Long Winded Article.....
Saturday - 13:13 10/30/99, EST
Is Greenspan Out To 'Get' Stock Market?
NEW YORK (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). |
