=====>Chronicles of Fed Blunders: ==> From Commentary by David Tice:
<<Charles Clough, Chief Investment Strategist for Merrill Lynch offered the following opening comments during his very cogent Monthly Strategy Call earlier this week. He stated, "Our capital market views are based on the degree to which the world's financial structure is dependent on credit, particularly Federal Reserve credit. The Fed's response to ‘the worst financial crisis in 50 years', an utterance reportedly made by the U.S. Treasury Secretary in the midst of last summer's turmoil, was the most aggressive reflationary policy response ever. When the capital markets closed in the wake of Russia's default and collapsing hedge funds, the banks stepped into the brink. Bank credit, which ordinarily grows 5% or so each year, suddenly exploded to a 22% annual rate of growth in the 1998 fourth quarter, and that credit found its way directly into the financial markets. Bank loans for the purpose of purchasing securities began rising at an unprecedented 120% annual rate; bank buying of non-Treasury securities, i.e., corporate bonds, stocks and mortgages, rose at an annual rate of 130%. The recovery in stocks and the reopening of the low-quality bond market is directly related to the Fed's aggressive support. The powers that be, seem intent on keeping the U.S. consumer spending by inflating the capital markets."
Mr. Clough's analysis is right on and we salute him. We will, however, add an additional key factor behind the capital markets' historic fourth quarter reflation: Mortgage lending behemoths Fannie Mae and Freddie Mac combined to create a stunning $88 billion of credit growth as they ballooned their balance sheets like never before. In last week's testimony before the House Ways and Means Committee, Chairman Greenspan testified that the Fed's easing of monetary policy this past fall was in response to "an abrupt stringency in financial markets." Well, he has certainly more than succeeded as the absolute inverse of stringency has powered a doubling of the NASDAQ 100 since October lows and created more than a $3 trillion gain in stock market value.
As the NASDAQ 100 has now nearly tripled from the level where Greenspan warned of "irrational exuberance" just over two years ago, Greenspan's recent comments are rather disconcerting. In his testimony last week before the House Ways and Means Committee, Greenspan stated, "I believe, at root, the remarkable generation of capital gains of recent years has resulted from the dramatic fall in inflation expectations and associated risk premiums and broad advances in a wide variety of technologies that produced critical synergies in the 1990s." Completely ignoring historic credit and speculative excesses, this is fallacious analysis and certainly not what one would hope to hear from a responsible central banker in the midst of a mammoth financial bubble.
He, however, certainly outdid himself yesterday with his testimony before the Senate Budget committee. With CNBC carrying his comments live to millions of Internet traders, Wall Street players, and small investors, Mr. Greenspan responded to a senator questioning if sound fundamentals were supporting the Internet stock phenomenon. Despite what was an ideal opportunity to "poor some cold water" on overheated speculation, Mr. Greenspan, instead, provided what was widely interpreted by the media as a strong endorsement. The Washington Post went with the headline "Greenspan Applauds Internet Stock Frenzy." We thought his comments so extraordinary, we have included much of Mr. Greenspan's Internet discussion.
"There is something else going on here though, which is a fascinating thing to watch. And it is for want of a better term, the "lottery" principle. What lottery managers have known for centuries is that you could get somebody to pay for a one-in-a-million shot, more than the value of that chance. In other words, people pay more for a claim on a very big payoff, and that's where the profits from lotteries have always come from."
"But to answer the question –"Is there some hype in this?" of course, there is some hype. There is hype in lots of things. But there is at root here something far more fundamental. And indeed it does reflect something good about the way our securities markets work; namely, that they do endeavor to ferret out the better opportunities and put capital into various different types of endeavors, prior to earnings actually materializing. That's good for our system. And that's in fact, with all of its hype and craziness – is something that, at the end of the day, probably is more plus than minus."
So, choosing gasoline instead of "cold water", Mr. Greenspan endorsed this astonishing speculative mania. For the day, Broadcast.com surged 25 points and Yahoo! rocketed almost 30 points as an index of Internet stocks increased its three-month rise to 162%. It is truly incomprehensible that our country's top central banker, the designated protector of our financial system, can somehow profess that a market mechanism functioning like as he describes, a "lottery", is somehow efficiently pricing and allocating capital in a sound manner, assuring the long-term health of our financial system and economy. We are now at the point where Mr. Greenspan not only accommodates the unprecedented money and credit growth that is powering a catastrophic bubble; he now is the leader in justifying unprecedented speculative excess. And while the Internet craze is a "fascinating thing to watch" for Mr. Greenspan, history will not have kind words for such "voyeur" central banking. >> |
