Ignore the Cheerleader-in-Chief
By Barry Ritholtz
RealMoney.com Contributor
10/15/2004 3:00 PM EDT
thestreet.com
In a speech at the National Italian American Foundation in Washington, D.C., Friday, Federal Reserve Chairman Alan Greenspan said he's not worried by the rise of crude oil prices to a record $55 a barrel.
"The impact of the current surge in oil prices, though noticeable, is likely to prove less consequential to economic growth and inflation than in the 1970s," he said.
Once the cheerleading crossed the tape, equity markets rallied while Treasuries slumped.
Forgive me for not being similarly inclined to genuflect toward the chairman's pronouncements. Despite Greenspan's sanguine attitude toward oil prices, I remain long-term bullish on the sector. I have longstanding long positions in BP (BP:NYSE) and ConocoPhillips (COP:NYSE), and recently added Interoil (IOC:AMEX).
I find traders' knee-jerk responses to Greenie's views on oil endlessly amusing. I guess they already forgot that on July 20, Greenspan testified before Congress that rising energy prices "should prove short-lived"; crude prices have risen nearly 15% since. Then there was Greenspan's amazingly bad call on natural gas in May 2003, when he warned of potential shortages; natural gas prices tumbled shortly thereafter. And let's not forget his advice to would-be home owners this summer, praising the virtues of adjustable-rate mortgages when fixed-rate loans were near half-century lows.
If you're thinking there's a pattern here, you're right. Consider the Road Runner routine the Fed chief pulled last year on fixed-income traders, which parallels what he did to equities traders in the '90s. I guess oil would complete the hat trick.
A quick review of the handiwork of this master bridge salesman: In a now infamous 1996 speech, Greenspan said, "How do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions?"
That was widely perceived as a warning that stocks had gotten too pricey for the Fed chief's taste. But only a year later, he started waxing eloquent on the majesty of productivity gains. Thereafter, the "productivity miracle" became a fixture in Fed speeches, white papers and FOMC meetings. It culminated in the massive 1999 liquidity infusion by the Fed in (erroneous) anticipation of a Y2K run on the banks. That surge in money supply effectively doubled the Nasdaq Composite from October 1999 to March 2000; I assume you recall how that ended.
Fast forward to summer 2003. The newest Fed concern was deflation. For a while the central bank seemed to have successfully jawboned the Treasury market into believing that rates would stay low for a long, long time. Greenspan even suggested that the Fed stood ready to make open market purchases to ensure rates stayed low.
As bond buyers then discovered to their chagrin, this statement turned out to be false. The fixed-income crowd became Wile E. Coyote to Greenspan's Road Runner. The Fed chief painted a tunnel entrance on a wall, and the bond boys ran face first into it. Forgive the equity crowd their snickering, as they had already paid their tuition to learn that costly lesson. Hey, it's the Fed chief's prerogative to change his mind ... but in doing so, he caused massive dislocation in one of the world's largest capital markets.
It now seems to be a regular cycle. Today, we heard the Fed chief's pearls of wisdom on oil and commodities. One of the phrases that caught my ear was this one: "Obviously, the risk of more serious negative consequences would intensify if oil prices were to move materially higher." But couldn't Greenspan have said the very same thing when oil was at $40? How about $50? I wonder if he will be saying something similar if and when oil hits $60?
Pardon my cynicism, but I am grabbing my hat and leaving before the curtain falls. I know how this will turn out: The cheerleader-in-chief will cost the unwary a healthy chunk of change. Quite frankly, anyone who buys or sells anything based on Greenie's prognostications is very likely to get what he deserves.
At the time of publication, Ritholtz was long BP, ConocoPhillips and Interoil, although holdings can change at any time.
Barry Ritholtz is chief market strategist for Maxim Group, where his research and market analysis are used by the firm's portfolio managers and clients in the U.S., Europe and Japan. He also publishes The Big Picture, his macro perspectives on the economy and geopolitics, entertainment and technology industries. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Ritholtz appreciates your feedback and invites you to send it to barry.ritholtz@thestreet.com. |
