Greenspan Should Give Somebody Else the Ball
By Laurel Kenner and Victor Niederhoffer, Columnists
Monday May 15, 9:05 am Eastern Time
The Fed's Greenspan and the Knicks' Ewing are playing outdated games that are hurting their teams.
We did exchange royal garments. Then we stood before a mirror and so alike were we that both said it seemed as there has been no change made.
-Mark Twain, The Prince and the Pauper
Patrick Ewing stands 7 feet tall, and at 37 is one of the oldest players in the National Basketball Association. He started out with a blaze of glory: No. 1 in the 1985 draft, Rookie of the Year in 1986, member of the All-Star team starting in 1986. He was hailed as the great hope for the Knicks to capture NBA championships.
Alan Greenspan is about 5 foot 6, and at 74 is past the age most workers retire. His record includes a 30-year career as chairman of Townsend Greenspan, a stint as chairman of the Council of Economic Advisers from 1974-1977, the miraculous achievement of a Ph.D. degree in 1977 some 27 years after completing his master's studies, and acclaim for putting the finger in the dyke in the midst of the 1987 crash to avert a catastrophe during his rookie year on the Fed chairman's job. He was hailed as the great hope for a virtuous economic circle of growth with little inflation and a rising stock market.
As current and former New Yorkers, we have suffered seeing the Knicks' inability to win a championship in basketball under the 15-year regime of Patrick Ewing. And most investors have suffered as Greenspan's Fed raised interest rates five times in the past 11 months, resulting in a lackluster stock market.
Ewing's Old Game Hobbles Knicks
Playing an old-fashioned, one-on-one offensive game centered around the aging Ewing, the Knicks have repeatedly failed to gain an NBA championship. He often does not register a single assist or offensive rebound in a game. When a younger teammate, Marcus Camby, answered a question about Ewing returning from an injury, Ewing gave him a ``death stare.'' When Ewing gets the ball, he invariably backs up into his patented high-outside-jumpshot game, as compared to the low inside game pioneered by Michael Jordan. During the crucial closing moments of a game, Ewing repeatedly calls for the ball from his teammates, to boos from the crowd.
During recent years, Greenspan has greeted each 1,000-point rise in the Dow Jones Industrial Average with growing dismay. He watches market movements on two computer terminals and a television set to CNBC, while spending hours at his cluttered desk ``poring over reams of memos and dogeared statistical tomes,'' according to a May 8 story in the Wall Street Journal. Greenspan is known as a chairman who insists on unanimity in all decisions, and when a committee member does say something not in accord with the party line, it is often rumored that he can expect a chewing out from the chairman.
Greenspan's Old Game Hobbles Investors
The well-behaved crowds at Greenspan speeches would never go so far as to boo the chairman. But in private they have taken to expressing exasperation and cynicism at his remarks, and some congressman have even taken the chairman on. ``The role of the Federal Reserve is to set monetary policy, not to jawbone the securities markets,'' Sen. Jim Bunning, R-Kentucky, told the chairman. One businessman suggested to a Fed official that Congress require Greenspan to hold a broad-based stock portfolio so he would personally feel investors' pain, according to the Journal article. (To avoid conflicts of interest, Greenspan's wealth is invested largely in Treasury bills.)
What Ewing doesn't realize is that the one game he plays has been passed over in modern basketball. ``The Knicks are getting beaten for the same reason that Southwest Airlines ate the lunch of many larger carriers,'' writes reader Brett Steenbarger. ``The large carriers were wedded to their hubs and routed all traffic through them. Southwest flexibly defined the most profitable routes, bought smaller planes, and flew direct. The old style was Wilt Chamberlain, Bill Russell, and Pat Ewing: route through the big hubs. The new style is Michael Jordan, Grant Hill, Larry Bird, Magic Johnson: hurt you outside, hurt you inside, penetrate off the dribble, pull up for the jumper -- very unpredictable, very fluid.''
What Dr. Greenspan doesn't realize is the simple truth that the modern economy is based upon innovation and research, not on the iron and coal that he wet his eyeteeth on during his 33 years at Townsend Greenspan. Research leads to development and growth in good companies. Then compounding, which Dr. Albert Einstein referred to as the most powerful force in the world, takes over to multiply the base earnings and sales by exponential factors.
Greenspan seems to rely heavily on work that Robert Shiller has published in his provocative book, Irrational Exuberance. One study in this book shows that companies with the highest price-earnings ratios up until 1989 returned less in the next 10 years than those in the lowest P/E ranks. But since 1989, the Nasdaq has returned 750%, while the S&P 500 has risen 430%. The average P/E of the Nasdaq over those 10 years was approximately eight times the comparable level of the S&P 500 multiple. Shiller apparently sold his stocks even before Greenspan became bearish at Dow 3,000.
Trading Places
How do we know when the irrational attempts of Ewing and Greenspan have unduly damaged their teams?
We respectfully suggest that to answer this question, the Big Fella and the Chairman follow in the footsteps of the Prince and the Pauper, and trade places. Both of their teams would benefit. And when they return to their places, their outlook would be so much more in keeping with the times.
Our suggestion may not be feasible, especially during the playoffs and before the scheduled Federal Open Market Committee on Tuesday. And we are well aware that many readers will disagree with our conclusions on many fronts. We know our own limitations in predicting markets, and of the dangers of hubris. We encourage our readers as well as the principals and their colleagues to share their views with us, and we will publish and send a cane to the authors of particularly uplifting commentary, particularly good for providing a firm base during the rough games we are witnessing.
Laurel Kenner is a financial writer in New York City. During her 16-year career, she has reported on police, politics and aerospace, and most recently headed US stock market coverage at Bloomberg News. At the time of this writing, Kenner was long SPY and QQQ, securities that track the S&P 500 and the Nasdaq.
Victor Niederhoffer is a private speculator specializing in futures and options trading. He formerly managed money and hedge funds, and had one of the best records until turmoil in Asian markets in 1997 caused financial disaster. He is the author of best-selling The Education of a Speculator. His hobbies include music, electricity, sports and ecology, all of which form a foundation for his scientific speculation. At the time of this writing, Niederhoffer was net short S&P 500 futures and options.
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