Five Things You Need to Know: Aging Greenspan Losing Ability to Obfuscate Financial Issues
The glory days for a man who once delivered a 45-minute response to a U.S. Senator's question in the form of a single sentence, were, today, strangely absent.
Kevin Depew's Five Things You Need to Know to stay ahead of the pack on Wall Street:
1. Aging Greenspan Losing Ability to Obfuscate Financial Issues
Alan Greenspan, writing in today's Financial Times, offered a lucid and concise explanation of the debt crisis and what is at stake for financial markets, a sign that perhaps the ravages of time have finally caught up with the 82-year-old former Federal Reserve Chairman.
Longtime market watchers expecting vintage Greenspan expressed "disappointment" in the former Fed Chairman's simple sentence structure and logical, point-by-point outline. "This is really tough to watch," a reporter who asked not to be identified said. "I was hoping to see some classic Greenspan syntax, multiple semi-colons in the same sentence and his trademark obscure phrasing, but instead we get a sensible, straight-forward piece on the implications of the debt crisis."
Indeed, the FT piece exhibited no sign of the complex, confusing sentence structure that Greenspan parlayed into his well-known persona as "The Maestro" of financial markets. The glory days for a man who once delivered a 45-minute response to a U.S. Senator's question in the form of a single sentence, were, today, strangely absent.
"This crisis is different - a once or twice a century event deeply rooted in fears of insolvency of major financial institutions," Greenspan wrote, adding, "Regulation, the alleged effective solution to today's crisis, has never been able to eliminate history's crises."
The clarity of Greenpan's line of thinking caused at least one economist to break down sobbing. Another economist, sitting nearby, set fire to a signed copy of Greenspan's book, "The Age of Turbulence."
"This is utter non-gibberish," scoffed a Fed economist who wished to remain anonymous. "I really don't understand why Greenspan would risk sullying his reputation for obfuscating financial issues by writing something so cogent."
The clearest indication that Greenspan has perhaps lost a step came near the end of his piece in the FT, where he wrote: "A financial crisis is heralded, in fact defined, by sharp discontinuities of asset prices." Greenspan then lucidly added, "The fact that risk was heavily underpriced for much of this decade was broadly recognized in the financial community, but the timing of the sharp price correction was nonetheless a surprise."
2. Why Rebounding Equity Prices Are Critical
The most important point in Alan Greenspan's Financial Times piece today was his explanation for why equity prices are critical to the stabilization of credit markets: "A sustained level of global equity prices will be critical if banks are to recapitalize themselves at the higher levels daunted investors now require," Greenspan wrote.
Certainly, central banks' injection of massive amounts of short-term liquidity have not yet resulted in the conclusion of the crisis - which is really too much debt. According to Greenspan, "the price of equities worldwide will determine whether the international financial system can maintain a modicum of stability as it eases out of its credit crunch, or falls back into another period of angst and turmoil." In other words, if equity prices can go up long enough to allow banks to recapitalize adequately by selling shares, then the next step in the healing process can begin.
However, and this is also important, it's not solely about equity prices. Capital gains also matter. "Capital gains cannot finance new physical investment, but do add to global net worth," Greenspan noted. If, for some reason, asset prices continue to fall and, consequently, drag down share prices, this would "impede the recapitalization of banks" and "debt issuance would also be suppressed as it leverages off the level of equity."
Bottom line: Is this a cyclical bout of risk aversion, or a secular one? Most bullish market watchers believe it is cyclical. I believe it is secular. That is the divide between bulls and bears right now.
3. Speaking of Secular Risk Aversion...
The Wall Street Journal today notes the spread of risk aversion from securitized mortgages to auto leasing to, now, credit card asset backed securities. "Investors are growing wary of bonds backed by credit-card payments, jamming up another debt market and making it tougher for Americans to tap what has been one of the easiest places to get credit," the newspaper said.
Weak demand in the asset-backed securities market, the main source of funding for credit-card issuers, hurts in two ways, the Journal points out. "It raises the borrowing costs for these companies, translating into higher rates for consumers. It also forces the companies to keep more loans on their balance sheets, thus locking up funds they could have extended to credit-card users."
Again, this is the second act, where the problems that began on Wall Street trickle down to Main Street and reverberate back to Wall Street just as everyone gets comfortable.
4. Speaking of Secular Risk Aversion II...
MGM Mirage (MGM) this morning reported a 69% decline in profit as the ripple effect on the economy spreads. The key item from MGM was that casino revenues decreased by approximately 4%, despite a nearly 97% occupancy rate. The company said it did "have to give on rates to some extent" to achieve that occupancy rate. But the story here is that despite an occupancy rate of nearly 97%, casino revenues dipped 4%, a clear sign of growing risk aversion even among those who decide to make the trip to Vegas.
5. A Dramatic Mood Swing Has Swept Across the Social Landscape
Sometimes we are so busy cataloging the darkening social mood transition that we forget to consider what it will look like on the other end, when social mood inevitably transitions from negative to positive, as it one day will.
So take a look at this excerpt from a book we ran across yesterday:
"Fast-forward a few years and a dramatic mood swing has swept across the social landscape. Unbridled boosterism and unabashed triumphalism has supplanted despair about the present and pessmisim about the future. To many commentators, it was as if a prolonged, blinding blizzard had ended, the storm clouds were breaking up, the sun was shining once again, and people were emerging from their homes to survey the damage and make repairs. The rush was on to declare New York City back on its feet, alive and kicking, revitalized and reinvigorated."
Now, how's that for positive social mood! The excerpt was from a book about the "crime crash" in New York city which occurred in the 1990s: "New York Murder Mystery: The True Story Behind the Crime Crash of the 1990s."
The author, Andrew Karmen, studied crime stats extensively to help uncover and debunk the "self-serving explanations" behind the NY crime plunge, focusing instead on such factors as a healthy economy and demographics, among other things. The reality, which Karmen's study alludes to, is that social mood was simply improving.
Compare the sentiment in New York City from the early 1990s, above, with today. From the New York Post, below.
And to think, we haven't even gotten to the beginning of the new crime surge. We're still at the beginning of the subway system disrepair.
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