Maximus Greenspan, Part II
"We cannot assure success, but we can deserve it."
"If the central bankers, government officials and economists who gathered here last weekend for the Federal Reserve Board’s annual retreat agreed on anything," reports the International Herald Tribune, "it was that economic policy has little success when used to fine-tune the economy."
But the nation’s top central banker, Alan Greenspan, went further. The only member of the ‘Committee to Save the World’ still at his post claimed, according to the IHT, "that there was nothing the central bank could reasonably do to avert or deflate a stock-market bubble."
We have begun today’s letter, as we did our last one, with a quote from George Washington. His remark fills a big hole in our philosophy of essentialism…and our approach to investing.
We have observed that people rarely get what they expect from life or from the investment markets; instead, they get what they deserve.
But in the second part of that sentence we take a guess, and make a wish…for we know too many people with far more money than they seem to merit. We do not doubt the wisdom of the old adage, "a fool and his money are soon parted." What we can’t explain is how they ever got together in the first place. And, too often, the assassin goes to his grave fat and happy, leaving us with only a prayer: that all the torments of hell will singe his corrupt, larded soul.
And so we turn to Alan Greenspan. What does the Fed chairman deserve, we wonder? Greenspan, we have been told, spends an hour a day in his bath. Perhaps it was there that he realized he bore no responsibility for the biggest credit bubble the planet has ever seen. Perhaps a central bank cannot be expected to fine tune an economy. But it must do something. What it is supposed to do is play nanny to the nation’s money.
As pointed out in this space many times, the Fed has taken up this responsibility as a nasty little boy takes up the task of getting rid of a spider – killing it little by little. In the century preceding the Fed’s creation in 1913, not a penny was worn away from the value of a dollar. In the 89 years since, fully 95 cents have disappeared.
Other Fed chairmen have stood watch as the dollar lost more value than it has during Chairman Greenspan’s tenure, but none has ever made such a vigorous effort to destroy it. According to Jonathan Van Eck, since Greenspan has been the Fed’s top banana, more new money has been created than under all the other Fed chiefs combined. Not only that, in Greenspan’s reign more new money has been created than under all the Treasury secretaries in America’s history.
Could there be a link, we ask, between all this new money and the biggest asset bubble in world history – for which Mr. Greenspan claims neither credit nor responsibility?
Mr. Greenspan, we have been told, spends at least an hour each day in his bath. Maybe it was among the fluffy suds that he came to believe that the nation’s capital markets had been transformed by a ‘productivity miracle.’
And maybe, while searching for the soap in the warm, slippery embrace of his own tub, he allowed himself to believe that there was no need to raise margin requirements, or to warn investors about the dangers of a bubble market, or to try to prick it himself.
And perhaps there too – among his bubbles – did the chairman come to think that the solution to a bear market and recession, though caused by too much credit, was to provide even more credit!
He must have hardly waited to dry himself off that day in January 2001 when the Fed began cutting rates like a lumberjack at a chainsaw contest. Down they came – faster than ever in history…a full 475 basis points over the next 12 months.
The poor mom and pop patsies, reaching for the new credit like a subway bum for a free drink, went further into debt with bigger cars and bigger mortgages. And thus was the bubble sustained…and Mr. Greenspan’s day of judgment deferred. But for how long?
We do not know what accolade history will accord Mr. Greenspan. But we think we know what the chairman deserves. Recently, Queen Elizabeth announced that she would grant him a knighthood. But as an economic indicator, the Queen’s Honors Committee must be among the most laggard of all. As the bubble deflates, criticism of the Fed and its chairman mounts. Mr. Greenspan would do well to leave the stage now, in our opinion. In fact, there are few men for whom cardiac arrest would be a good career move; the fed chairman may be one of them.
September 6, 2002
We’re waiting for the panic.
The Great Bear Market began nearly 3 years ago, depending on how you calculate it. But stocks are still very expensive – as Eric points out below. Investors are still adjusting themselves, mentally and emotionally, to falling stock prices. They still believe in ‘stocks for the long haul’ and avoid opening brokerage statements, hoping they’ll improve as the long haul arrives.
We are still in Stage II of this bear market. Stock prices fall away, little by little…then, in big lumps…as the smart money gets out. Over time, the I.Q. of the money left in the market gets lower and lower… until all that is left is the very dumb money.
And then, finally, in the third stage, the dumbest money panics. No bear market has ever reached its final bottom without at least a few days of panicky selling…when almost all the transactions on Wall Street are sell orders. That is when prices really drop, of course.
But isn’t there a buyer for every seller? Uh…yes…but when the mob begins to rush for the exits very few people resist the trend. Those who do can name their own prices for the stocks they want to buy.
So far, we have only had two days of what might qualify as panic selling. One was last year…and the other just occurred on Tuesday. There will be plenty more, we predict, before this Great Bear Market of 2000 – ? is finally over.
Eric…what happened yesterday?
Eric Fry, reporting from Wall Street:
– The bear market resumed yesterday, as the Dow tumbled 141 points to 8,284 and the Nasdaq slipped nearly 3% to 1,251. Intel and Wal-Mart both announced that their sales aren’t quite as strong as previously forecast. And that’s not the sort of news that makes folks want to buy stocks. In fact, its hard to argue with NOT buying stocks, at least not the pricey S&P 500 types of stocks.
– Even though the S&P 500 has collapsed 43% from its all-time high, it remains richly priced at more than 30 times earnings. Could it mount a "tradeable" rally from current levels? Sure, but why bother? Buying the S&P 500 at 33 times earnings is like eating almost-fresh fish or drinking almost-clean water. You might not get sick. But then, that’s not really the goal, is it?
– While the gruesome bear market in stocks continues to unfold, a spectacular bull market in bonds is underway. That’s because many of the shell-shocked investors who manage to stagger back from the frontlines with some of their capital intact are seeking refuge in the relative safety of fixed income. And as bond prices rise, bond yields fall. So it was that on Tuesday, the yield on the 10-year US Treasury Note dove through 4% for the first time in 39-years.
– A 4% yield might seem pretty skimpy, but at least it doesn’t come with a minus sign in front of it. What seems skimpy to the lender, of course, can look very enticing to a borrower. So it’s no secret that the generation-low interest rates are flowing straight through to the mortgage market, where low rates and easy credit are driving the never-say-die housing market.
– Over in the corporate world, however, the benefits of low interest rates are not enjoyed by all. Many of the corporations who are most in need of cash and who would most like to take advantage of the low prevailing interest rates to issue new debt are shut out of the market. Breakingviews.com explains: "Bond prices at the low end of the investment-grade spectrum…have developed a fairly close correlation with equity prices in recent months. This makes it hard to market new issues of BBB- and low-single-A-rated borrowers, at least until the stock market steadies." Make that IF the stock market steadies.
– Dan Denning, editor of Strategic Investments, passed along this surprising factoid: "A new poll by the National Center on Addiction and Substance Abuse reports that more than one third of teenagers say they could buy marijuana in just a few hours. 27% said they could get it in an hour or less. The AP reports that "For the first time since the study began in 1996, marijuana edges out cigarettes and beer as the easiest drug for teenagers to buy – 34% said it’s the easiest of the three, compared with 31% for cigarettes and 14% for beer.
– We’re not sure exactly how to profit (legally) from this phenomenon. But here’s a related idea: When it comes to investing, says MoneyNews.com, "Sin is in." "If investors want to make money, they may need to be downright sinful with their investment philosophies," says the online news group. "Dallas-based Mutuals.com has established the Vice Fund. Manager Dan Ahrens told Bloomberg the fund specializes in "socially irresponsible" companies. Examples given include Harrah’s, Anheuser-Busch and Philip Morris.
– "What’s the attraction of firms like these?" MoneyNews asks rhetorically, "The Standard & Poors 500 fell 19% in the year ended June 30. In that same period, tobacco stocks were up 8%, alcohol 12% and casinos 20%." These performance numbers aren’t too shabby. But if you’re gonna make a deal with the devil, we’d suggest holding out for at least a guaranteed 30% per year, plus a Ferrari Daytona and a sea-side chateau in Cap d’Antibes.
– Speaking of devilish behavior, Congress is now beginning to wonder whether Goldman Sachs conjured up any evil deeds during the bubble years. The House Financial Services Committee asked both Goldman and Credit Suisse First Boston to turn over all records pertaining to their investment banking activities with telecom and technology companies.
– That’s going to be a one very big shoebox full of papers. There’s bound to be a least one nefarious deed buried in all those files. Goldman’s stock dropped more than $3 on news of the Congressional investigation… Stay tuned.