The Market....
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WALL ST WEEK AHEAD - Greenspan on balance beam
By Richard Melville
NEW YORK, Sept 6, (Reuters) - The quantum shift in market
sentiment produced by the global economic downturn has
investors searching for direction and asking an entirely new set
of questions in their evaluation of the market's outlook.
The last two weeks have both been among the worst in history
for holders of U.S. and global equities and there is no consensus
on whether the next market move will be upward or downward.
For many, the outlook depends on what action, if any, the Federal
Reserve decides to take.
For now, Federal Reserve chairman Alan Greenspan appears
content to participate in developing the questions and only
hinting at answers.
However, in contrast to two years ago, when Greenspan's
rhetorical query about ''irrational exuberance'' jolted markets,
the Fed chairman's stride is more closely matched to Wall Street's
in this latest exploration.
For years, Greenspan argued to a near-deaf Wall Street that the
main risk to the economy was that the maturing business
expansion in the United States would eventually give rise to
inflation. That thinking gave rise to the Fed's decision to keep
real short-term interest rates relatively high in recent years.
But now, Greenspan's job is more complicated: charting a course
between inflation and recession amid evidence that either
outcome is possible.
In a speech on the economy delivered last Friday at the
University of California, Greenspan acknowledged a shift in the
Fed's thinking when he disclosed that the central bank's interest
rate policy committee decided at its August meeting that the
threats to the economy from the global slowdown were
''balanced'' with those of inflation.
''It is just not credible that the United States can remain an oasis
of prosperity unaffected by a world that is experiencing greatly
increased stress,'' Greenspan said.
The comments offered an earlier-than-scheduled glimpse into the
Fed's thinking at the August meeting. Greenspan's statements
seemed to confirm Wall Street's suspicion that the Fed dropped a
bias toward higher interest rates at the meeting and did so as a
first step toward easing.
''The good news is that Greenspan has indicated we are perhaps
about to lower interest rates,'' said Peter Cardillo, director of
research at Westfalia Investments.
While such a move would theoretically make U.S. financial assets
less attractive to international investors, many believe a Fed
action would spur a round of easing by central banks in other
developed economies, particularly in Western Europe.
''That could take the pressure off Asia and the other emerging
markets'' and interrupt the spiralling global slowdown, Cardillo
said.
Indeed, Greenspan argued the need for addressing the crisis. He
said economic activity had already been restrained by events
from abroad and added, ''As dislocations mount, feeding back on
our markets, restraint is likely to intensify.''
Those comments put Greenspan somewhat at odds with those
economists who argue that the world's problems would not upset
economic growth in the United States.
To be sure, investors have not bought the ''oasis'' argument,
anyway, much less the idea inflation remains a threat.
The last two weeks have produced frenzied buying of U.S.
Treasuries. While the flight to safety is understandable given the
highly fluid situation in markets around the world, the reality is
fixed income investments are only attractive when inflation is
not a risk.
Meanwhile, for every dollar that poured into the bond market,
two or three seemed to exit stocks. In the United States, the Dow
Jones Industrial Average stands at 7640.25, more than 18
percent below its July 17 all-time high 9337.97. In emerging
markets from Russia to Brazil, daily percentage losses are
stretching to double-digit levels.
Has the reaction overstated the problem? On that question,
opinions run the gamut. Bulls point to continued U.S. and
European economic growth, bears to the fact that an
ever-spreading crisis has afflicted larger and larger economies,
including the United States' largest trading partner, Canada.
The debate -- and the market's gyrations -- are now the stuff of
weekend talk shows. On CBS's Sunday morning program Face the
Nation, a show generally devoted purely to national policy and
politics, Goldman Sachs & Co Inc. strategist Abby Joseph Cohen
appeared as a guest and took her bullish message to Main Street.
''We think from these levels, the stock market direction is up over
the next few months,'' Cohen said.
''The only way the current level of the stock market makes sense
is if indeed we are going into mild recession in the United States,''
she continued, ''and we don't see that this year or next.''
Part of the reason Wall Street is so confident that recession will
be averted lies the same place many have looked for an answer to
the market's current malaise -- and that is back with Alan
Greenspan's Fed.
Cohen said she believed investors would behave favorably if given
an interest rate reduction -- one she compared to a vitamin B-12
shot. She compared the last Fed move, a tightening, to a flu shot.
Significantly, comments by U.S. Treasury Secretary Robert Rubin
and Japanese Finance Minister Kiichi Miyazawa after their
meeting in San Francisco last Friday offered little sign the two
had made any headway towards finding a way out of Japan's
economic quagmire.
Finance ministers from the world's two top economies headed
home apparently as frustrated as ever with each other's tactics.
At a news briefing after the meeting, Rubin pointedly declined to
be drawn on whether he felt more encouraged now that Japan
would finally do what Washington wants it to do.
''The world needs Japan to rise to the economic challenge,'' Rubin
said. ''I'd like to hope that the kinds of discussions we've had will
move things forward, but ultimately, what's going to matter is
what Japan does.''
Just before the talks got under way, a Japanese official insisted
Tokyo had already done most of what it should do.
Amid all the talk, Greenspan gave no indication he would move
quickly enough to satisfy investors looking for a quick fix to the
market.
Indeed, there is cause to believe he welcomed the break in the
market's rise. While his speech failed to echo in words the now
famous ''irrational exuberance'' utterance, he returned
repeatedly to themes like market expectations and risk.
That is unlikely to sit well with those who wished for lower rates
immediately, if not yesterday. It may also extend the period
during which the market's gymnastics look less like the
high-flying Olympic vaults of recent years than a new, more
cautious style reminiscent of the balance beam.
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Jim
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