Is Greenspan Sealing the Market’s Fate?
Submitted by Pater Tenebrarum of Acting Man blog,
The Third-Biggest Living Contrary Indicator of All Time Speaks Up
There once was a time when it was fair to say that Alan Greenspan was the biggest living contrary indicator of all time. Long before he became known to a wider audience, in early January of 1973, he famously pronounced (paraphrasing) that 'there is no reason to be anything but bullish now'. The stock market topped out two days later and subsequently suffered what was then its biggest collapse since the 1929-1932 bear market. That was a first hint that stock market traders should pay heed to the mutterings of the later Fed chairman when they concerned market forecasts: whatever he says, make sure you do the exact opposite.
More proof was delivered in 1996, when Greenspan bemoaned the 'irrational exuberance' in the stock market, just as it embarked on one of its biggest rallies ever. Then in 2000, Geenspan finally agreed that a 'new era' had indeed arrived; that investors according billions in market capitalization to companies that would never make a dime were acting perfectly rationally, and that there was surely no end in sight to the productivity miracle. It was the biggest sell signal he had yet produced.
The reason why we feel he must be relegated to third place is that since then, arguably two even bigger living contrary indicators have entered the scene: Ben 'the sub-prime crisis is well contained' Bernanke, and Olli 'the euro crisis is over' Rehn. Admittedly it is not yet certain who will be judged the most reliable of them by history, but in any case, when Greenspan speaks, we should definitely still pay heed.
As CNBC reports:
“Although blue-chip stocks are hitting all-time high after all-time high, former Fed Chairman Alan Greenspan told CNBC Friday that "irrational exuberance" is the last term he'd use to describe today's market. Greenspan said in a "Squawk Box" interview that stocks by historical standards are "significantly undervalued" even considering the recent moves higher. He added that the payroll tax increase didn't dent spending because of rising asset prices.”
Oh Boy! Is a crash imminent? After all, the 'Dow 36.000' guys are back as well, believe it or not. Here is James Glassman, shamelessly piping up again after leading countless investors down the garden path with his 1999 book:
“The Dow Jones Industrial Average set a record this week, but it’s still far from the mark that economist Kevin Hassett and I forecast in our 1999 book, “Dow 36,000.”
We wrote in the introduction that “it is impossible to predict how long it will take” to get to 36,000. Then, in the same paragraph, we rashly made a guess anyway: “between three and five years.”
Today, the far edge of that time frame is clearly in reach. From its low of 6,547 on March 9, 2009, the Dow has risen 117 percent. Another 117 percent in four years would put it at 31,022, just 16 percentage points shy of the magic number.”
The argument he forwards is just as specious today as it was then. It is of course no great feat to 'forecast' that the DJIA will 'reach 36,000 points in an unpredictable period of time'. Monetary inflation practically ensures that it will one day get there. Since the Fed's founding, the purchasing power of the currency it issues has plunged by 97%. That plunge is likely to accelerate in coming years, given the massive increase in the money supply since 2000 (US broad money TMS-2 has increased by 214% since then, i.e., there is today more than three times more money in the economy than 13 years ago).
Recognizing that making such a prediction, but not pinning a specific time frame to the magic number would make the whole exercise useless, Glassman and Hassett decided to throw their 'three to five years' target out there, just in time to mark the beginning of the worst secular bear market in a century.
Glassman offers a raft of excuses for why the forecast didn't pan out, but that is just telling us that he was never qualified to write this book. Anyone who didn't understand the dynamics of the credit and asset bubble that led to the historic market peak should have refrained from getting his unqualified opinions in print, if only for the sake of saving gullible investors from making the costly mistake of believing in this overly rosy outlook.
Incidentally, Glassman is correct when he says that it would be a good idea to enact economic policies conducive to economic growth, but he seems not to realize that this means that his renewed optimistic forecast is plainly contradicted by the economic policies that are actually pursued at present.
The 'rock-solid' investment advice of yesteryear, to be 'placed on an altar next to the works of Benjamin Graham and Peter Lynch' – it's back!
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