In Greenspan We Trusted
"The mildness and brevity of the downturn are a testament to the notable improvement in the resilience and the flexibility of the economy," said Alan Greenspan to a congressional committee recently.
"The fundamentals are in place," he continued….as the stock market rose…."for a return to sustained healthy growth: imbalances in inventories and capital goods appear largely to have been worked off; inflation is quite low and is expected to remain so; and productivity growth has been remarkably strong, implying considerable underlying support to household and business spending as well as potential relief from cost and price pressures."
Mr. Greenspan spoke with no smile on his face. Nor were his fingers crossed. He said what he said as though he meant it…..as though he believed it himself.
Certainly, his listeners seemed to believe it. They looked grave when the cameras turned in their direction. They posed silly questions prepared for them by earnest staffers. And laughed at their own dull jokes as if they had botched lobotomies. None seemed to have the slightest idea of how ridiculous and pathetically insipid the whole show really was.
The spectacle seemed designed for the editors of MONEY magazine…to reassure the Shareholder Nation that it faced nothing more troubling than a temporary ‘failure of confidence’ on the part of skittish investors…and that as soon as a few miscreants were behind bars the whole nasty episode would soon be forgotten. No one was rude enough to point out that it was the star witness, Mr. Greenspan himself, who bore much of the blame for the bubble and its aftermath. Nor did anyone seem to wonder how the nation’s central banker could correct his mistake.
Stock market crashes produce more noise than light. After the crash of ’29, for example, similar hearings were held by similar groups of Washington hacks. That was before the days of air-conditioning, though. And few matters were important enough to sweat through a summer in the nation’s capital. But when the weather softened, the pols turned up the heat for the benefit of the rubes and patsies in the home districts.
Albert Wiggin, head of Chase National Bank, no relation to our own Addison Wiggin, was discovered to have shorted his own shares and made million. Sam Insull presided over the Worldcom of the ’20s – Commonwealth Edison – a $3 billion utility whose books were audited by Arthur Andersen. He fled the country when the cops came looking for him. And poor Richard Whitney, who had once headed the New York Stock Exchange, went to prison for embezzling as much as $30 million from the NYSE pension fund.
Mr. Greenspan, by contrast, is still greeted in congressional hearing rooms as though he knew what he was doing. The politicians – and MONEY magazine readers – are still counting on him to save the world as we know it. If only he could…
But what can he do? He can raise the fed funds rate. Or he can lower it. He can loosen credit…or tighten it. Raising rates is hard work for a central banker. In recent years, only Paul Volcker seemed to have the stamina for it. At the time – in the early ’80s – people were so upset that they burned the fed chief in effigy. Senators fulminated against him as if he were old Beelzebub himself. But Volcker held the patient down and gave him the medicine he needed anyway.
Greenspan had a much lighter time of it. Every occasion seemed to call for easier money…and the nation soon became used to it. The credit-fed boom became as tedious as the San Diego weather forecasts. Is it any wonder consumers stopped saving for a rainy day? Even after last year’s 9- month recession consumers still did not get out their umbrellas.
A recession is supposed to lower consumer spending and increase savings levels. But, it did not. Instead, consumers borrowed and spent more than ever before, confident of clear skies tomorrow. Instead of being alarmed, Mr. Greenspan told Congress that this reckless behavior was "an important stabilizing force for the overall economy." No one was heard to guffaw or laugh. But consumers are now nearly as helpless and desperate as the central bank. Paul Kasriel of Northern Trust points out that for the first time since WWII, the average net worth of Americans is going down. It rose by about $3,700 per year in the last few years of the ’90s. But in the last 2 years, it has fallen by about $1,000. The stock market has wiped out between $5 trillion and $7 trillion.
Only real estate prices seem to defy the general deflationary trend….the latest headlines from Denver and other cities suggest that that bubble may finally have found its pin too.
"As consumers finally begin to realize that a continuous plunge of the stock market is burning what they considered their reserves for retirement," writes Dr. Kurt Richebacher, "they will return to saving from their current income…It will be the final fatal blow for the recovery and economic growth."
And what of Mr. Greenspan; can he not save the situation…by lowering the fed funds rate again….loosening credit even more…or maybe even printing more dollars?
He can do nothing else. Raising rates would kill the mortgage refinance business – and stop consumer spending abruptly. The consumer is the last man standing in the U.S. economy. Greenspan must do all he can to hold him upright – even if he is already dead. "The Fed …is stuck in a policy that requires its figurative printing presses to work 24/7" explains Grant’s Interest Rate Observer.
Making a long story very short, the Fed’s is increasing the money supply of dollars at more than 11% per year. Its major competitor – the European Central Bank – is going in the opposite direction; the ECB’s balance sheet is shrinking by nearly the same number.
But making more credit available to people who are already deeply in debt is like offering a tuna sandwich to a drowning man; it is not the right moment.
"Within the next few months, it will become the general recognition that the U.S. economy is on the verge of sliding into a prolonged, severe recession," concludes Dr. Richebacher in his latest letter. "This spells unprecedented havoc to U.S. stocks, bonds and the dollar. Under these circumstances, there is but one highly lucrative investment for dollar-based investors: German and French government bonds."
August 5, 2002
Help is on the way, dear reader.
MONEY magazine to the rescue. "What Every Investor Needs Now….Answers to all your questions," promises the Special Issue for September. We have a lot of questions, so we decided to have a look…
"How bad is it?" was a decent first question.
"We have a crisis of confidence," say the Money folks.
"The economy is basically sound," writes Amy Feldman as if she had a clue, so "why is the stock market sinking relentlessly? And what will it take to turn things around?"
MONEY has no idea. "We think there are at least two important reasons for the market’s latest woes," writes Feldman, "fear and valuations." But she doesn’t mean that stocks are still much too expensive for a bear market bottom, but that investors have lost confidence in earnings reports. "For the market to begin to rebound, investors will need to get comfortable with investing again," she writes.
What will it take to make investors comfortable?
"Clear signs that the market’s continuing problems won’t end up leading the economy into a double-dip recessions…" and "signs from regulators, legislators and prosecutors that serious reforms will be put into place…"
Heh…heh…keep ’em hoping…keep ’em believing… that’s what MONEY and the rest of the financial press seems to be doing. Do these people really think a few new regulations and a few show trials can end a bear market?
"When will the bear market end?…Are stocks cheap now? …Is our financial system broken?…" the MONEY team has an answer for everything. And on almost every page is another photo – a smiling couple from Cincinnati, a retired man in Virginia, a family in St. Louis – all of the poor hapless patsies sure that stocks won’t let them down. "Be reasonable," the magazine seems to say. "Be patient."
"Keep a diversified portfolio, stay in stocks for the long run, and you’ll be fine."
But nowhere in this entire Special Issue do they raise the questions we most wanted answered: What is really caused the boom….and what is behind the worldwide falloff in equities? And our favorite: Is America following Japan into a long, soft, slow depression? Finding no answer in MONEY, we’ll have to answer it ourselves… more below…
Meanwhile, Eric Fry is taking a few days off….so the latest financial news from Addison Wiggin, in Paris….
Addison Wiggin in the City of Light…
– In two days last week – Thursday and Friday – the Dow gave back more than 400 points and all but wiped out last Monday’s wild rally gains. Nor did the Nasdaq or the S&P 500 fare any better. They shed 32 and 20 respectively on Friday…
– If the twentieth century provides us with any guidance, we can expect to see these kind of wild rallies in both stock prices and hope… but we can also expect the bear market to take us back to a point lower than from whence the bull market began.
– For example, from 1923 to 1929 the Dow surged up nearly 450%. It started it’s bull run at about 85, climaxed at 381 in September of 1929, then began it’s descent. Despite rallies in 1930 and 1931 that boosted the market as much as 35%, the Dow reached a low point of 41 in July of 1932… less than half of the level it began 9 years before.
– "Our modern American bull market," writes CBSMarketWatch’s Thom Calandra, "began in 1990 with the Dow at 2,365. When the 10-year rally began to unravel in January 2000, the Dow was almost 12,000. A total gain of almost 500%."
– The similarities are a bit eery, aren’t they? If the trend continues you might expect the Dow to drop to… half of where it began… or, 1,185. Frankly, I had to check the math a couple of times. A drop that far is simply too preposterous to consider. Or is it?
– Well, just for the sake of being preposterous… that would mean the Dow, which opened today at 8,313 would have to lose another 7,128 points. And investors would lose another $7 trillion or so. Of course, that’s just a back- of-the-envelope calculation… but it would take years for that kind of carnage to works its through the economy.
– Friend and fellow scribbler John Forde (that’s Forde with an ‘e’) tells me that, among other things, if you spent a dollar per second, 24 hours a day, it would take 242,904 years and 2 months before you spent your wad… $7.7 trillion in pennies would weigh about 23.7 million tons and fill the entire Chicago Sears Tower… three times…(7.7 trillion is, in fact, exactly 39 times the total number of hamburgers ever REALLY sold by McDonald’s.)
– During the late great Tokyo bubble of ’89 things were even more out of hand. The Nikkei 225 exploded after achieving the mind-numbing height of 39,000… a point at which it was trading at 100 times earnings. "Once again," offers Calandra, "[after the collapse began] numerous rallies ensued. The Nikkei rose almost 20 percent months after the December 1989 zenith. About a year later Japan’s benchmark index rose by more than a third in a five-month span, into the spring of 1991.
– "As we know, the Nikkei hasn’t stopped skidding," Calandra continues, "It’s been as low as 9,420 in the past year… the number to remember, though, is where the Nikkei started it’s amazing run – 6,850 in 1984 – before reaching its pinnacle 39,000."
– Investors are now beginning to feel like maybe "10 years ago in Japan" was a) not all that long ago and b) not that far away.
– As we reported in the Daily Reckoning late last week, Stephen Roach has cautiously gone on record warning Morgan Stanley’s clients that a double-dip recession is, perhaps, imminent. Folks in the farm belt, might be thinking something like: "well, duh." In fact, one Daily Reckoning reader writes:
"The corn crop is 88% destroyed and other crops are not doing well either. Drought. The farmers say they are in a depression, not a recession. 113 degrees almost every day. Hardly ANY rain for almost 3 years. Grasshoppers everywhere and they are HUGE. We’ve had a beautiful 15 room Victorian house for sale for almost 3 years – can’t sell it although the price is $35,000 under appraised value, and can’t even rent it at $650 a month!
"Everything seems just like my grandfather told me about – the depressions he lived through. He was born in 1869 and died in 1952 and lived through several.
"Denial and greed seem to be the strongest emotions in the human being. People who prefer to live in reality are NOT liked (like me!). Some tell me, ‘I don’t want to hear it ANYMORE,’ and their money is still disappearing."
Back in Baltimore…
*** Whew, it is hot. Yesterday, in France, we were wearing sweaters outside. Here in Baltimore, we can barely go out at all.
*** Catching up on family news, I discovered a cousin who had lost his job and was forced to move in with his wife’s parents. Hard cheese for them. We can’t help but wonder how many people are nearing the same desperate straits… "In the typical household," writes the Mogambo Guru, "both adults are working, both adults have tapped out their credit cares, both adults have borrowed against all the equity in their home, and now they simply have run out of money and fresh sources of credit to go shopping. Or even pay the bills."
*** Vanity, vanity…all is vanity.
"The world is as it should be," said a friend at dinner last night. He was referring to the habit of many wealthy people to buy brand-name designer products at preposterous prices.
"I was just in Europe with friends," he explained. "There were people on the streets selling what looked like Gucci bags for $25. They were such good knock-offs you couldn’t tell the difference. Logically, rich people should buy them. Because they don’t have anything to prove. People would assume they were real, anyway. Only poor people should buy the real ones – and get some sort of proof of authenticity that they could show off to their friends." "I asked one of my rich friends why she didn’t buy the cheap ones. ‘I wouldn’t be caught dead with a knock-off,’ she told me."