The Fabulous Destiny of Alan Greenspan / The Daily Reckoning

verfasst von - ELLI -, 02.12.2002, 21:22

-->The Fabulous Destiny of Alan Greenspan

The Daily Reckoning

Paris, France

Monday, 2 December 2002

--------------------

*** Nine weeks of rising stock prices. How long can this
continue? Lucent up 322%...

*** Bernanke says too much...who wants a currency whose
supply is infinite? Bonds worried...

*** Retail sales are soft...88% profit in 2 weeks...and
more!

--------------------

Well, it's Monday morning and we're back in business. We're
watching the greatest show on earth - Wall Street's
Fabulous Dream Machine - with a cast of millions...sex,
fraud, genius, sorrow, pomp, special effects. You name it;
it's got it. Tragic heros. Good guys and bad guys. Snappy
dialogue. Everything.

The market's purpose, we keep saying, is not financial, but
moral. That's what makes the show so interesting...people
get what they've got coming, but never without an ironic
and unexpected twist or two.

Stocks go up and down. Recently, they've been going up.
They went down so much for so long - with neither a panic
to the downside, nor a strong rally to the upside - we
began to wonder. Stocks can't just keep going in one
direction all the time, we pointed out...our stroptured
minds sliced immediately to the essentials...or we'd be out
of business!

We figured something had to give. It did. Back in October,
stocks bounced and have been rising ever since. We haven't
read tomorrow's newspaper, of course, but our guess is that
this rally will peter out soon....perhaps leaving the Dow
its a trading range for a month or two...before resuming
its death march.

We've seen this show before. Like the latest James Bond
movie, there are sure to be new gadgets and a new woman or
two...but we doubt it will turn out any different.
Meanwhile, while the old circus on Wall Street continues, a
rarer and even more remarkable spectacle is taking place in
the world's money system. Monetary systems come and go. But
not very often. Good ones last a long time. Gold coins from
Byzantium, for example, remained in circulation, and held
their purchasing power, for 800 years. Likewise, the gold
coins introduced in the beginning of the 19th century were
still serviceable by the century's end.

What makes currencies hold their value is the obvious
thing: they remain in limited supply. If, somehow, the
supply of Byzantine gold coins had doubled - other things
being equal, the price would have fallen in half. If they
became as common as senators, they'd be worthless.

Historically, paper currencies are notoriously short-lived;
custodians are rarely able to resist the temptation to
print more and more notes. Soon, people catch on; they
realize that the supply of currency is not limited...and
that, instead, it is growing quickly. They rush to get rid
of it. The velocity of money increases. Even if the central
bank were not actually printing more currency, the speed
with which it changes hands makes it appear that there is
more and more of it in circulation. Most often, this
'hyperinflation' is only arrested by introducing a new
currency.

The illusion of limited supply is critical to a paper
currency. People have to believe that the central bank
can't or won't make their money worthless. Otherwise, they
will dump it immediately...and make it worthless!

So imagine our surprise when Fed governor, Ben Bernanke,
announced that the Fed would create an almost unlimited
supply of new dollars - if it thought necessary - in order
to head off deflation. Dennis Gartman said the speech by
Bernanke was"the most important speech on Federal Reserve
and monetary policy since the explanation emanating for the
Plaza Accord a decade and a half ago."

Can the Fed really head off deflation by 'printing' more
money? Can it do it without destroying the dollar and the
economy? The Washington Post:"The broadest measure of
prices in the economy shows they rose less than 1% during
the 12 months ended September, the smallest increase in 50
years. The U.S. economy is not quite in deflation. But it
is getting close enough so that Bernanke will probably get
a chance to find out.

Eric, are you back on the job?

------------

Eric Fry in New York City...

(Eric, by the way, will be a host on CNNfn, Tuesday and
Wednesday of this week, that's tomorrow and the day after,
9:30 to 11:30 am Eastern Time. Catch him if you can)...

- Another week, another gain for the Dow Jones Industrial
Average. The blue-chip index chalked up 91 points to 8,896
to log its eighth straight winning week - a feat it had not
achieved in more than four years. Hard to believe, isn't
it? Even during the manic, blow-off phase of the late great
1990s bull market, the Dow never registered eight
consecutive winning weeks.

- Meanwhile, the Nasdaq has managed to achieve some minor
miracles of its own. The tech-fueled index gained a modest
10 points for the week to 1,478 to reach a new five-month
high. For those keeping score at home, the Nasdaq Composite
has advanced 33% from its Oct. 9th low of 1,114.

-"A glaring feature of the latest rally," observes Alan
Abelson of Barron's,"is the leading role that has been
assumed by some of the most insubstantial companies in the
market. This group includes largely discredited tech and
telecom firms, ghosts of rallies past, with sketchy
finances and sliding businesses."

- Nortel Networks, for example, has vaulted 272% from its
October lows, and Lucent has rocketed 322%."In fact,"
Barron's observes,"some 50 stocks whose market
capitalizations top $1 billion have racked up triple-digit
gains as of November 26, according to FactSet Research
Systems, Inc. That has brought back another hallmark of the
1990s - ridiculous valuations. Broadcom, Yahoo!, Cymer and
eBay are among the stocks now fetching at least 50 times
their 2003 earnings estimates and four times their trailing
12-month sales..."

- A new bull market rarely begins with the old bubble
leaders. Despite the stunning two-month rally on Wall
Street, the stock market still faces a steep uphill climb
if it is to finish the year in the plus column. The Dow is
about 11% below where it was at the start of the year and
the Nasdaq is down 24%. Anything is possible, of course,
even the improbable prospect of investors' continuing to
scoop up richly priced tech stocks as if it were still
1999. Which, if you take James Boric's angle from Friday's
guest essay, might provide you with some decent short-term
profits...

See: Capitalizing On Bear Market Rallies
http://www.dailyreckoning.com/body_index3.cfm?id=4355

- Still, during the times when stocks are climbing to the
heavens, it becomes harder and harder to remember that they
are also capable of falling. But, as musty history books -
the ones that Greenspan says he does not read - tell us,
stocks do sometimes fall. It was only one year ago that the
Nasdaq climbed 51% from its post-September 11 nadir. Most
of the Wall Street soothsayers greeted the advance as"a
new bull market" (sound familiar?), but the rally stalled
out in January and the Nasdaq eventually tumbled to new
bear market lows.

- We are not predicting a repeat, but we don't rule out the
possibility.

- To be fair to the stock market bulls, a few of the recent
economic reports hinted of modest improvement. But a wisp
of economic strength is not nearly enough to justify the
market's extremely rich valuations. What's more, the
consumer seems to be swooning. One by one, America's
largest retailing operations are reporting disappointing
sales trends. Last week, toy retailer FAO Schwarz announced
disappointing sales and earnings.

- Apparently, not all consumers have gotten the message
that"he who dies with the most toys wins."

-----------

Back in Paris...

*** Our Sunday Thanksgiving dinner came close to disaster.

"Where are the keys to the wine cellar," your editor wanted
to know. He was looking forward to the turkey, chestnut
dressing, buttered leaks, carrots, salade de gesiers, and
so forth. But the thought of trying to choke through a big,
rich meal without a lavage of alcohol made his mouth dry
and his palms sweat. The keys were lost. The search party
came back in a quarter of an hour - empty handed.

Five years after the beginning of the information age, and
no one seemed to know anything. Who had the keys last? Why
were they not on the key board? Was there another set?
How gladly your editor would have traded all the benefits
of modern telecommunications for a single liquor store that
made home deliveries on a Sunday!

And then, at the last minute, the clouds parted...and there
was his friend, Pierre, to whom he had given a second set
of keys - just in case!

Pierre produced his keys and the party was saved.

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---------------------

The Daily Reckoning PRESENTS: A Daily Reckoning Classique
originally broadcast on December 3, 2002, which proves the
ol' French adage: plus ça change, plus c'est la même chose
- the more things change, the more they stay the same.


THE FABULOUS DESTINY OF ALAN GREENSPAN
by Bill Bonner

This week marks an important anniversary.

"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 past decade?" asked the Fed chairman, when
he was still mortal. The occasion was a black-tie dinner at
the American Enterprise Institute in December - five years
ago.

"We as central bankers," Greenspan continued,"need not be
concerned if a collapsing financial asset bubble does not
threaten to impair the real economy, its production, jobs,
and price stability. But we should not underestimate or
become complacent about the complexity of the interactions
of the asset markets and the economy. Thus, evaluating
shifts in balance sheets generally, and in asset prices
particularly, must be an integral part of the development
of monetary policy."

Mortals make mistakes. But Greenspan was right on target in
'96. It was later, after he became a demi-god, the
"Maestro," that the Fed chief erred.

In 1996, the bear market of '73-74 and the crash of '87
were still functioning as caution signs. Greenspan spoke on
the evening of the 5th. On the morning of the 6th, markets
reacted. Investors in Tokyo panicked...giving the Nikkei
Dow a 3% loss for the day, its biggest drop of the year.
Hong Kong fell almost 3%. Frankfurt 4%. London 2%. But by
the time the sun rose in New York, where the Fed chairman
was better known, investors had decided not to care. After
a steep drop in the first half-hour, as overnight sell
orders were executed, the market began a rebound and never
looked back. By the spring of the year 2,000, the Dow had
almost doubled from the level that had so concerned the Fed
chairman.

But while the maestro was alarmed at Dow 6,437, he was
serene at Dow 11,722. Fatal to Greenspan's judgment was a
combination of bad information, bad theory and a human
nature that - though unchanged for many millennia - seems
to have avoided the notice of central bankers.

Greenspan's theory was that by carefully controlling the
cost of credit and the money supply he could avoid serious
economic downturns. You have suffered enough discussion of
this issue here in the Daily Reckoning, dear reader. For
today's purpose, we will just point out that Mr. Greenspan
has everything he needs to get the economy back on track,
except the essentials. He cannot make telecom debt worth
what people paid for it. He can't restock consumers'
savings accounts. He can't make Enron a good business. He
can't erase excess capacity, nor make investment losses
disappear.

In addition to the bad theory, Mr. Greenspan had bad
information. The"information age" brought more information
to more people - including to central bankers...but the
more information people had, the more opportunity they had
to choose the misinformation that suited their purposes.

Since the late '90s, however, many of the figures used to
justify the New Economy have been revised, downward."The
government previously decided that neither corporate
profits nor productivity improvements were nearly as good
as they appeared to be in 1999 and 2000," reports Floyd
Norris in the New York Times."And now the industrial
production numbers have been sharply revised downward."

"The new numbers show industrial production was
dramatically overestimated, particularly in the high-
technology area," Norris quotes John Vail, the chief
strategist of Fuji Futures, a financial futures firm in
Chicago.

What was true for the nation's financial performance was
also true for that of individual companies. Companies
engineered their financial reports to give investors the
information they wanted to hear - that they earned one
penny more per share than anticipated. But what they were
often doing was exactly what Alan Greenspan worried about -
impairing balance sheets in order to produce growth and
earnings numbers that delighted Wall Street. Curiously,
during what was supposed to be the greatest economic boom
in history, the financial condition of many major companies
- such as Enron and IBM - actually deteriorated.

But by 1998, Alan Greenspan no longer noticed; he had
become irrationally exuberant himself. Markets make
opinions, as they say on Wall Street. The Fed chairman's
opinion soon caught up with the bull market in equities. As
Benjamin Graham wrote of the '49-'66 bull market:"It
created a natural satisfaction on Wall Street with such
fine achievements and a quite illogical and dangerous
conviction that equally marvelous results could be expected
for common stocks in the future."

Stocks rise, as Buffett put it, first for the right
reasons, and then for the wrong ones. Stocks were cheap in
'82...the Dow rose 550% over the next 14 years. Then, by
the time Greenspan warned of"irrational exuberance",
stocks were no longer cheap. But by then, no one cared.
Benjamin Graham's giant"voting machine" of Wall Street
cast its ballots for slick stocks with go-go technology and
can-do management. Stocks rose further; and people became
more and more sure that they would continue to rise.

"Greenspan will never allow the economy to fall into
recession," said analysts."The Fed will always step in to
avoid a really bad bear market," said investors. Over the
long term, there was no longer any risk from owning shares,
they said. And even Alan Greenspan seemed to believe it. If
the Fed chairman believed it, who could doubt it was true?
And the more true it seemed, the more exuberant people
became.

"What happened in the 1990s," says Robert Shiller, author
of the book"Irrational Exuberance," is that people really
believed that we were going into a new era and were willing
to take risks rational people would not take...people did
not feel they had to save. They spent heavily because they
thought the future was riskless."

But risk - like value - has a way of mounting up, even
while it seems to disappear. The more infallible Alan
Greenspan appeared...the more"unduly escalated" asset
values became. Having warned of a modest"irrational
exuberance," the maestro created a greater one.

Your editor,

Bill Bonner

P.S. The most exuberant phase is passed. But neither
investors nor consumers could be said to be acting
"rationally". Consumers are still spending as if there were
no recession. And investors are still buying stocks - as if
they were bargains.

"People are habitually guided by the rear-view mirror,"
explains Warren Buffett,"and, for the most part, by the
vistas immediately behind them."

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gesamter Thread:

• The Fabulous Destiny of Alan Greenspan / The Daily Reckoning - - ELLI -, 02.12.2002, 21:22
  • Re: The Fabulous Destiny of Alan Greenspan / The Daily Reckoning - Palstek, 02.12.2002, 21:31