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Jul 26 1999 5:58AM ET
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What to Watch For in Greenspan Part II
by Robert Brusca
President, Ecobest Consulting
Special to CNBC
Old movie buffs know that Humphrey Bogart never said, 'Play it again,
Sam" in the movie Casablanca. But the citation somehow became
ingrained in our memories and associated with that film as though it had
been spoken. There is a lesson here: Listen carefully and don't memorialize
something that never happened.
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Parsing the Fed chief still tough as ever
Greenspan testimony puts productivity back in focus
No one really wants Alan Greenspan to repeat what he said last week.
(After all it's a Fed Chairman's testimony not a James Bond movie -- once
is enough!) But he's going to do it anyway. According to
Humphrey-Hawkins protocol, the Fed Chairman gives his talk on the
economy to both the House and Senate banking committees, alternating
one first, then the other, year-by-year. Each year, there are two series of
testimonies under the Humphrey-Hawkins Balanced Growth and Full
Employment Act, one in February, the other in July.
Whenever the Fed Chairman talks, we ought to listen carefully. There is no
dearth of commentary on what he said and what it really meant (this piece
is yet another example of that). But listening for yourself is the best way for
you to know what is going on and to weigh comments by commentators
(like me).
Catching the re-run is like renting Casablanca from Blockbuster to see
what Mr. Bogart really did say. You get a chance to hear Mr. Greenspan
again this week. But unlike Casablanca, Mr. Greenspan can change the
"spin" he puts on the testimony the second time around, even though he will
read from the same text. Listening to the Q&A session is still mandatory
for serious investors. What should you listen for?
Contradiction Resolution In the first leg of his mid-year testimony Mr.
Greenspan noted that the economy was growing at a rate beyond its
sustainable pace. Later, in the important Q&A session, Congressman
Barney Frank (D-Mass.) got Mr. Greenspan to say that "we cannot tell at
any point in time what actual potential (growth of the economy) is because
it is very difficult to measure." Mr. Greenspan said that, instead of nailing
down potential growth, what is important is to identify the imbalances in the
economy.
So which is it? Is the Fed concerned about unsustainably strong growth, or
is it concerned about growing imbalances? Virtually all the Fed's discussion
under Mr. Greenspan has concerned obtaining maximum sustainable
growth. His road map to get there has been to keep inflation down. His
about-face in answering Frank seems both telling and shocking. But did we
really get it right? We will want to listen for more on this major schism in
Mr. Greenspan's own beliefs. Is change afoot?
Key Imbalances If the economy is beset with key imbalances, what are
they? What is Mr. Greeenspan really looking at? How are these likely to
affect the making of policy?
Labor Market: We know the Fed Chairman is concerned with the
tightness in the labor market, an imbalance of sorts that could bring on
wage inflation. Further tightness alone now seems likely to lead the Fed to
a rate hike.
International Trade: Greenspan has become more concerned about the
trade and current account deficits. These gaps have become very big and
could themselves threaten to pressure U.S. interest rates higher. Look for
any sign that the Chairman connects recent dollar weakness with a growing
trade gap or with a diminished appetite for U.S. dollar-denominated
investments by foreigners. That kind of concern could lead the Fed to hike
rates.
Budget Surplus: As Mr. Greenspan has said, it's a nice problem to have,
but the fiscal surplus is still an imbalance. The surpluses are huge and how
they are dealt with will have repercussions for monetary policy. The
surpluses and the money they represent are currently the focus of a real
political tug-of-war between Republicans and Democrats. Stay tuned to
this one, and not just over this next week.
The Stock Market: Mr. Greenspan has spoken on several occasions
about how he is wary of the stock market. This time around he made some
new stunning statements. They represent diametrically opposite positions
from those he has held in the past. Now, the Fed chief all but admits that
he just might hike rates to slow the stock market. Listen for more on this to
be sure!
Mr. Greenspan and the Stock Market While this title may have the
same cadence as another popular old movie title (Mr. Smith Goes to
Washington), Mr. Greenspan is hardly the idealistic figure that James
Stewart played in that movie.
Mr. G has been mired in pragmatism. Mr. Greenspan was an economic
consultant long before he became Fed chairman. He had been active in
Republican politics. He headed the commission that looked into the Social
Security funding problem He has been plugged into Wall Street,
government, politics, and the economy for sometime. And he has been
commenting on stock market values for quite a while as Fed chairman.
At one point he essentially called the stock market subject to "irrational
exuberance" (when the DJIA index was around 6,700). Now, with the
market some 60 percent higher, it seems that he just can't take it anymore.
He is concerned again, concerned enough to make implicit threats.
In a portion of the written testimony that was not actually read aloud to the
committee, Mr. Greenspan penned, "Should an asset bubble arise, or even
if one is in train, monetary policy properly calibrated can doubtless mitigate
a part of the impact on the economy."
Given Mr. Greenspan's tendency for understatement and word-mincing,
this is a fairly clear indication that he would be willing to adjust monetary
policy for the sake of the stock market alone -- if he felt the action would
not "harm" the rest of the economy. And this is a new wrinkle for him. He
previously said that aiming at the stock market was not the Fed's job.
True, the new statement is not a full reversal of that position, but it's enough
of one that it should raise eyebrows. Combine this change with the new
sub-theme of his testimony being a focus on imbalances instead of
economic growth rates, and it seems that the news on the stock market
and its potential to impact monetary policy has been downplayed.
Listen carefully to what Mr. Greenspan says about stocks in the next
testimony. He is running out of patience and you could be at risk!
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