<<Greenspan sees it but will get behind the curve because>>
Jim here is a few comments on my last issue on Greenspan etc.
I believe the most important thing that has happened regarding the equity
markets in a long time was Greenspan's testimony.
Greenspan indicated that the biggest threat to continued prosperity was
the equity asset bubble and if it does not deflate very soon he will
start thrashing a needle at it. When the most powerful man regarding
economic and monetary policy makes such a major change in policy we
should listen carefully and act accordingly.
Greenspan has taken a major shift in policy and it seems hardly anyone
has caught on. The main stream press and Investment opinion is still
fixed on the old and usual economic indicators, CPI, PPI, GDP and
durable goods orders etc. while Greenspan is saying this is no longer
the threat or what he is concerned with. The beginning of his testimony
was saying the old economic indicators are less important and new ones
are having more influence on the economy
"many of the empirical
regularities depicting the complex of economic relationships on which
policymakers rely have been markedly altered"
Greenspan then goes on to say how continued low inflation and good
times, referred by myself and others as the 'Goldilocks economy' has
induced and complacency for risk
"such a benign
economic environment can induce investors to take on more risk and
drive asset prices to unsustainable levels. This can occur when
investors implicitly project rising prosperity further into the future
than can reasonably be supported"
This newsletter has talked for some time on the inflation problem
being 'asset inflation' and Greenspan's speech is riddled with such
references. The Fed has singled out real estate and equity speculation
as the main threat of potential destabalization.
Greenspan talks about the labor market growing tighter and tighter
and can't continue and this is being driven by a huge demand for goods
and services. Labor productivity has not grown fast enough and in
turn consumers have increased their spending by running down their
savings. This has been accommodated by booming equity and real estate
prices (bubble) that causes people to spend ever more and adding more
pressure to already tight labor markets that will eventually lead to
higher wages and inflation.
"That last development represents an unsustainable trend that has been
produced by an inclination of households and firms to increase their
spending on goods and services beyond the gains in their income from
production. That propensity to spend, in turn, has been spurred by the
rise in equity and home prices,"
Greenspan is also saying brining an end to this asset bubble soon
would be good timing, when the economy is strong.
"Even if this period of rapid expansion of capital gains comes to an
end shortly, there remains a substantial amount in the pipeline to
support outsized increases in consumption for many months into the
future. Of course, a dramatic contraction in equity market prices
would greatly reduce this backlog of extra spending."
Greenspan believes the Fed can control the consequences of popping the
bubble and that problems following the bursting of the Japanese bubble
for example were a result of the wrong policies following the 'pop'.
"While bubbles that burst are scarcely benign, the consequences need
not be catastrophic for the economy."
Greenspan is trying to warn or prepare us for a stock market crash or
big down turn. If it does not happen on its own, he will cause it.
Hopefully it will be handled properly.
"And certainly the crash of
October 1987 left little lasting imprint on the American economy."
Greenspan also says that now is a good time to have a stock market
crash.
"Should volatile asset prices cause problems, policy is
probably best positioned to address the consequences when the economy
is working from a base of stable product prices"
"It is the job of economic policymakers to mitigate the fallout when
it occurs, and, hopefully, ease the transition to the next
expansion."
This is how Greenspan ended his speech. Why would he end it this way
unless he believed a fallout would occur. Will the Fed keep increasing
rates until the a fallout occurs? I believe so, unless it happens on
its own before hand. Tuesday's report that Consumer confidence has hit
a 30 year high, all but guarantees further rate hikes.
Basically the Fed believes the biggest threat to the economy is asset
price inflation and they plan to reign it in
The Fed raised rates 0.25% on Wednesday as expected but the market
celebrated because of the surprise stance of the Fed changing from a
bias of raising rates to neutral. I expect this change could have been
because the markets have gone sideways and the bond market has been
killed, already increasing market rates and/or the problems in South
America that are surfacing. The Fed has also raised rates many times
in the past from a neutral stance, possibly they are trying to create
uncertainty or take the market more by surprise with the next rate
increase. As usual it is always a guessing game what the Fed is up to. |
