the world. Chuck Prince, then CEO
of Citicorp, said prior to the last world financial calamity that
you have to keep dancing as long as the music’s playing. There
are some people who literally either won’t listen to the Fed or
don’t believe them, etc. and are still going to be in these trades.
The short answer is I expect a lot of market disruption.
I think this might throw the U.S. economy into a recession be-
cause the economy is fundamentally weak. Some people have
been smart enough to get out of these carry trades, at least
based on the Fed’s warnings, but some people have not and
will get a rude awakening.
They may have to unwind those trades quickly, and we
may see a lot of liquidity pressure. We’re seeing it anyway
based just on the Fed’s talk. Imagine the reality of the Fed ac-
tually raising rates for the first time in eight years.
I think we’ll have a very bumpy ride and it won’t be soft
landing. Beyond that, the whole idea that the Fed would raise
rates was based on a forecast that the economy was getting
stronger and we sort of achieved self-sustaining growth.
Nobody in economics, nobody on Wall Street, nobody on
the buy side, nobody in academia, nobody I’ve seen anywhere
has a worse forecasting record than the Fed. I don’t say that
out of spite or to try to embarrass anyone; it’s just a fact. Year
after year after year they produce these very high growth fore-
casts, and every year they’re wrong. They’re not just wrong by
a little bit; they’re wrong by orders of magnitude.
So when the Fed says, well, we think the economy is healthy
enough for a rate increase, that’s the first sign that it’s not. Now
besides that, there’s a lot of data. We’re seeing auto loan de-
faults go up, real wages are stagnant to down, labor force par-
ticipation continues to be very low, our trade deficit is getting
worse partly because of the strong dollar, emerging markets are
slowing down, and China and Europe are slowing down.