Is Greenspan Out To 'Get' Stock Market?
NEW YORK, Oct. 30, 1999 (Reuters) - Federal Reserve Chairman Alan Greenspan's views about the stock market and the economy have had an explosive reaction on Wall Street, turning the best laid-out investment strategies into a pile of rubble.
But investors are speaking back to the Fed chief and his dozen regional bankers.
''Why do we think they know better than a supposedly efficient market,'' says one online reader.
''Greenspan should be kept as far away from a microphone as possible,'' says another.
''Although it may appear that Alan Greenspan is getting senile and starting to repeat himself, his attempts at talking the market down are actually the result of a new Fed policy that specifically targets equity pricing,'' another claims.
Indeed, investors are worrying about whether the Federal Reserve will again raise interest rates, possibly pounding another nail into the coffin of one of history's greatest bull markets.
The Street's big concern is that Greenspan is out to ''get'' the stock market by unleashing a barrage of interest-rate increases. A boost in the cost of borrowing money can be a killer for a market that has soared amid a stable monetary environment.
Officially, the Fed says it wants to put the brakes on the economy and prevent inflation, which can breed in booming times, from eating away at people's paychecks.
But secretly, the Fed would love to knock the wind out of the market, which it views as a speculative bubble. It fears that the longer stocks keep rising, thanks to the longest peace-time economic expansion ever, the greater the risk of a crash, which could flush the economy down the tubes.
Thursday, the Greenspan had some rare kind words about the economy, acknowledging in a speech to a top-notch business group in Florida that the boom in technology and strong productivity gains has spurred the nation's expansion.
But Greenspan, the pessimist, could not resist adding that there were limits on how long productivity could continue to accelerate and eventually, inflation would rear up again. He also said that the recent jump in bond interest rates to two-year highs was starting to cap the super strong growth.
Greenspan has made it clear he is not going to look at stock prices when deciding whether to raise interest rates.
Yeah, right, say Wall Streeters.
The Fed chief has taken a lot of heat since he first applied for the job of the nation's Greatest Investment Strategist three years ago.
Critics say the Fed has no business telling investors that the market is too high. Will Greenspan's next trick be to tell people when to start buying because stocks are too cheap?
Is Greenspan smarter than the millions of investors who have decided on the level of stock prices, the critics wonder.
And, does anybody truly have the market cornered on what is the right price for stocks?
''Not even the world's most sensitive seismograph will be able to detect one investor who has made money following what Greenspan has said or does,'' said James Dines, publisher of the Dines Letter.
''Greenspan raised interest rates twice this year and the market went up anyway,'' he said. ''It's one of the biggest mass delusions I have ever seen, what I call the 'Great Greenspan' phenomenon.''
In the opinion of the Fed chief, investors have been overly generous in paying up for stocks.
In December 1996, Greenspan first talked of investors' ''irrational exuberance'' when the Dow Jones industrial average was only at 6,000 points.
With the Dow hovering at 10,700, the Fed chief whose remarks often are difficult to decipher, suggested recently that the nation's banks should prepare for the bursting of the stock market bubble.
The comments sent the Dow index into its worst weekly point drop in history in mid-October, a whopping 630-point fall.
The big worry is that the Fed policy-makers, who raised interest rates twice this summer, could be lining up for a third increase at their next meeting on Nov. 16.
History has shown that the market is usually shaken but not stirred by the first and second interest rate increase. But the third hike is usually the one that gets the most attention. It's a wake-up call for investors because it can open up the door to further credit tightening, which could choke the economy.
Lately, Greenspan has gotten a lot of criticism about his ''open-mouth market policy,'' which is not to be confused with the Federal Open Market Committee, the group that sets interest rates.
Mark Leibovit, an online market commentator for vrtrader.com., says Greenspan, as the head of the world's biggest banking system, is out of line in trying to analyze the market.
''Will he be willing to recommend buying stocks when they are depressed?'' he asked.
Leibovit said Greenspan does not have a perfect record when it comes to reacting to a crisis.
''Mr. Greenspan was a key player in the events leading up to the Crash of 1987,'' he said. ''Though not much has been made of those events and times ... when interest rates needed to be loosened at the moment when things were becoming unglued, he chose incorrectly to stay the course,'' Leibovit said. ''The results were catastrophic.''
The Fed chairman has been the head cheerleader in the burst-the-bubble game.
Although a market bubble is an elusive thing, Greenspan seems to imply that he knows what it looks like.
''We're seeing the perils of being more transparent,'' said Allen Sinai, chief global economist for Primark Decision Economics Inc. of the Fed's new policy to be less secretive about its closed-door deliberations.
''But my own philosophy on comments on financial markets is that the 'less said, the better,''' said Sinai, who has been tracking the Fed for the last 25 years.
''Unwillingly and unintentionally, senior policy makers have made comments in the past that have upset and moved markets and finally, have come back to bite them,'' he said.
Perhaps, the best way to handle a market bubble is to do nothing.
''If stocks are over-valued for too long, then the market will eventually correct itself,'' Sinai said. ''Whenever central banks have tried to do the work of the market, the results have been bad.''
In 1929, the U.S. central bank boosted interest rates to pop what it viewed then as a bubble. The famous stock crash and the Great Depression followed. A decade ago, Japan raised interest rates to deflate its stock market as the Nikkei stock index zoomed to nearly 40,000 points. The Japanese market plunged and last year the Nikkei was still bottom-feeding at the 10,000 level.
''The safest road for the Fed would be to focus on price stability and look at the stock market as one of many contributors to the behavior of the economy and inflation,'' said Sinai.
Greenspan may have bitten off more than he could chew by playing stock market analyst.
''Greenspan will be in a pickle if he has to spend all of his time trying to figure out when the stock market is over-valued, under-valued or properly valued,'' Sinai said. ''He might as well be out on the Street, doing market strategy and getting paid a lot more than what he's getting as Federal Reserve chairman.''
What's so bad about the good times on Wall Street?
The answer: Pessimism and doubt appear to grow right along with prosperity, says David Ranson, president of the consulting firm H.C. Wainwright & Co.
''The longer the stock market climbs upward, the more the talk centers -- not on continued success -- but on dire predictions of 'corrections' and the bursting of 'bubbles,''' said Ranson.
For the week, the Dow Jones industrial average was up 259.61 points at 10,729.86. The Standard & Poor's 500 index rose 61.68 to 1,362.93 and the Nasdaq Composite index was up 149.92 at 2,966.44, a new high.
(Questions or comments can be addressed to Pierre.Belec(at)Reuters.Com).
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Re: It all depends on how the media chooses to spin things.
You're absolutely right, Dr. Lee.
Q. What do you get when you cross an apple (NYC, the Big Apple) with a peach (GA, the Peach State)?
A. A pizza pie!
Cheers,
Mick $$$
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