Today I’m going to tell you a story about two people. Both of them are real, although I don’t know the name of the second person.
The first person served on the Federal Reserve Board in the 1990’s. He was an economist with a grasp of the history of the economy and the financial markets. He thought being appointed to the Federal Reserve Board would be a fun, interesting, and exciting career move. Instead he became disillusioned and disappointed.
He found that being a member of the Federal Reserve Board was not an intellectually stimulating thing to be. Alan Greenspan dominated the whole board and the rest of the members just tended to be yes man. Many of them had very little interest in being on the board and others didn’t have the knowledge to make effective decisions. As a result Greenspan swayed over the board and dominated it. Any dissent was muffled out and our protagonist became a dissenter.
One day this man looked a chart of the stock market and the valuation of the S&P 500 and took note that it had reach levels not seen since the peak of the 1929 stock market crash. He believed those history books that blamed the Great Depression and 1929 market crash on a loose Federal Reserve policy that created a speculative bubble. He also blamed the recent Japanese collapse on loose monetary policy that created a stock market and real estate bubble. He believed the fallout from those bubbles were the reasons for the length and severity of the Japanese downturn and the Great Depression.
But he knew there is a problem with bubbles. Once they are created they can’t be stopped without causing economic calamity and the bigger the bubble the worse the calamity. So the best thing to do is to prevent bubbles from happening in the first place.
This man believed that Greenspan was not doing that. In fact he was doing the opposite.
Newly released transcripts reveal that during a Federal Reserve meeting in 1996 this man spoke up and said that the Fed would have to soon take measures to prevent a stock market bubble and collapse. The other members on the Fed board shook their heads and then nodded as Greenspan said, “I am not sure we would know a bubble if we saw it, at least in advance.”
Our dissentor then said that the markets were poised for a “gamblers ruin.” And then at the end of the meeting prophetically gave the last word:
`Readers of this transcript five years from now can check this fearless prediction: profits will fall short of expectation. Unfortunately, optimism is ripe in the markets.''
A few months later Greenspan testified to Congress and gave his famous “irrational exuberance” speech and warned that the markets maybe or maybe not were overvalued.
Our protagonist thought maybe he was having some influence, but then looked in dismay as Greenspan cut rates over and over again in order to bailout international bankers and hedge funds who made some pretty bad investments during the 1998 Asian/Russian economic crisis and cried for help.
Convinced that the system was now on the course to implosion, our protagonist resigned from the Federal Reserve Board and sold every single one of his stocks in 1998. He put his money in treasury bills and collected interest.
You know what happened next. The market went up like mad for another 2 years. Our man wrote a book called “Economic Puppet Masters” that attacked the IMF and World Bank and Greenspan’s pattern of bailout and warned that if the pattern of bailout continued an even larger and more severe crisis would sweep over the world’s economic system.
No one noticed the book at the time. The market went up like mad and books like DOW 50,000 were on the best-seller list instead.
Then the bull market died and the market crashed. The economy tipped into a recession and instability reigned throughout the world. Our protagonist became a prophet for a few months. Presidential candidate George Bush even hired him as his Chief Economics Advisor during his campaign.
The man’s name is Lawrence Lindsay. Every once in awhile there is a rumor that he will become the next Chairman of the Federal Reserve Board. But right now he is stuck in a closet in the White House and has very little influence over the President. His ideas aren’t politically popular and no one wants to hear the truth about the economy and the stock market. Better to trout the Treasury Secretary out on TV every 3 weeks to claim that the economy has bottomed and boast that it is about to boom than to take the risk of looking like Jimmy Carter.
And now for our second character.
He runs a mutual fund and is a regular on CNBC. He owns a lot of tech stocks in his mutual fund and doubled down when the market made a top in January and everyone he knew said that the economy had bottomed. Yeah, the market may have been overvalued at the time, but he thought that the market wouldn’t drop. The economy and earnings would just catch up to the market while the market stayed in place. Every other bear market bottomed with a rally that eventually retraced the lows. But he thought this time was different. Everyone said it was!
His top holdings are in AOL, Nividia, Cisco, and Corning. People say these stocks are overvalued, but they are tech stocks so he thought they were different. He says:
“Things are getting tough now though. The SEC is investigating Nividia for accounting fraud and that damn Chris Byron keeps writing articles about Cisco detailing fraud and insider trading. If it weren’t for that damn Enron and these reporters the market wouldn’t drop and I would look smart for not betting against the recovery.
But the market is dropping and these people who play with charts say it will drop more. I’m in a tough spot. I need to have all of my money invested in the market. That is what my fund does and I need to get more money in that fund. That’s why when I am on TV I am really positive even though everything is bad right now.
I’ll tell you what I’m doing now. I’m starting to sell some of my tech stocks. I’ll buy them back after the accounting worries go away and the market rallies and people tell me things are better.
I have to invest the extra money so I’m buying DOW stocks. Things like Caterpillar and General Electric. I’m trying to hide in the DOW. I hope it works.
Let me straighten out my tie and comb my hair for the TV. I think I’ll tell them to buy today.
My story can tell you something important about the market. Right now hundreds of fund managers are doing just what I am doing. They are selling tech and buying the DOW. That is why the DOW isn’t falling and gets above 10,000 every couple of days. The problem is that if that DOW falls through support then a lot of us are going to get scared and sell our DOW stocks too. That happened last year when the market fell in the winter and bottomed in April. Back then I had my money hidden in the DOW until the DOW crashed along with the Nasdaq.
We’ll probably have to sell even more than I like because we keep getting orders to liquidate positions and raise cash in order to meet redemptions. This has been going on since the beginning of the year. It’s a touchy subject and makes me uncomfortable. It is like a vote of no confidence. I don’t even talk about it with my fund manager buddies when we go on vacations, I mean conferences. We hope this problem will go away. That CNBC is good about it too. I like that Maria. She doesn’t talk about this either. If she were to say that people were getting out of funds than she might encourage even more people to do it. .She is good at protecting us.
I like Alan Greenspan. I hope he cuts rates again. I bought a lot of bad stocks over the years that keep dropping and I can use a little help. You need to be patriotic and put more money in my fund. Or just buy stocks. That helps me too. We got a war going on. And I’m not talking about that terrorist war that everyone has forgotten about. I think we won? I’m talking about a war of survival for my fund. A lot of mutual funds closed shop last year and I don’t want to be forced to do that. It’s fun being on TV and going to parties. It’s fun to pretend to be a good stock picker and financial researcher. People really look up to me and my wife thinks I am really smart. So does my girlfriend. The fundamentals are good right here. Someone told me that the economy bottomed and semiconductor stocks are going to go to the moon. Sometimes I buy a stock and go on TV and tell you to buy and then I sell it right afterwards. It doesn’t get anymore FUNdamental than that. And it helps my portfolio. So does saving my money to buy 10’s of thousands of shares of Nividia to make it go up on the last day of the month so that the holding look even better. I got all kinds of tricks that I play.
Right now you can’t see me. I’m hiding in the DOW. You’ll get a letter in the mail about how the fund is doing. Don’t open it! It might have anthrax on it." |
