Greg,
They the FED have single handedly smashed the nascent new economy under the misread of inflation that has been no where to be seen for years. I hope they replace them all soon. I wouldn't care what it did to the market short term. The FED has way too much power, the market is better suited at controlling the economy.
I'm not so sure. I've read that just since September, overall forward earnings estimates have been revised downward from around 13% increase to around 10% increase. A credit tightening is certainly not the sole cause of this, and probably not even a major cause. In my view, the potential for a bubble developing in the stock markets was great, and bubbles when they burst wreak absolute havoc. Just look at Japan, for example, which has yet to even begin to recover----almost 15 years later. Or ask somebody who bought real estate in Southern California at the height of the real estate bubble in the mid to late 80s, some of whom have still not broken even.
Earnings and the future prospects of earnings are the driving force which determines stock price in the medium and long term, and stock price will always regress towards valuations based on earnings expectations, New Economy be damned. The basic premise behind the New Economy which differentiated it from the Old Economy was that earnings growth expectations were gross underestimates secondary to the New Economy companies creating vast new markets, and the anticipated exponential expansion of existing markets. To the extent that this was perceived to be true (and I fully admit that I perceived it to be so), then just to that extent were stock prices driven up. Now, it appears increasingly evident that the basic premise was not really true, at least to the extent that initial perceptions believed it to be true, and so stock prices are adjusting to conform with perceptions which are more in accordance with reality. This once again highlights the dangers of extrapolation.
Me, I'm haunted by the things I read and ignored all along the way, vis-a-vis every bubble is accompanied by the widespread misperception that this time things are fundamentally different, and that's why the principles of economics don't apply here.
Greenspan may someday be considered something of a hero, if it turns out that he did indeed play a major role in inhibiting the development of an expansionist bubble whose collapse would be certain to have long term devastating effects. If the expectations of earnings growth going forward which fueled the explosion in the Nasdaq to reach the 5,000 level ever turn out to be realistic, the market will push Greenspan out of the way, and bid stocks accordingly. But I doubt that this will happen.
In the medium term, with the prospects of recession looming ever larger, Greenspan will likely be the villain. But, if the scenario had played out under conditions of eased credit, then the Naz would likely be nearing 8,000 or 10,000 now, with greed rampant. Then, with everybody and their brother singing the praises of stocks, and even Joe Lunchbucket taking out a loan on the house, hocking everything and going into debt to buy stocks on full margin to get a piece of the "get rich quick" stock gold rush-----when economic realities finally forced a recession or slowdown, what might be the impact? And how long might that last?
While the stock market crash of 1929 certainly did not cause the Great Depression, nevertheless the effects of the economic realities (i.e., impending depression) in the context of a market which was largely unchecked, and in which credit was loose and margins excessive, was such that recovery did not really occur until over a decade later, and might have been much longer had the powers that be not gotten us into World War II. I'd say Greenspan has noted well the lessons of history---and, of critical relevance, understands the value of discipline.
Love him, hate him, whatever. At least Greenspan takes action based upon real data within the context of fundamental driving forces of economics----stock market be damned. And, I might not like it, but I can see from my own experience with this that I can be just as guilty of "irrational exhuberance" as the next guy, because I'm human, and therefore susceptible to the untoward and self-defeating effects of greed and fear---though most often I am unaware of this, much to my later dismay. So I am unknowingly in need of somebody or something which can bring my perceptions more in line with reality, though I kick and scream and call names all along the way.
Don't get me wrong, I don't suggest that AG should be canonized saint, just that events have given me a better understanding of my own limitations. And, a better realization that my misperceptions are unconscious, and quite capable of being driven into regions which are just not based in reality by those old bugaboos, greed and fear---again, much to my eventual dismay.
Given that, the worst thing for me in the long run would be for the markets to control or determine the economy, but its also thing I would want to happen.......but, there's my misguided self interest showing its face again. And though I've always resisted, I must admit that it has been invariably true that what I've needed has been discipline. My parents, teachers, and every authority figure in my life have been right all along.
All JMVHO.................
Regards,
Walkingshadow |
