On Alan Greenspan's "Next New Thing"
This makes me feel like an old-timer
I've been more than a little puzzled reading commentary about Alan Greenspan's comments. They've been portrayed by a number of people as "new policy" or "finally he admitted it" in terms of his talk about the FOMC looking at asset prices for purposes of monetary policy.
Let's take a step back in time, courtesy of the back files at NymbleInvestor.com - the site where I published daily market commentary for 29 straight months (four days off) beginning in May 1999.
I warn you, you'll likely find the perspective a little jarring...
Friday August 27th, 1999 - - Macro Issues
We'd now like to interrupt this bull market with a word from our self-appointed bubble burster. Live from Jackson Hole, Wyoming... he's a bear's best friend... let's give it up for Alan Greenspan! Whoo Whoo Whoo
Yes, the market was due for a bit of profit taking after some serious upside strength. The fact many pundits blame this all on Mr. Greenspan's speech tomorrow strikes us as overdoing it a little. However, as we often point out Mr. Greenspan takes every chance he can get to slap the market down so perhaps these folks aren't quite so far out in left field.
The profit taking today was not seen as unusual. It did no technical damage, either.
Mr. Greenspan starts his speech at 9am EDT. He is due to cover, among other things, appropriate policy responses to asset bubbles and financial crises. If he takes a potshot at the market or does anything that will suggest another rate hike before the end of the year, then the markets will retreat.
You can see by looking at the chart the bias at the open is positive. Despite this, we simply don't like our chances that profit taking before a widely vacationed week won't combine with Mr. Greenspan and take the market down another couple of notches.
Monday August 30th, 1999 - - Macro Issues
In Friday's Daily Prospect List, we suggested Alan Greenspan might give the market some trouble. We were right. Mr. Greenspan commented the Fed would have to make the asset markets an integral part of monetary policy going forward. Some traders took this to mean Mr. Greenspan was going to use the power of the Fed to dampen and restrict the market. Other traders took it to mean the chance of an October rate increase just went up.
Regardless of which of these two opinions of Mr. Greenspan's comments are true, they both had the same effect -- driving the market down. The Dow closed off 10 points for the week, but the NASDAQ managed to hold on to most of its impressive gains.
The charts for the major market indices and their underlying stocks are still closer to being overbought than oversold. This, in combination with Mr. Greenspan's comments, will likely push the market down this week. Some will call it profit taking while others will say the market will be aligning itself for another possible interest rate hike. Whichever way you cut it though, it means a downward bias.
In addition, we have some important economic numbers out this week. On Tuesday, we have the Chicago purchasing report followed on Wednesday by the NAPM report. On Thursday, we have jobless claims again. The NAPM report will be closely watched, but the big report will be the quarterly employment situation report out on Friday. Of all of these, the employment report will move the markets the most.
We're heading into an uncertain market week. Attention should be paid to your upper and lower stops to protect any profits you might have if the market decides to really take a turn for the worst. There is no shame in sitting on the sidelines while the market continues to digest Mr. Greenspan's words. As one of our Subscribers so eloquently put it:
"It is better to be a live chicken than a barbecued bull..."
So what did Mr. Greenspan say in August 1999?
In a speech entitled "New Challenges for Monetary Policy" the good doctor had the following gems:
"...our analytic tools are going to have to increasingly focus on changes in asset values and resulting balance sheet variations if we are to understand these important economic forces. Central bankers, in particular, are going to have to be able to ascertain how changes in the balance sheets of economic actors influence real economic activity and, hence, affect appropriate macroeconomic policies."
"As model builders know, all economic channels of influence are not of equal power to engender growth or contraction. Of crucial importance, and still most elusive, is arguably the behavior of asset markets. More broadly, there is an increasing need to integrate into our macro models more complete descriptions of the responses of households and businesses to risk--behaviors that are generally modeled separately under the rubric of portfolio risk management."
"...the issues that I have touched on this morning are of increasing importance for monetary policy. We no longer have the luxury to look primarily to the flow of goods and services, as conventionally estimated, when evaluating the macroeconomic environment in which monetary policy must function. There are important--but extremely difficult--questions surrounding the behavior of asset prices and the implications of this behavior for the decisions of households and businesses. Accordingly, we have little choice but to confront the challenges posed by these questions if we are to understand better the effect of changes in balance sheets on the economy and, hence, indirectly, on monetary policy."
To me, the totality of this speech was one enormous signpost that Alan Greenspan's Fed saw asset valuations as one of the big drivers of the economy. Furthermore, it was something that had to be added to monetary policy models - making it something that could be "managed" to promote economic stability.
One last thing and I'll return to writing our Anniversary Issue... I really encourage you to read the speech. I'll repeat the link here. I find it fascinating that Mr. Greenspan's August 1999 speech echoes some of the same warnings about risk analysis, homes as cash producers, and tail events we have been reading in the pages of Minyanville for some time.
And I cannot resist throwing in this Google-mined gem...
The more things change...
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