Just for fun...a little Abelson snippet...
...Besides the fact that they just couldn't contain their bullishness anymore, investors charged wildly into the market because Alan Greenspan told them to.
Or, at least, that's how they read the sacred text issued by the Fed that accompanied its action. For even while flicking rates up a tick, Mr. Greenspan seemed to give the investing multitudes the all-clear by disclosing a change to a neutral monetary stance from the previous tilt toward tightening. This postural shift was widely -- and, we must say, logically -- viewed as assurance that another rate boost was not immediately in the cards or perhaps not in the cards at all.
The irony is so obvious that were we endowed with even an iota of shame, we'd avoid spelling it out. But we can't resist. Having scolded the stock market on more than one occasion (the latest a bare two weeks earlier) for being a touch frothy and overvalued, and having warned gravely of its potential to overstimulate the economy and even bring an early end to our lovely, booming expansion, on Wednesday Greenspan & Co. encouraged the market to get even more frothy and overvalued. Which it lost no time in doing.
What was in the good governors' minds? Well, as usual, we suspect, not much. Shifting to neutral from a bias to tighten was something the Federal Reserve often has done whenever it increased the cost of credit. That, for example, is precisely what it did in 1994-95 during a stint as serial rate-hiker, when it effected six increases, in the process doubling the federal funds rate, to 6%.
The difference, of course, is that until this year the world learned what the Fed's monetary stance was only weeks after the fact. So investors couldn't very well take "neutral" as meaning "buy," as they obviously did last week.
Along with Wall Street, Washington was widely pleased by the Fed's tepid action and purring words. Which perhaps is all ye need to know as to why the Fed did what it did and said what it said.
It's hardly a stretch to imagine the stock market, having started out the new quarter with such a big bang, gathering strength in the weeks ahead, fueled by sparkling earnings reports and fresh infusions of speculative adrenaline. That could have one heck of an impact on consumer confidence, already sky high, and consumer spending, already blistering.
Which, in turn, could turn up the heat on an economy already steaming along at a fairly torrid 4%-plus annual clip ... and give the Fed no choice but to raise rates.
Or, is that really the game plan?
Please, don't misunderstand. A congenitally peaceable soul, we'd hate to be mistaken for a hawk. Except for its ponderable presence in financial assets, inflation, we firmly believe, is pretty much of a phantom menace. And, goodness knows, we're not arguing that the Fed should have been more assertive and lifted rates by half a percentage point instead of a quarter.
Our beef is one we've sourly sounded before. If Mr. Greenspan believes that the stock market is too high and too hot, he has ample means via an increase in margin requirements to do something about it without visiting unnecessary grief on the economy as a whole. Certainly, the Jack-in-the-beanstalk rise in margin debt, which is probably only the visible part of on-the-cuff stock buying, suggests investors are growing wildly giddy on leverage. If he doesn't believe stocks are too high or the mood too speculative, then why keep yakking about it?
Fed, schmed, interest rates dance to other pipers, as well, as Thursday's abrupt reversal by the bond market rudely reminded one and all. What gave bonds a touch of the wobbles again, of course, was a smashingly strong report for June by our old friends, the purchasing managers.
The group's composite index climbed to a robust 57, up from 55.2 in May and the highest level in two years, buoyed by a revival in the manufacturing sector and the richer prices being garnered by companies for their goods. That 57 reading, incidentally, translates into a 4.7% GDP. And, all the signs indicate, the trend is onward and upward.
The message that came through loud and clear -- that the boom is alive and well -- was repeated with equal volume and clarity in Friday's employment numbers. Payrolls last month swelled by 268,000, solidly above expectations and in striking contrast to May's revised loss of 50,000 jobs.
And although the unemployment rate rose a hair, all of the rise was the result of an expansion of the labor pool. There were actually more people at work in June than May.
The extremely hospitable employment climate is evident not only in the additions to payroll and the rise in hourly wages, but also in the greater willingness of people to quit for another job or just to go fishing, confident they'll have little trouble latching on to a new paycheck.
A rejuvenated bull market and a boffo job market are catnip for consumers and a solid guarantee that they'll continue to spend with gusto and abandon. Great for the continuation of good times. But not very encouraging for those policy makers or professional kibbitzers who are banking on a slowdown to curb animal spirits and bring down interest rates.
What's more, threatening to make life even more difficult for these gloomy Gusses is the revival of exports and, with it, as the purchasing managers stress, renewed thrust in the long-dormant manufacturing sectors. The economy has done pretty well without conspicuous help from these precincts. Think of what it might do once they start perking.
The markets are not likely to ignore the implications of a simmering economy not so far removed from boil. After all, it was they, not Mr. Greenspan and his colleagues, that hoisted rates a full percentage point this year.
And, as we noted a few weeks ago, the capital markets are in for more woe from another source: the incredible avalanche of corporate borrowing.
The bottom line: Whatever the Fed's stance -- relaxed or tight, upright or supine -- rates are headed higher. Bad news for bonds and, if and when the fever breaks, bad news for stocks.
Happy holiday! |
