Heinz, interesting point on CSCO. Abelson contends Greenspans epiphany included a reference to Dutch tulip bulbs.
August 30, 1999
Werner Visits Wall Street
By Alan Abelson
Heisenberg is alive and well.
And so is his principle.
Don't feel bad if the name doesn't ring a bell. Unless you're into quantum mechanics or, at the very least, like to curl up with a dogeared physics text, there's no reason it should. The Heisenberg we're referring to is the distinguished (and departed) Nobel Prize winning German physicist, Werner Heisenberg, best known among hoi polloi like us for the uncertainty principle.
In rough translation, that principle posited that certainty in scientific quest will always be compromised because the very act of observation alters what's being observed (we did say a rough translation).
As it happens, Heisenberg and his principle, quite unannounced, showed up in Wall Street on Friday and gave the markets a fright. And they were escorted there, if you can believe, by none other than Alan Greenspan.
Not that Mr. Greenspan was spotted prancing about with a ghost and a principle in the neighborhood of Broad and Wall. In point of fact, he was at some remove from that infamous intersection, stretching his limbs in Jackson Hole, Wyoming.
We both envied and commiserated with the Fed chief. Envied because Jackson Hole is one sweet place to be. On the other hand, its normally pristine air was strangely noxious, a condition that was traced, thanks to an emergency investigation by the Environmental Protection Agency, to the presence of a large group of central bankers.
And indeed, besides yielding to an impulse to flee Washington in late August, when that city's resemblance to Hades transcends the metaphorical, Mr. Greenspan had journeyed to Jackson Hole to deliver some words of wisdom -- or at least talk to -- the assembled central bankers. And it was from that podium that he loosed Heisenberg and his principle on unsuspecting Wall Street.
Mr. Greenspan pulled off that bit of long-distance prestidigitation by first informing his well-fed, impeccably barbered audience that he and his merry band at the Federal Reserve had discovered that the stock market has an effect on the economy. Needless to say, but we will, anyway, after gasping in astonishment, the bankers rose to their feet (which is not an easy maneuver for a number of them) and spontaneously saluted Mr. Greenspan with a burst of applause.
But then he confessed that the Fed had not been able to determine how the stock market affected the economy. And that's when Mr. G began to conjure up the spectre of Heisenberg. So, Mr. G went on, it would be necessary that he and his mates keep close watch on the stock market to try to get a handle on how it influenced the economy.
Presto! That sent Heisenberg and his trusty principle winging to Wall Street, where, frankly, they gave the poor denizens conniptions. For said denizens perceived that the very act of focusing on the stock market inevitably meant that the Fed would exert an impact on it. And since the market had managed to do rather well for going on nine years absent such attention, they feared Fed focus could only spell trouble.
And, it may really surprise you, we have a hunch they're right.
The stock market actually took awhile to grasp the implications of the Fed's epiphany, as disclosed by Mr. Greenspan, and it wasn't until rather late in the session that most of the damage was done. The explanation for the somewhat delayed reaction was that it took investors three-four hours to decipher what Mr. G was saying. In contrast to some of his recent pronunciamentos, which have been relative models of clarity, in his remarks to the central bankers, he reverted to his former public-speaking style, which features impenetrability enlivened by occasional obscurity.
The bond markets were much quicker to get the message. We're not sure whether bond people are smarter than their equity counterparts or more nervous.
Despite Mr. Greenspan's dense language, which may have been a bow to his audience, since central bankers tend to talk in tongues, certain key words and combinations of words came through loud and clear to investors. One was his labeling of the stock market's rise over the past five years as "extraordinary." That may lack the rhetorical flourish of "irrational exuberance," but it somehow struck an ominous note just the same.
Especially since he suggested that making the rise all the more "extraordinary" was that it couldn't be explained entirely by strictly economic drivers like earnings. Rather, he indicated less savory factors also were at work, alluding to "waves of optimism and pessimism." Since pessimism has been on extended leave, one can only assume the waves he had in mind were bullish ones.
Morever, he indicated that even earnings have been hoked up, in some instances by capitalizing expenses, but more insidiously by disguising labor costs through the use of options as compensation instead of traditional coin.
We'll refrain (with some difficulty) from musing on why the Fed has come so late to the realization that the use of stock options instead of cash to pay employees may be distorting (read: understating) wage inflation. We'll even refrain from voicing the suspicion that to do so would have been politically incorrect.
But that it has finally taken public note of the phenomenon doesn't bode well for companies fond of stock options and particularly for high-tech outfits, the most generous corporate bestowers of such goodies.
Mr. Greenspan also commented on the role of leverage in kiting asset values, citing the ballooning of home equity loans. He did not explicitly tie those borrowings to investment in the stock market. Still, it wouldn't shock us if it emerges he suspects there is such a tie.
Any speech that makes mention of Dutch tulip bulbs can't be considered entirely favorably disposed toward the stock market. And when that phrase trips off the lips of the chairman of the Federal Reserve, it's a tad unnerving. All the more so when it's coupled with the expletive "bubble."
Investors, then, were correct when they felt bad vibes emanating from Jackson Hole.
In contrast to his vague fret about overexuberant speculation three years ago, Mr. G's concerns last week were laid out in some detail. Even more to the point, in contrast to simply tut-tutting, this time around, the chairman proposed an agenda of sorts.
How it plays out obviously nobody can say with assurance. But only the most committed bull (or maybe only those deserving of commitment) can see it as a plus. |
