>>>>Should the Feds be messing with our stock markets or are they there to watch over inflation ? We now have a stock market with few buyers, isn't that a liquidity problem ? >>>>
What a difference a few years makes?
It was Dec 1996 when AG uttered his opinion about "irrational exuberance".......
The difference now is rates are 40% lower (and equities are still a good deal higher! by 60-80%)
finance.yahoo.com
What happens should the economy get back on its feet...and inflation becomes a real concern (The fed's stated #1 enemy)
Yuk....
Lets face it with unemployment near record lows, $$$ at historical highs & record deficits, the picture for the market as a whole doesn't look to good.
Next sector play is basic materials (inflation!), then to cash (before Fed jacks rates) Of course this assumes the fed's attempts to inject liquidity forstall a major downturn in consumption and the deflationary threat.
Just MHO
here's some hsitory
mad2
The New York Times
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December 7, 1996, Saturday, Late Edition - Final
SECTION: Section 1; Page 35; Column 2; Business/Financial Desk
LENGTH: 1068 words
HEADLINE: A Buried Message Loudly Heard
BYLINE: By RICHARD W. STEVENSON
DATELINE: WASHINGTON, Dec. 6
BODY:
Alan Greenspan, the chairman of the Federal Reserve Board since 1987, has long since learned that his every phrase will be transmitted instantaneously to stock and bond traders worldwide and that his merest inflection can send markets stampeding.
Deep into a speech he gave here on Thursday night, after touching on Alexander Hamilton, William Jennings Bryan and the Federal Reserve-Treasury Accord of 1951, Mr. Greenspan spent several minutes discussing, in his usual professorial style, the relationship between the economy and the financial markets, asking how to judge when "irrational exuberance" has pushed the price of stocks and other assets too high. The impact of the 10 sentences he devoted to the topic was to leave markets reeling from Tokyo to London to New York, if only briefly, and to raise the question of whether Mr. Greenspan deliberately intended to suggest that stock prices are getting out of hand and need to be deflated somewhat.
Given Mr. Greenspan's long experience in his job, it is inconceivable that he was unaware that his remarks could unsettle the markets, people who have worked with him said. At the same time, though, Mr. Greenspan probably had no intention of starting a full-scale rout in stock prices, they said, and may simply have caught the markets when, after the rapid run-up in recent weeks, they were already moving down and needed only the slightest nudge to drop more sharply.
More likely, the people who have worked with him said, Mr. Greenspan probably wanted to issue a general reminder that excessively high stock prices could hold risks for the economy and could make setting interest rate policy even more complex than usual.
"My guess is that, yes, he was sending a quiet message, but that as usual the amplifier kicked in the moment it came out of his mouth," a former Federal Reserve official said. "It was not the kind of thing where the Fed chairman was screaming on a mountaintop trying to make sure everyone notices. On the other hand, I know he's not naive."
Indeed, although his public statements are relatively few, Mr. Greenspan is willing to use his considerable influence -- not only over the financial markets but in Washington as well -- on subjects he considers to be of real importance.
Just today, in a speech in Philadelphia, he addressed the looming crisis in the Social Security system and praised the report made to Congress this week by a panel of economists who said that cost-of-living adjustments for Government benefit programs were overstated and should be scaled back.
Mr. Greenspan has also been willing at times to prepare the markets for coming changes in interest rate policy, and some analysts said his comments Thursday night could be interpreted as a warning that the Fed would raise rates if the economy got any stronger and the risk of inflation increased.
Yet today's jobs report suggested that if anything, the economy is slowing, and some economists said the next move in interest rates could well be downward -- a step that would be bullish for stocks. So another interpretation would be that Mr. Greenspan was warning that he might not be able to reduce rates in the face of a slowdown for fear of driving the market into a speculative frenzy.
Whatever his intentions in his comments Thursday evening, Mr. Greenspan's language was provocative enough that it was almost certain to receive widespread attention.
"Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets," Mr. Greenspan said in the speech. "But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the last decade?"
Yet Mr. Greenspan never specifically raised any concern about asset prices in the United States. And he went on to say that even if stock prices did collapse, it did not necessarily follow that the economy would be imperiled, citing its resilience following the October 1987 crash.
But he reiterated in more direct language than he usually employs that stock prices were something the Fed watched closely in assessing the health of the economy and the risks to stability.
"But we should not underestimate or become complacent about the complexity of the interactions of asset markets and the economy," he said. "Thus, evaluating shifts in balance sheets generally, and in asset prices particularly, must be an integral part of the development of monetary policy."
Predictably, though, it was not Mr. Greenspan's more subtle points that were highlighted in the reports of his speech that went whizzing around the world.
A few minutes before Mr. Greenspan delivered the speech, Reuters sent out the following report, based on an advance text: "Fed must be wary when irrational exuberance affects stocks, assets -- Greenspan."
Other news services quickly followed with similar reports. Within hours stock prices were tumbling in Australia, then in Japan. As the sun rose over Europe, markets dived there as well. A little over 14 hours after Mr. Greenspan rose to give his speech, the New York Stock Exchange opened, and the Dow Jones industrial average was soon down more than 144 points.
Stocks quickly began rebounding on Wall Street as investors decided that the weak job-growth numbers released this morning further reduced any chance that the Fed might raise rates. But the day's tumult made clear one peril of trying to communicate with markets and policy makers by smoke signal: the possibility that vague statements could be misinterpreted or overblown and cause a financial crash. In the absence of today's weak jobs report, some analysts said, there might have been nothing to keep stock prices from sliding hundreds of points.
There was considerable speculation on Wall Street that Mr. Greenspan knew at the time he gave the speech that the jobs report would be reassuring to investors, giving him leeway to issue a warning on stock prices. Mr. Greenspan does receive advance notice of major economic indicators, but it is unclear whether he knew about the jobs report before the text of his speech was distributed to journalists under an embargo shortly after midday on Thursday. Fed officials did not respond to an inquiry about when Mr. Greenspan received the report.
GRAPHIC: Photo: Alan Greenspan
LOAD-DATE: December 7, 1996 |
