March 18, 1996. It was the height of the dot-com boom years. And gracing the cover of Fortune magazine was a photo of a rather smug looking Alan Greenspan, then Chairman of the US Federal Reserve. The headline across the top-- "It's HIS economy, stupid". The inside story was entitled "In Greenspan We Trust". And the article went on to suggest that, no matter WHO won the presidential election that year between Bill Clinton and Bob Dole, Greenspan would still be running the economy. And handily. This is a major testament to the state of our financial system. We award a tiny banking elite nearly totalitarian control over our money supply... and by extension, the economy. We're just supposed to trust that they're good guys. Competent guys. That they know what they're doing. Fast forward almost two decades. Long Term Capital Management. The NASDAQ bubble. The real estate bubble. The credit crunch. The mortgage crisis. The banking crisis. The sovereign debt crisis.
Ye Gods! Even that discredited old hack, Alan Greenspan ? the man who bears as much responsibility as anyone for the hypertrophy of state- supported finance and thus for the havoc it continues to wreak ? is at it, trying to tell us that because of a low ‘equity premium’ (read: ludicrously intervention?depressed bond yields), the ‘momentum’ of stocks ‘is still relativel. Such a market is therefore likely to suck everyone in to its last, Plinian updraft no matter how stretched everything becomes and no matter how great the risk of being cast into perdition in the pyroclastic collapse to come.
It has been a very interesting week as the Government shutdown/debt ceiling debate debacle moves into the background. The focus has now turned back towards the fundamentals of the market, economic environment and the ongoing Federal Reserve interventions. What is becoming increasingly evident is that market participants are once again potentially throwing "caution to the wind" betting on a belief that the Fed's ongoing Q.E. programs will continue to trump valuations and economics. After all, that has seemingly been the case up to this point. The problem is that no one really knows how this will turn out. However, as we discussed earlier this week, it is likely that we are close to finding out answer. In the meantime, here is our weekly list of "things to ponder this weekend."
As Alan Greenspan described this week, in an interview with John Stewart on “The Daily Show,”
“We really can't forecast all that well. We pretend that we can but we can't. And markets do really weird things sometimes because they react to the way people behave, and sometimes people are a little screwy.”
Which means they don’t necessarily go along with your central planning, no matter how good you think it is. But still economists insist that, if they are allowed to monkey around with it, they can make an economy better. And therefore, the Fed, which has lived by the sword of QE, will probably die by it too.
Back on August 1, 2010, Alan Greenspan - who is once again making the media rounds in a desperate attempt to peddle his ridiculous book about forecasting (in which he explains it wasn't the Fed's models that were wrong; it was reality, and all those who inhabit it, that had a glitch) and is arguably the man who created the single biggest credit expansion in the Pre-New Normal era who no longer has access to the money printer so needs to sell books, and soon enough he may devolve to pitching newsletters - issued one of his most memorable post-Lehman bloopers. To wit: "if the stock market continues higher it will do more to stimulate the economy than any other measure we have discussed here." We decided to investigate his claim...
Alan Greenspan is out pitching his news book. We explained the miracle of revisionist history and questioned the sanity of anyone buying this 'guide to economic forecasting' earlier in the week, but in his appearance this morning on CNBC, the "maestro" did a great job explaining just how flawed his own logic was (without our help). He explains (sadly reflective of the current clairvoyance of Jim Bullard) that, speaking for himself and his FOMC colleagues, "all of us knew there was a bubble," though failing to admit to being the progenitor, "but we badly missed the timing." But, perhaps summing up the mantra of his ilk better than any other sentence, Greenspan concludes, "a bubble in and of itself does not give you a crisis..." adding, during a later Bloomberg TV clip, "I missed certain forecasts, you don’t apologize for that... We are not omniscient. I am a human being."
Charts Show that U.S. Policy Has Increased Terror Attacks
The Chinese yuan has reached 20-year highs versus the U.S. dollar. It's a significant development with potentially huge ramifications for China and the world.
As markets twiddle their thumbs waiting on Washington to come up with a political solution to the Federal Debt Limit/budget debate, ConvergEx's Nick Colas decided it would be a good time to review the academic literature on how markets discount expectations in the first place. Behavioral finance posits that human nature skews perceptions of risk and return, causing everything from irrational risk aversion to asset price bubbles. Against this current backdrop of theoretical uncertainty, measures like the VIX are currently somnambulant. So, using the modern vernacular, WTF? The bottom line, Colas explains, is that Wall Street thinks it has the current "Crisis" all figured out: a last minute deal with no Treasury default. And just as we haven’t sold off materially during this drama, don’t expect a huge (+5%) lift afterwards.
Stunning Facts that Your History, Economics and Business Teachers Never Learned ...
After reading the coverage of Janet Yellen’s Fed Chair nomination yesterday, it feels as though it’s 2006 all over again. Confidence in our central bankers seems to be approaching all-time highs, little more than five years after it collapsed alongside the financial sector. The overwhelmingly positive response to Yellen’s nomination is worrisome because, well, it’s overwhelming positive. As Galbraith once astutely observed: “In economics, the majority is always wrong.”
Unlike her predecessors, Janet Yellen has never had a youthful dalliance with hawkish monetary ideas. Before taking charge of the Fed both Alan Greenspan, and to a lesser extent Ben Bernanke, had advocated for the benefits of a strong currency and low inflation and had warned of the dangers of overly accommodative policy and unnecessary stimulus. (Both largely abandoned these ideals once they took the reins of power, but their urge to stimulate may have been restrained by a vestigial bias against the excesses of Keynesianism). Janet Yellen, who has been on the liberal/dovish end of the monetary spectrum for her entire professional career, has no such baggage. As a result, we can expect her to never waver in her belief that stimulus is the answer to every economic question.
David Stockman, author of The Great Deformation, summarizes the last quarter century thus: What has been growing is the wealth of the rich, the remit of the state, the girth of Wall Street, the debt burden of the people, the prosperity of the beltway and the sway of the three great branches of government - that is, the warfare state, the welfare state and the central bank...
What is flailing is the vast expanse of the Main Street economy where the great majority have experienced stagnant living standards, rising job insecurity, failure to accumulate material savings, rapidly approach old age and the certainty of a Hobbesian future where, inexorably, taxes will rise and social benefits will be cut...
He calls this condition "Sundown in America".
This is at a time when we have real economic growth barely above 2% and nominal growth of just over 3% (abysmal by any standards) after six years of monetary easing and 5 years of QE1; QE 2; Operation twist; QE “infinity” and huge fiscal deficits. After last week Citi notes it is not clear that this set of policies is going to end anytime soon. It seems far more likely that these policies will be continued as far as the eye can see and even if there are “anecdotal” signs of inflation this Fed (Or the next one) is not a Volcker fed. This Fed does not see inflation as the evil but rather the solution. Gold should also do well as it did from 1977-1980 (while the Fed stays deliberately behind the curve). Unfortunately Citi fears that the backdrop will more closely resemble the late 1970’s/early 1980’s than the “Golden period” of 1995-2000 and that we will have a quite difficult backdrop to manage over the next 2-3 years.