Sinking The Greenspan Put

Earlier this week, at least in California, the “Greenspan Put” was still in the money.

The investment logic behind it was the soul of simplicity…with the sinew of experience. Ever since Alan Greenspan took control of the Fed late in 1987 it has been a safe bet that stocks would rise.

The security of this gamble was insured not merely by the Information Technology or the New Paradigm – but by something in which the players had a lot more faith: Mr. Greenspan’s readiness to pump liquidity when things started to get a little dry. The Fed chairman’s control of the irrigation gear, in the parlance of Wall Street, kept things green.

A put option is merely an agreement that gives you the right to sell – to put – something to someone else at a given price. Put options protect you in a falling market – since they give you the right to sell shares (which you can buy at the market price) at a higher agreed-upon price.

The “Greenspan Put” is the way traders describe the protection against falling prices supposedly guaranteed by Mr. Greenspan.

If things ever really got bad, hydrologist Greenspan would open the sluices – as he did when Long Term Capital Management nearly dried up…and when the Asian Currency crisis threatened world markets. Or, so investors thought.

Even people who wouldn’t know a put option from a golf club seemed to sense the security. If things got rough…Mr. Greenspan would find a solution.

“Folks are immensely optimistic out here,” reported Dan Denning from the SF Bay Area earlier this week.

“At a dinner party…guests marveled that the Presidio National Park (the former military base at the base of the Golden Gate Bridge) is now the most valuable property in the world… it must be true considering how high rents are in the area.”

San Francisco is a long way from Baltimore.

“I also talked to a young couple living in Berkeley (no one can afford to live in San Francisco anymore, except the homeless…) Anyway, both the husband and the wife work in dot.coms and they have a four month old girl. The husband works for a firm that does interface design for things like palm pilots. The wife quit her job at Wells-Fargo bank to work for a start-up because they `needed the money’.”

“Wouldn’t a job at the bank be safer?” asked Dan.

“Well,” came the reply. “Maybe. But she works for a company that is going to sell personal financial planning over the web. Make it really easy for people.”

“Don’t most people like to meet their financial planner in person? I mean isn’t that why they go to one? [Because it is personal]” Dan inquired.

“Good point,” replied his interlocutor. “I guess we’ll just have to see. They may have the wrong model. She’ll just get another job though.”

“That’s what everyone around here seems to think,” continued our reporter. “Even a close relative of mine. She makes a modest salary, enough to live comfortably on. But as we sat listening to hour after hour of terrible election coverage (they’re fascinated by it out here, giving away Al Gore buttons on the street, although one elderly Asian man had a sign that said: `Impeach Clinton, Twelve Galaxies United’. On the back it said ‘Made in Holland’.”

“Anyway, as we sat watching the election coverage, she checked her stocks. I asked how they were doing.”

“Down 20% this year,” she said. “But I’m not worried, they always come back. Everyone knows that.”

“She then asked me what were the symbols for Cisco and Intel, the two stocks she’s banking her retirement on. I told her I thought she should be careful. But she said these were clearly the safest companies out there, you had to stay in them, everyone knows that.”

Staying in them has been costly. So costly that the pros are beginning to ask: `What happened to Mr. Greenspan’s put?’ The Nasdaq has been cut in half…surely its time to exercise the option…open the flood-gates and delight the vegetables.

The Fed chairman is, of course, very familiar with the hazards of moving too quickly. The main hazard is the moral one. If investors see no risk of loss – they will make ever more reckless bets.

He also understands the virtue of inscrutability. If his responses are known in advance – the market discounts them. The head of the European Central Bank, Wim Duisenberg, was publicly ridiculed and practically hounded from his post after he revealed the bank’s strategy for defending the euro. Greenspan does not want to make that mistake. Thus, he would like the “Greenspan Put” – an implied understanding of what the Fed will do – to disappear.

The Fed claimed it never `targeted the stock market’ when it set interest rate policies. That is probably both true and insufficient. When the stock market went up – people thought themselves wealthier and spent more freely. The stock market created `wealth’ – stock options, and portfolio values – that competed with the offerings of the Bureau of Printing and Engraving for the goods and services of the world economy. The Fed couldn’t ignore it.

And now that the stock market is destroying `wealth’ – Alan Greenspan will be unable to ignore that too. Eventually, he will move to lower interest rates…but in the meantime, he probably doesn’t mind disappointing speculators.

And yesterday, St. Louis Fed governor, William Poole, described when the Fed will exercise its Greenspan Put option:

“I would want to respond,” he said, perhaps anticipating the next Fed policy meeting on Dec. 19th, “if it looked like the financial market events are feeding in to affect the real economy in an adverse way.”

That moment cannot be far off.

Your reporter, wishing he had bought puts…

Bill Bonner Paris, France December 1, 2000

P.S. And a very entertaining moment it promises to be. Because, from California to Boston people still believe in stocks. As James Cramer put it, the current decline is “unfathomable.” Investors can’t believe that this downturn will continue. Greenspan’s put option – his ability to strike the market with the equivalent of a monetary cattle prod – is the device that is supposed to turn things around.

Cattle prods may work well on bulls…but I don’t know if it will work on a real bear. Japan has been prodding its market for more than ten years. Interest rates were reduced, as the FT put it, to “effectively zero.” Government spending – known in the post-Keynesian lingo as `fiscal stimulus’ – has hit records. And still – the stock market lies as dead and inert as a used-up battery or a dot.com office.

*** “People have stopped looking for a bottom,” said John Manly, equity strategists at Salomon Smith Barney, “and are looking for an exit.”

*** Thus, on this first day of December…the anxiety of autumn seems to already be giving way to the despair of deep winter. The Nasdaq slouched again – down 109 points, or about 4%.

*** It was worse…at one point yesterday, the Nasdaq was down almost 7% – nearly 50% below its March peak. In effect, the entire Nasdaq has just about split, two for one…the hard way. You can buy almost twice as many Nasdaq shares today as you could back in March, for the same amount of money.

*** “96 funds have lost more than 40% this year,” declared James Cramer on TheStreet.com. “The declines are unfathomable to me…but everyone acts as if it is business as usual…the strategists don’t mention it.” All you hear, according to Cramer, is `buy and hold’…and `it always comes back.’

*** Those lucky Michael Murphy investors. His `must own’ Big Tech stocks became more affordable. Microsoft lost more than $7. Intel fell $4 and change. Cisco was down more than $3. AOL is barely holding above $40. IBM…HP…almost all the techs fell as investors began to doubt that Santa would come this year.

*** Gateway was at the epicenter of the tech shock – after it disclosed that computer sales were 30% below last year in the post-Thanksgiving sale. Gateway stock fell 36%.

*** The Dow had a bad day too. The index was down 2% – 214 points, leaving it down 9% for the year. Retailers Abercrombie and Fitch dropped 26%; Ann Taylor fell almost 30%.

*** “Falling income, More Jobless” explained a Reuters headline. Jobless claims, it was revealed yesterday, rose more than expected…and personal income fell 0.2 in October, for the first time in almost 2 years.

*** Spending rose just 0.2% – less than expected. “Consumers at the high end are starting to get concerned about their wealth,” explained an analyst in a Reuters report, “and consumers at the lower end are going to be squeezed by higher energy prices.”

*** Instant Analysis & Gratuitous Comment: Incomes falling, GDP growth slowing, spending still increasing, and the leading Information Technology stocks selling at half price – is this a `Transcession’…a brief interlude before we all get rich? Or is it something more familiar – a bear market and a coming recession?

*** The Nasdaq has fallen 20% just in the last 3 weeks – erasing more than $3 trillion in paper wealth. And yet, P/Es for the big techs are still above 100.

*** Abby Cohen appeared yesterday – trying to restore faith in the fantasy that has so enriched her employer, Goldman Sachs. In October, she said the S&P would end the year at 1575. It closed yesterday at 1314. Hmmm…anything is possible, but face it, Abby, you can’t predict the future either.

*** Ignoring that insight: if I were Mr. Bear I would be enjoying this immensely. The big, furry beast got no notice nor respect for years. Now his name is in the papers almost every day. If I were he, I’d want to stretch this out…enjoy it for as long as I could. So, I’d probably take a little holiday rest – giving the pilgrims a chance to forget about me for while.

*** Probably the biggest news yesterday got little more than a footnote in the financial press: The euro rose 2% against the dollar. When the dollar follows the Nasdaq down – all of the illusions of `late, degenerate American capitalism’ of the 1990s will collapse…and the new millennium can begin. (More on that as it develops…)

*** “Euro Gains Against Injured Dollar” observes the Financial Times. The euro is at a 4-week high – at 87 cents/euro. My guess: we will not see an 85-cent euro again for a long, long time.

*** Gold stirred yesterday like – rising $3.70. The gold stocks rose too. Let’s see…if people lose faith in stocks and the U.S. dollar…where might their money go? Another guess: we won’t see Franco-Nevada at C$15 again for a long time either.

*** Investors seemed to have pulled the plug on incubus, I mean incubator, stocks. ICG is at $6.19…it was $212 a year ago. CMGI lost $664 million in the last quarter; shares are down from $163 to $11. Divine Interventures fell from $12 to under $2. And Idealab raised $1 billion – but then had to cancel it’s IPO.

*** Wouldn’t it be nice if you could create a successful business that would create other successful businesses? That was the incubu…er…incubators’ idea – to leverage a few easy insights and billions of dollars of other peoples’ money into a perpetual wealth machine. But it’s not that easy, dear reader, it’s just not that easy.

*** The Champs Elysee is already decked out for the holidays. The trees, which last year, were bagged in an odd way…are strung with lights. The view down from the Arc de Triomphe to the big Ferris wheel at the Place de la Concorde is spectacular.