Do you have any favorite Clint Eastwood movies? Mine are Pale Rider and Unforgiven, which I feel permanently placed Eastwood among America’s greatest actors/directors. However, it is Dirty Harry that provides his most memorable quote, “you’ve gotta ask yourself one question. ‘Do I feel Lucky?’ Well, do ya, punk?'"
I thought about Eastwood while reading a recent blog post by Berkeley economist Brad DeLong. In it, the eminent professor discusses the current views of numerous important economists on inflation and recession. He notes that Larry Summers “is in strong underlying agreement right now with New York Fed Bank President John Williams. Summers sees a 1/3 chance that the Fed has not done enough, a 1/3 chance that the Fed has gotten it right, and a 1/3 chance that the Fed has overdone it and should have started cutting rates months ago.” *
Which makes the fictitious detective Harry Callahan’s question particularly pertinent right now. Especially when we consider that at 1/6, Callahan’s antagonist had better odds than we do. The full quote reads “Uh uh. I know what you’re thinking. ‘Did he fire six shots or only five?’ Well to tell you the truth in all this excitement I kinda lost track myself. But being this is a .44 Magnum, the most powerful handgun in the world and would blow your head clean off, you’ve gotta ask yourself one question. ‘Do I feel lucky?’ Well, do ya, punk?"
In my world, Jerome Powell plays the part of Harry Callahan and I do not know if there are other bullets in his .44 Magnum. Larry Summers believes that there is only one possibility in three that the Fed has gotten it right. Russian Roulette is one in six that you got it wrong, the same odds that Dirty Harry laid out.
Our current market is priced for far better odds. Prices are high and so are interest rates. Market enthusiasts must feel very lucky since anticipated Fed cuts over the next twelve months or so do not justify today’s prices. If Summers is right that there is a 1/3 chance that the Fed will hike, then the end of this movie could be every bit as exciting as Eastwood’s.
We are not in a movie though. The availability of high interest rates on relatively short-term and high-quality bonds makes the gamble little more than a bad bluff by poor players with a weak hand. We shall continue to keep our durations short and our credit quality high. Ultimately, there will be better values in risk assets for us to exploit.
Dirty Harry. United States: Warner Bros., 1971.
* DeLong, Brad. “How Is Our Current State Different from What We Would See in a Successful Inflation Soft Landing?” Web log. Brad DeLong’s Grasping Reality (blog), September 14, 2023. https://braddelong.substack.com/.