 Greenspan is
gone in nine months
Todd Stein & Steven McIntyre
Archives
The Texas Hedge Report
February 25, 2005
Courtesy of www.texashedge.com
Here is a prediction:
the market's response to the departure of Alan Greenspan is going
to be quite different from the muted reaction we experienced
when Bob Rubin resigned. It's hard to describe just how much
of an institution Greenspan's face and the monotony of his speeches
have become in America. Investors for almost two decades have
grown accustomed to the financial media dissecting every word
uttered by the Federal Reserve chairman. Whether you think Greenspan
is a brilliant "maestro" or a bubble-blowing politician,
it is safe to conclude that his presence has served to comfort
the investing public. We're not talking about "comfort from
familiarity" such as Walter Cronkite giving Americans the
news and tucking a generation into bed every night. We're
talking about something far more powerful where one man's presence
has lulled millions of investors to sleep and all but wiped out
the risk premium in the stock market.
Greenspan's
solution to every economic crisis has been to print more money
- often by cutting rates which has the effect of increasing credit.
The Fed cut interest rates in 1998 partly due to the blowup of
hedge fund Long Term Capital Management. When fears of Y2K hit
the American populace in 1999, the chairman put his foot on the
monetary pedal and increased liquidity to extreme levels. A significant
amount of that newly created money found its way into internet
and other technology stocks fueling the greatest stock market
bubble in history. As the NASDAQ bubble deflated in 2000-2002,
Greenspan should have let the detoxification process take its
course. Instead, he poured Americans another drink and cut rates
again to the lowest levels since the Eisenhower administration.
Such a low rate monetary policy has spawned a hazardous credit
and housing bubble which still exists today.
It will be
interesting to see if Greenspan spends his last several months
in office trying to keep the party going, so that he goes out
on top. Then, when he leaves and Ben "Printing Press"
Bernanke (or someone else) takes over, the house of cards will
tumble. We expect the Republicans to take major heat in the 2006
or 2008 elections for appointing Greenspan's successor, whoever
it is. (Remember how former SEC chief Harvey Pitt took the blame
for corporate shenanigans that occurred years before he came
into office?) Furthermore, we expect confidence in the U.S. Dollar,
the U.S. equity markets and the U.S. fixed income markets to
plunge. This should be a great time to own gold and silver.
Todd Stein & Steven
McIntyre
Archives
Texas Hedge Report
Todd Stein
& Steven McIntyre
email: admin@texashedge.com
For more information, go to http://www.texashedge.com.
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