BLASPHEMY
By Mike Gasior
afs-seminars.com
I cannot believe that three years have elapsed since I began writing
this newsletter and that this is my third year-end edition. Without a doubt, it has been a historic 36 months in both the financial markets and the economy and I frankly believe that there is much more excitement still ahead of us whether any of us feels up for the excitement or not.
As is my habit I will review how I did on some of my predictions from a year ago and make more foolish prognostications about what I think might happen in the coming twelve months. I definitely also want to touch upon some major themes which are affecting, or will affect the markets and the economy at large in the near future.
Now let me get to the explanation for what seems a peculiar choice for the title of this newsletter.
ALAN GREENSPAN HAS TO GO
Thousands of readers of this missive have seen me live and have likely heard me not only explain what the Federal Reserve is and had me explain the role of central bankers, but have also heard me sing the praises of Fed Chairman Alan Greenspan. Even in these writings of mine I have been prone to gushing words about him and would sing halleluiahs about how lucky we all have been that he has been on standing guard for the past 15 years. This is what makes what I am about to say next extremely hard for many of you to believe, including myself to a large degree.
Alan Greenspan has to go and the sooner the better.
As much as I continued to pray at the alter of Chairman Greenspan even throughout this past year, a new word had begun to creep into my vocabulary regarding actions recently taken by the Fed with monetary policy: hysterical.
Most Americans and other people around the world did not appreciate that 2001 was EASILY the most historic year ever in the way in which the Federal Reserve dropped interest rates in an effort to stimulate a dying economy. They dropped rate seven times prior to September 11th and then dropped them four more times after the attacks for a total of 11 cuts within the calendar year. If Greenspan was a pilot and the economy was an airplane, Greenspan clearly thought the economy was in a 90-degree dive straight down.
For me, the most recent move by the Fed to drop rate another 50 basis points (half of a percentage point) was the straw that broke the camels back for. For the life of me I could not, and can not, figure out who exactly that decline was supposed to benefit since consumers have enjoyed basically 0% financing on vehicles for the past 18 months and the lowest mortgage rates in 30 years. Corporations have used the lower rates to more than double their outstanding level of debt to almost $4 trillion by the end of this year, versus under $2 trillion at year-end 1995.
So if the 50 basis point drop in rates was not to benefit consumer or corporate borrowers, then who was it supposed to benefit? Well my thought is simply Chairman Greenspan himself. Obviously nobody wants to become President of the United States or Chair of the Federal Reserve for the money. No doubt much more money would be available in the private sector for former Presidents and Chairs. The issue that I believe is driving Alan Greenspan right now is what his legacy will be after he leaves the Fed and how history will treat him. I have said many, many times that he is already held up as one of, if not THE best Chair the Federal Reserve has ever had, and I am not alone in those feelings either. Alan Greenspan himself has seemed to enjoy taking the credit for the wonderful world we enjoyed during the 1990's where even morons got rich, the stocks of horrible companies went up and unemployment almost didn't exist.
The problem in all this is that the market and economy we are experiencing right now had to happen, but it should have happened much earlier than now and didn't have to be nearly this bad. The decline in corporate profits are suddenly of large concern to nearly everyone, but people forget that the peak in these profits occurred five years ago in 1997 and have profits have been declining since then. As manufacturing hours also began to decline starting in 1997, unemployment has begun to increase in lockstep. In 1998 several Asian economies and markets unraveled and the U.S. stock market dropped 20% during the summer of that year. Then the Long Term Capital Management hedge fund in Greenwich, Connecticut busted and threatened to take several large banks and investment banks down with it. Many of them had negative market exposures of their own in addition to their links to this hedge fund. Chairman Greenspan, who was determined not to let such a catastrophe happen on his watch started printing money and flooding the markets with credit and liquidity and the crisis was averted for a while.
I recently read a terrific quote from a gentleman by the name of William McChesney who was Fed Chairman from 1951 until 1970. His thought was that the role of the central banker was to take away the punch bowl right before the party really gets rolling. Well, Alan Greenspan didn't take the punch bowl away at all. In fact, he poured a liter of vodka into it instead and the world gave him plenty of excuses to do it. First the Asian and Russian crisis's of 1998. Then 1999 provided him with Y2K as another excuse.
An excuse to do what you ask? An excuse to inject a brand new $3 trillion dollars into the economy between 1997 and 2001 at a time when companies profit levels were in steady decline. If you look at the money supply as measured by M3, which includes literally ALL currency in circulation, it increased 61% during that time period. This massive inflow of cash into the economy allowed questionable companies to limp along for a few extra years before the inevitable bankruptcy of so many of them and made their ultimate fate worse than it would have been. This policy also allowed the stock market to inflate further, and avoid the inevitable decline we are witnessing right now.
Now we've arrived at the point where: |
