Note: Professor Fleckenstein provides his commentary for educational purposes - his insights are not intended as investment advice. You can find his daily comments at www.fleckensteincapital.com
The Transcript Outs the Truth
All in all, there's little to say, except that much as we saw during the mania, momentum carries the day, buying begets buying, and fundamental considerations are largely irrelevant. Of course, much of today's attitudes can be traced to the bubble that we have in housing, which is a consequence of policies designed to ameliorate the ramifications of the bubble that we had in equities. All long-term readers know that I place the blame for the stock bubble and the real-estate bubble squarely on Alan Greenspan and his easy-money comrades at the Fed.
Over the last two years, I have mostly avoided beating that dead horse. However, I read with interest a story in yesterday's Wall Street Journal titled "Fed Officials Worried in 1999 About Managing Stock 'Bubble,'" which discussed the fact that in 1999, Fed officials were aware of the stock bubble, even though they claimed before and after not to have known.
Since those days, I have been waiting to see the contents of the 1999 minutes (as well as 2000 and 2001, etc), to learn what the Fed was really saying, as opposed to what it said in public. With the Journal story serving as a reminder, I went to the Federal Reserve's Web site to look at the December 1999 FOMC minutes. Though I buzzed through it rather quickly and could easily have missed some points, I was struck by a number of items.
Lone Wolf Amidst the Bull Bankers
In an introductory presentation to the FOMC, Fed economist Mike Prell noted the lunacy as follows: "I refer to the incredible run-up in 'tech' and e-commerce stocks, some which have entered the big-cap realm without ever earning a buck. To illustrate the speculative character of the market, let me cite an excerpt from a recent IPO prospectus:
"'We incurred losses of $14.5 million in fiscal 1999, primarily due to expansion of our operations, and we had an accumulated deficit of $15.0 million as of July 31, 1999. We expect to continue to incur significant . . . expenses, particularly as a result of expanding our direct sales force. . . . We do not expect to generate sufficient revenues to achieve profitability and, therefore, we expect to continue to incur net losses for at least the foreseeable future. If we do achieve profitability, we may not be able to sustain it.' Based on these prospects, the VA Linux IPO recorded a first-day price gain of about 700% and has a market cap of roughly $9 billion. Not bad for a company that some analysts say has no hold on any significant technology.
"The warning language I've just read is at least an improvement in disclosure compared to the classic prospectus of the South Sea Bubble era, in which someone offered shares in 'A company for carrying on an undertaking of great advantage, but nobody to know what it is.'
"But, I wonder whether the spirit of the times isn't becoming similar to that of the earlier period. Among other things, it may be noteworthy that the tech stocks have done so well of late in the face of rising interest rates. Earlier this year, those stocks supposedly were damaged when rates rose, because, people said, quite logically, that the present values of their distant earnings were greatly affected by the rising discount factor. At this point, those same people are abandoning all efforts at fundamental analysis and talking about momentum as the only thing that matters [just like right now!].
"If this speculation were occurring on a scale that wasn't lifting the overall market, it might be of concern only for the distortions in resource allocation it might be causing. But it has in fact been giving rise to significant gains in household wealth and thereby contributing to the rapid growth of consumer demand--something reflected in the internal and external saving imbalances that are much discussed in some circles. Whether our assumed 75 basis-point increase in the fed funds rate would be a sufficient shock to halt this financial locomotive is open to question." (The emphasis is mine.)
Failing to Follow the Bouncing Bubble
One can quickly see that this particular Fed staffer understood what was going on, although without knowing more of his thoughts or talking to him, I'm not sure if even he comprehended the extent of the misallocation of capital that was taking place at the time. We must also remember that this was only December of 1999, with another 50% rally in the Nasdaq yet to come.
In any case, one might have thought that after such a powerful introduction by Prell, some of the Fed governors might have had their curiosity piqued. But near as I could tell in going through the Q&A that followed his remarks, most of the governors were much more concerned about economic minutiae than the epic bubble they had blown. Y2K was supposedly a concern at the time, though I read with interest that "bankers around the [Philadelphia Fed] district reported that they believe that Y2K will be a nonevent."
Given the concern by some Fed staff members that a bubble was brewing, and given that certain district reports suggested Y2K was a nonevent, one might have thought that a sober band of concerned citizens might have tried to ensure that the liquidity they were forcing into the economy wouldn't be used for more speculation. But of course, that was not the case. When Al discussed the stock market in passing, he said: "It is only a question of how much of a bubble there is in the process." He was sure that productivity would save the day, no matter what.
Considering how out-of-control the mania was in 1999, I was struck that this group of clueless buffoons spent nearly half the time (according to the transcript of this meeting) arguing about whether the post-séance communiqué was going to be asymmetric, symmetric, or a little of both, etc. -- rather than spending any time discussing what their actions had wrought on the economy.
Greenspan was so pleased with himself in the lead-up to the voting that he opined: "Having said all that, my view on policy is, if I may reference Governor Kelley's comment about raising his hand and saying present, that I almost think the best way we could have gotten through this period would have been somehow to cancel this meeting. The reason is that markets, as far as I can see, seem to be pretty much where we as a Committee would like them to be."
'We are the hollow men . . . headpiece filled with straw'
There you have it: The most incompetent, irresponsible Fed chairman in the history of the world thinks nothing of talking from both sides of his mouth about whether he can identify a bubble. He blows the biggest one in history, claims he didn't know it was happening, and bails it out with a housing bubble that he says can't get started because real estate can't have a bubble. What I'd like to know is, given not just his record but also what he says in public (and what we can now see he says behind the public's back), how can this menace to society have any credibility whatsoever? I certainly don't know. I encourage everyone to read through these minutes just to get a flavor for how completely untrustworthy and shallow these people are.
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