Opening Up the
Temple
by Louis Corrigan
(TMFSeymor)
This somewhat diminished role for the
journalists is due, ironically, to the Fed's
increased openness under the seemingly
sphinx-like Greenspan. In early 1994, the
agency started publicly announcing when
the FOMC votes to change the target
interest rate. Previously, investors had to
watch the New York Fed's open market
interventions to gauge a policy shift.
Making sense of these interventions wasn't
always easy. In November 1989, Wessel
apparently mistook some normal seasonal
adjustments to the money supply for a rate
cut. "It took the Fed forever to forgive
him," claims one observer.
The Fed is also much chattier than in the
past. During the past two years, "there's
been a Fed governor on the wires every
other day" weighing in on the economy,
says PIMCO's Hague. This "pattern of
quotes" forms a mosaic that, in the light of
macroeconomic data, reveals a good bit
about the Fed's thinking. PIMCO's Hague
says he pays particularly close attention
when FOMC hawks (those inclined to raise
interest rates at any sign of inflation) come
out sounding dovish or vice versa.
In December, 1998, the Fed went even
further by agreeing to immediately reveal
any changes in its policy bias. At each
FOMC meeting, the members indicate
whether they are leaning toward raising
rates, lowering rates, or remaining neutral
at the next meeting. Previously, this bias
was only made public after the following
FOMC meeting, six to eight weeks later.
So the quarter point hike in late June came
with the news that the Fed had adopted a
neutral bias, indicating that Greenspan &
company were not necessarily going to
raise rates again soon -- contrary to many
predictions.
Ironically, such increased openness hasn't
always clarified matters. There's been
plenty of debate lately over whether
FOMC officials even agree on what the
neutral stance adopted in June actually
meant. Indeed, stock and bond markets
have swooned since Greenspan told
Congress on July 22, that the Fed would
"act promptly and forcefully... if new data
suggest it is likely that the pace of cost and
price increases will be picking up."
Yet, Greenspan added that the Fed's
neutral stance meant that future moves
depended on what upcoming economic
data indicate about the economy and that
the Fed "did not want to foster the
impression that it was committed in short
order to tighten further." In their articles
on June 23, Wessel highlighted
Greenspan's wait-and-see comments
whereas Berry focused on the chairman's
inflation concerns.
Because the new open door Fed extends to
Greenspan's efforts to publicly
communicate policy intentions to the
capital markets ahead of time, Fed-watcher
Jones argues that there are simply fewer
meaningful Fed leaks. And the market
does seem to be picking up Greenspan's
signals. Bianco's research shows that the
fed funds futures contract -- a market that
most directly reflects traders' bets on
interest rates -- had just a 50-50 chance of
correctly predicting an FOMC decision
during the period from 1988 to 1994. Yet,
since 1994, the futures have been right
about 85% of the time. "The market knows
how to read Greenspan," he asserts.
"That's why the business of Fed watching
is in serious decline. "
Even so, G's rap for speaking in riddles if
not rhyme still puts a premium on the
listener's experience. "It's like looking at a
series of paintings and one or two things
change in each one," explains Wessel,
sounding like a docent at a Monet exhibit.
"Your eye is drawn to the things that
change rather than to all the things that are
in the background. But if you only looked
at one painting, you wouldn't know what
that one thing is. There's quite a bit of that
in reading Greenspan's speeches."
fool.com
Next -- He's Berry Good, But...
He's Berry Good,
But...
by Louis Corrigan
(TMFSeymor)
Berry earned his Ph.D. in Greenspeak in
early April 1998, when he cut through the
G-man's hemming and hawing to a
gathering of the American Society of
Newspaper Editors and focused on part of
the Q&A where Greenspan suggested the
stock market's ascent seemed justified by
rising corporate earnings. As columnist
and money manager James Cramer noted
in Brill's Content, both Wessel and USA
Today misinterpreted this frank admission
of rational exuberance. The latter even
carried the scare headline: "Greenspan
leery of sky-high stocks." Only the
Bloomberg Business Wire and Berry
captured Greenspan's bullishness.
"I don't think it was as significant as Jim
Cramer made out," says Wessel in an
annoyed tone that implicitly acknowledges
Cramer's long-running feud with Dow
Jones (NYSE: DJ). "But if I had it to do
all over again, I probably would have
referred to the answer he gave because
people seem acutely interested in
everything Greenspan says about the stock
market." Wessel admits that since he was
watching the speech on TV, "I wasn't
listening as closely as I should."
Nonetheless, Cramer clearly overstates the
case when he asserts that "Berry's
monopoly on interpreting the Fed is
Microsoft-like." Berry may have a
proprietary operating system, but it's both
a little buggy and open to stiff
competition.
For instance, Berry missed the hike in the
Fed funds rate in April 1994, the last time
the FOMC changed rates between regular
meetings prior to the cut in October 1998.
And like nearly everyone else, Berry failed
to predict that October 1998 rate cut.
Also, on September 17, 1998, Berry
"misinterpreted" something he was told
following Greenspan's remarks to Congress
and came out with a story that was just
wrong: "The next meeting of Fed
policymakers is scheduled for Sept. 29, but
Greenspan's comments and those of
numerous other central bank officials
suggest that a rate cut at that meeting is
unlikely." That meeting produced the first
of the three rate cuts last fall.
What's more surprising is just how badly
Berry blew the initial call on the most
quotable nugget in the history of
Greenspeak. On Thursday, December 5,
1996, Greenspan asked in his speech to the
American Enterprise Institute, "How do we
know when irrational exuberance has
unduly escalated asset values...?" Like
other reporters, Berry got an embargoed
copy of the speech before the event. "I
read it and thought, 'There's nothing new
here,'" he confesses. So he didn't even
bother to write a story for the next day's
Post!
His editor called at dawn to say the
Japanese market was tanking. Had Berry
missed something? Berry contacted Joe
Coyne, the Fed's chief public information
officer, who was in the office early,
preparing to travel with Greenspan by train
to Philadelphia. Coyne conferred with two
senior Fed staffers and told Berry he didn't
think Greenspan's comments were directed
at the U.S. market. Later that morning,
Coyne called Berry from the train. As
Berry explains, "He said he had spoken to
the chairman and told him what he had told
me. And the chairman said, 'Call him
back.'" G had indeed intended to warn the
market.
Berry describes the incident as "unique," a
case of Greenspan intervening directly
only because otherwise the Fed would have
given him the wrong interpretation. Yet,
the authoritative tone in Berry's article on
December 7, 1996, is striking: "However,
many investors and traders around the
world misread the signal: Neither
Greenspan nor other officials are about to
raise rates." That sounds a lot like his
article in April 1998 when Berry both
confirmed and rebutted Wessel's story on a
change in the FOMC's bias toward
tightening. And that makes you wonder
just how often those off-the-record
conversations occur.
Then again, one could argue that Wessel
totally scooped Berry on the irrational
exuberance episode. On November 25,
1996, Wessel began a piece: "If you were
Alan Greenspan, wouldn't you be worried
about the soaring stock market?" While
Wessel noted that the Fed was then
avoiding any mention of "stock" and
"market" in the same sentence, he added
that "the Fed would welcome less
exuberance on Wall Street." Greenspan is
no plagiarist. The chairman had been
working on the speech for a month. What
did Wessel say about special envelopes in
his mail?
fool.com
Next -- Fed Schmed? Not Really
Fed Schmed? Not
Really
by Louis Corrigan
(TMFSeymor)
All the intrigue over leaks owes something
to the fact that the Fed has a chummy
relationship with favored reporters. These
journalists attend Greenspan's annual
Fourth of July party on the Fed's balcony
overlooking the mall in Washington, D.C.
They also trek to Jackson Hole, Wyoming,
each August for an economic conference
where Fed officials, corporate executives,
and reporters pal around on the golf
course.
James Padinha, an economist who writes a
daily column for TheStreet.com, has
spoofed this whole insider's world in a
piece entitled "Greenspan and Me."
Padinha conjured up a fantasy day of
hanging out with G in Jackson Hole,
chowing down at Billy's Giant
Hamburgers, renting Showgirls, and
chilling to the new Hole CD.
Unfortunately, he didn't tell us whether G
prefers Versace Courtney or grunge
Courtney!
While it's safe to say that reporter Andrea
Mitchell (Greenspan's wife), Berry, and
even Wessel have heard more of
Greenspan's sweet nothings than Padinha,
the increasingly transparent Fed has
actually increased the value of someone
like Padinha who excels at analyzing and
explaining the sheaf of obscure data
Greenspan reportedly reads while regularly
soaking in his tub like some modern day
Marat. William Meehan, chief market
analyst at Cantor Fitzgerald, admires
Padinha's wit and the fact that he offers a
"less biased point of view than you might
get from many other economists that get
paid by wire service brokerage houses."
Other pros find that the best source for the
Fed is, well, the Fed itself. "Go to their
website," recommends Jeff Applegate,
chief investment strategist at Lehman
Brothers. "Read what they're saying, read
their speeches. I think that's the best source
rather than reading somebody's take on
what they're saying."
Fed schmed, others say. Jim Paulsen, chief
investment strategist for Norwest
Investment Management, calls the Fed
"sexy stuff," but he thinks G is more a
passenger than a driver. "Interest rates are
being established by the bond market, and
the Fed just follows, usually with a lag."
Maybe, but the markets still move on Fed
news so traders are always looking for that
special edge on G's thinking. Some bond
traders key off of PIMCO guru Bill Gross
both because, as Bianco says, "he has the
power to make some of his forecasts
self-fulfilling" and because traders think
Gross has an inside track on Greenspan.
PIMCO's Hague counters, "I don't think
that's the case." He says traders like to
know what PIMCO is doing simply so they
can "get in front of the order flow,"
profiting from the impact PIMCO's
outsized trades have on the market. Still,
PIMCO was betting correctly on lower
interest rates throughout 1998, even when
many bond traders still feared a rate hike.
One surprise is that CNBC has become
increasingly important in the Fed-watching
world. First, there was the widely joked
about "briefcase indicator": If G's briefcase
bulges on days when the FOMC meets, a
rate change is in the offing. This indicator
had a world-beating 16-0 record before
blowing the no-brainer call that the FOMC
would stand pat on December 22, 1998.
On a serious note, CNBC's Ron Insana
appeared to scoop everybody on the
surprise October 15, 1998 intermeeting
rate cut, the one that gave investors the
courage to pull back from the increasing
panic and eventually rally stocks to new
highs.
At midday on October 8, 1998, with the
Dow down 240 points and investors fearing
a freefall, Insana reported that former Fed
governor Lyle Gramley, an advisor to
Schwab's (NYSE: SCH) Washington
Research Group, was talking to clients
about the possibility of a relatively swift
Fed rate cut via an intermeeting conference
call. Up to that point, no one had seriously
floated such an idea, at least not publicly.
Though few observers think former
governors such as Gramley have a direct
line to the Fed's current decision-making,
Hague and others say recent veterans have
an edge because they "understand the
psychology" of the FOMC members.
Apparently so. A week later, the FOMC
cut rates via a conference call, making
Gramley's prognostication absolutely right.
Yet, the market's retest of the September
1, 1998 lows actually ended with Insana's
report, which sparked an afternoon
recovery on October 8 that made up nearly
all the morning's losses. The Dow
continued to rally with the fury of Berkeley
radicals of yesteryear. In less than seven
weeks, G-force winds had sent the Dow
soaring 25% to a new high.
As long-term investors, Fools can afford to
focus on businesses and ignore most of this
Fed play-by-play analysis. Still, it's easy to
see why traders like to be wired into G and
the posse of informed observers he attracts.
A lot of the market's short-term gyrations
depend greatly on what Greenspan does
about interest rates -- or, at least what the
more widely watched commentators
surmise he will do.
fool.com |
