 Greenspan's $500/oz. Legacy
Todd Stein & Steven McIntyre
The Texas Hedge Report
Aug 05, 2005
Snippet Courtesy of www.texashedge.com
Housing prices are booming.
The NASDAQ and S&P 500 stock indices are at four-year highs.
The Russell 2000 index is at an all-time high. The unemployment
rate is not far from near-decade lows. This is the legacy that
Alan Greenspan wants to leave.
During the 1980s and 1990s,
Greenspan became addicted to the attention he was receiving from
the highest levels in the White House and on Wall Street. It
was in those years that he began selling out his sound money
principles in exchange for a lifestyle of private jets and fancy
limousines. When the Internet bubble imploded in 2000-2002, Greenspan's
magnificent legacy was in danger. Fortunately for him, he held
the keys to a 21st century electronic printing press giving him
the ability to create and make available more cheap money than
this country knew what to do with. This unprecedented liquidity
injection bailed out equity investors, junk bond hedge funds,
and major banks and created a massive real estate bubble that
still exists today.
After cutting interest rates
to record low levels, inflation began to rear its ugly head.
Despite the government's best attempts at doctoring the Consumer
Price Index, the average American could feel that something was
different. Whether it was rising gas prices, higher electricity
and grocery bills, or increasing healthcare costs, inflation
started to creep into society. These inflation fears have caused
Greenspan to raise rates in a bite sized fashion over the last
few months. The yield curve has become flatter than a pancake
as long-term rates refuse to budge despite the Fed's best attempt
at jawboning the long end of the curve up.
We believe that Greenspan's
recent testimony to Congress was his final attempt to jawbone
long rates higher. The financial press was certain a few months
ago that rate hikes would end by summertime, now it is a given
that rates will be hiked for the remainder of the year. We continue
to predict that something in the economy or financial markets
will break in the coming quarters. At that time, the Fed will
have no choice but to stop hiking rates and likely begin lowering
them again. There is no way Greenspan (or his successor) will
take the heat for a recession or a deflationary depression. Stagflation
is much more politically acceptable as people tend to remember
nominal numbers rather than real numbers. A weakening Dollar
and $500/oz. gold price are small prices to pay for the Greenspan
legacy to be solidified.
The problem is that putting
Humpty Dumpty back together again is no small task. While some
additional weakening in the Dollar and $500/oz. gold may be palatable
to financial markets, the ability to contain the Dollar's further
destruction from those levels will be no easy task. Greenspan
has helped create structural spending problems in the U.S. that
cannot be fixed overnight. Couple this with gigantic wage gaps
between the U.S. and Asia and the recipe for a currency disaster
is born. Until the U.S. consumer restrains his penchant for spending
every nickel he makes, a widening trade deficit and Dollar weakness
loom. In fact, as we rapidly approach seven and eight percent
current account deficits, the odds of the Dollar decline becoming
disorderly only increase. Once again this points to the benefits
of owning gold and silver. Gold seems destined to break $500/oz.
in the current environment, but if people begin to see through
the problems with the Dollar and the interest rate box the Fed
is in, then gold prices may quickly leave 500 bucks an ounce
in the rear view mirror.
more follows for subscribers
. . .
Aug 05, 2005
Todd Stein & Steven McIntyre
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