Greenspan is helping stocks, from the Washington Post
<<By FRED BARBASH
Washington Post
I'm still getting e-mail from investors complaining in unpublishable language about Federal Reserve Chairman Alan Greenspan, as if there were anything I could do about him or anything I would want to do about him.
I admit I, too, once felt he was messing with my stocks needlessly every time he mentioned the I-word, not to mention every time Fed policy-makers hiked interest rates.
Inflation, I thought, what inflation? As for a "soft landing," landing just wasn't on my flight plan.
But I've come around. I'm convinced he's saving my cookies -- and those of everyone else invested in the stock market.
That's because the signs of creeping inflation are now unmistakable -- consumer spending, labor shortages and pressures on wages. And while rising interest rates are bad for our portfolios, honest-to-goodness inflation is devastating.
Start with the money you earn at work. Because prices get higher, you'd have less of it to invest.
Every dollar you did invest would face a future even more uncertain than it is already when you buy a stock. We already adjust our market returns for inflation. For example, if the prices of the stuff you buy are growing 3 percent annually, you subtract that from your 8 percent stock appreciation and what have you got?
What you've got is sometimes less than you can earn from purchasing a new bond, which is why more people would be buying them in preference to stocks, which would in turn take people out of equities, further constricting your gains. The U.S. Treasury is even selling inflation-indexed bonds now -- when inflation goes up, so does your return.
You get no inflation protection with stocks, of course. When inflation starts rising, you would be lucky to get that 8 percent return annually. That's because inflation erodes our buying power and when we buy less, corporate profits decline. When profits decline, so do stock prices.
So thanks, Alan.
As I see it, Greenspan is now in the position of propping up the market, not knocking it down. We should be grateful.
Recently, I saw Merrill Lynch's monthly survey of mutual fund managers. For the first time since the survey began in 1996, the May poll showed that the people who buy and sell the most equities are bearish on technology stocks. They prefer "defensive" stocks, such as health care, consumer staples and energy.
Increasingly, they like cash. Fund managers planning to raise cash outnumber those planning to invest by the highest margin since the survey's inception.
The primary reason was worry about inflation and the possibility of an economic slowdown.
We didn't need a survey to tell us that big investors are changing their tunes. We're seeing the result in a sideways stock market at the moment.
But the conventional wisdom about this movement is that it is being caused by "a climate of rising interest rates."
If this survey reflects wider sentiment, however, it's being caused less by the rate hikes themselves and more by the fear that they won't be sufficient to curb inflation.
Under these circumstances, I hate to think how these folks would be reacting had the Fed not acted, or had the Fed raised rates only by 25 basis points instead of 50.
Conversely, had the Fed not been raising rates over the past year generally, dampening stock prices however much it did, I hate to think how high the already-overvalued Nasdaq might have soared, making stocks vulnerable to an even greater and more sudden plunge.
Of course, a survey is just a snapshot, and it's hard to tell just what these professionals are reacting to.
"There are a lot of fund managers out there who have gone through style drift," said Richard Babson, who publishes the Babson-United Investment Report. "They lost their way from original principles, loaded up on tech stocks and followed the latest fad or trend."
Now, he suggested, they're overcompensating.
I ask every chief executive and chief financial officer I meet at the Washington Post or through interviews what they're worrying most about. The answer, universally, is that they're most worried about being able to hire enough good people to meet the demand for their products.
This concern is quantified in the most recent PricewaterhouseCoopers survey of CEOs of the fastest-growing companies. Asked to name "potential barriers" to growth over the next 12 months, "lack of skilled, trained workers" took first place, with 67 percent identifying it as a problem.
In the first quarter of 2000, second place went to the first cousin of labor shortage, "pressure for increased wages."
That's deadly. That is the essence of the inflationary scenario.
All those cute stories you read about corporate recruiters running around the beaches at spring break looking for job candidates -- that's a sign, too.
"We have seen that inflation is seeping in at the edges," said Babson. "The three bears are coming home."
Alan Levenson, chief economist at T. Rowe Price Associates, the Baltimore-based mutual fund company, said he thinks the Fed will probably succeed in moderating inflationary tendencies. Even if it can't "stay completely in front of inflation," he said, "I'm not concerned about inflation staying, rising and taking root."
Advice to investors?
"I would want to be more defensive" because of the rate increases, said Levenson. But "I don't think an equity investor would want to go to cash unless he or she is convinced we're moving into a recessionary environment."
"As we are heading up this interest rate hill," said Babson, "it's more of a stock picker's market needing more attention to fundamentals. What does the company do? Does it have earnings? Does it have expanding margins on its products? What's its competition?"
If anything, he said, the retreat of some investors may create opportunity for others -- "brand names at bargain prices.">>
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