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Greenspan's Loathsome Legacy


Left post with economy in precarious state.


I'm holdin' on your rope got me ten feet off the ground.
I'm hearin' what you say but I just can't make a sound.
You tell me that you need me,
Then you go and cut me down.

- Apologize (Timbaland)

"The road is cleared," said Galt. "We are going back to the world." He raised his hand and over the desolate earth he traced in space the sign of the dollar.
Atlas Shrugged (Ayn Rand)

Darkness within darkness
The gateway to all understanding
Tao Ching (as translated by Stephen Mitchell)

In a speech last week in the Gulf, Alan Greenspan told Arab nations to drop their peg to the U.S. dollar. In so doing Greenspan is arguing that inflation is literally built into the U.S. dollar. Greenspan is saying this is why the Arab nations are having such trouble with inflation.

If the Arab nations drop their peg to the dollar, it will further reduce demand for U.S. currency. Talk about putting a knife in the greenback when it's down!

Of course, maybe the Arab nations will think twice about taking advice from the Maestro who advocated ARMS and new-fangled derivatives as instruments that would benefit financial markets and disperse risk.

To quote Greenspan himself, "I would tell audiences that we're facing not a bubble but a froth – lots of small local bubbles, which never grow to a scale that could threaten the health of the overall economy." The fact is that quite possibly we are facing the worst housing recession in U.S. history, which could wipe out $4 trillion to 6 trillion in household worth. According to economist Nouriel Roubini, 10 million households may end up with negative equity, and a huge incentive to simply put the house keys in the post.

Let's call it for what it is – Greenie's irrational exuberance gave us the most serious credit crisis since 1907. As former Treasury Secretary Lawrence Sumers states, "Price falls in the housing market of this magnitude are likely to mean more than 10 million Americans would have negative equity in their homes, and more than two million foreclosures would take place over the next two years."

We all hope Alan is getting well paid on his speaking tour. One can only imagine what Ayn Rand would think. I can't help pondering whether John Galt asks, "Who the hell is Alan Greenspan?"

So, we can't entirely blame Bernanke for urging lenders to forgive portions of mortgages held by homeowners at risk of defaulting. Ben's in a box. He simply took the reins of the Fed at a difficult time. It is the previous chairman who left the U.S. in a precarious state.

Once revered and lionized, Greenspan may arguably go down in history as one of the most reviled Fed chiefs ever. Greenspan left his job in disarray with housing and big banks in possibly the worst condition in U.S. history. But, then, turnaround is fair play – the U.S. dollar was once revered also.

While at the helm and while on his jaunts has Greenspan forgotten that the Fed is entrusted with two duties – guarding the purchasing power of the dollar, and insuring that the nation is prosperous?

Given the sad state in which he left the nation there is something downright disdainful in Greenie's talking down the dollar. For someone who enjoyed being so obtuse while at the Fed, perhaps he should just learn to keep his mouth shut now. There are enough Fed Governors throwing slings and arrows out to the media these days. But then, that's America for you – the cult of celebrity often trumps good of country.

Like Nero fiddling, Al blew the clarinet while kindling the fire that threatens what was the American Empire. It's none other than the Maestro who connected the notes and dots between the housing bubble and the fragility of the financial system. Indeed, the Maestro conducted while the ship of state was listing.

It's too late for an apology for the loss of power and esteem it has cost the U.S. And, while money flows where money goes, and some seek shelter in the brave new world of the global growth paradigm, it seems inescapable that the dangers created for the U.S. exist for the rest of the world as well.

Be that as it may, no trend goes in a straight line. It's a cliché to say that markets fluctuate. But cliches are so called because they are typically true. Whether the January lows in fact hold for the remainder of the year or not, remains to be seen. Whether that is the story that the Dow Transportation Average is telling us remains to be seen. Whether this is a long-lasting secular Bear market or not remains to be seen. Whether a multi-week, or even a multi-month, rally phase is ahead of us before another downturn remains to be seen.

The best we can do as traders is take it a day at a time when there is so much confusion, and risk is being so overtly shunned. But, the very anathema of risk and the propensity for speculators to have cinched up on their time horizons suggests that endangered species called 'A Trend' may come out of hibernation sooner than later – with all due apologies to the Volatility Vultures.

S&P Daily Chart for 2008 with 20 DMA

Click to enlarge

Apple (AAPL) Daily Chart from 11/2007 to Present

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AAPL Daily Chart for 2008 with 50 and 200 DMA

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Jeff Cooper is author of Jeff Cooper's Daily Market Report. Call 212-991-9357 or click below for a FREE 14 day trial.
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No positions in stocks mentioned.

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