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July 22, 2004 |
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During his testimony Alan Greenspan said that the slow down in consumer spending will be ‘short-lived’, that ‘attractive’ mortgage rates “are providing solid support to home sales”, and that “the probability that economic activity might stagnate has receded”. Surprisingly, on this last note Greenspan suggested that stock prices – which Alan knows can be influenced by investor irrationality - are one of the indicators that he is paying attention to. In short, the body of evidence Greenspan produces to drive home his strong consumer spending scenario is skimpy. US consumers have found the means to sustain their spending ways before, during, and after economic recession because of rising stock prices, declining interest rates, the housing/refi bubble, and tax breaks. Betting on wage gains arriving just as monetary and fiscal stimulus efforts ebb is simply that: a bet. Inflation and The Dollar Surprisingly, Greenspan offered an honest, albeit brief, take on inflation. To summarize, the Fed doesn’t have a clue. "But we cannot be certain that this benign environment will persist and that there are not more deep-seated forces emerging as a consequence of prolonged monetary accommodation. Accordingly, in assessing the appropriateness of the stance of policy, the Federal Reserve will pay close attention to incoming data, especially on costs and prices.” Not surprisingly, Greenspan skirted around the dollar issue – instead opting to quickly mention how a weaker dollar has impacted prices. “Core inflation, of course, has been elevated by the indirect effects of higher energy prices on business costs and by increases in non-oil import prices that reflect past dollar depreciation and the surge in global prices for primary commodities.” Given that the overpriced US dollar is one of the most important economic/inflation indicators going, why did Greenspan only mention the word ‘dollar’ once during his testimony? Because Greenspan aims to produce cheer, not fear. Nevertheless, while prodded during the Q&A session following his testimony, Greenspan's warned – as he has done before during Q&A sessions (but rarely during his prepared remarks) - that the US’s dependency on foreign capital will one day reach a breaking point. “…at some point we are going to reach a status where our net debt to foreigners, currently now about a little under a fourth of GDP, will get exceptionally large.” Fed Looks To Acquire Ammo An alcoholic faced with a depleted liquor cabinet will tell you anything if it may help him get a bottle. During his testimony earlier this week The Maestro told us that “Despite the softness of recent retail sales, anticipated future income bodes well for consumer spending.” Think about this quote for a moment – (which is made up of three snippets from the sentence noted earlier) --- do you get visions of sugar plums? Or do you get the image of Greenspan telling investors what they want to hear? With the US economy still expanding and jobs being created, it may seem of little importance that this is the first time during Greenspan's tenure that he is ill prepared to aggressively respond to any unforeseen economic/financial crisis. However, economic growth has recently shown signs of softening, the mad rush into stocks is, apparently, finished, and the Fed has only raised interest rates once. Wall Street expects more tough love from the Fed, but it is clear that The Street is not saying ‘thank you Alan, may we have another?’ “Wall Street economists have essentially translated the statement to mean that the Fed will continue raising rates this year by 25 basis points at three of the next four meetings left this year, putting the federal funds rate at 2.0 percent by year-end.” CBSM Needless to say, these are dangerous times for those who anticipate, contrary to Greenspan’s opinion, that current trends suggest that future incomes are not going to be all that spectacular. Moreover, these are dangerous times for those who believe that the US dollar is headed for another fall, that the pricing environment will remain extremely volatile, and that the Fed - while not necessarily behind the curve - is nonetheless unprepared for the next curve ball thrown their way. As Greenspan suggested in his ‘don’t blame me for the bubble’ speeches last year, the Fed’s job is to respond to dangers after the blow up. But how does the Fed respond to not having ample ammo to deal with the next unexpected crisis when acquiring ammo represents a danger itself? Judging by his testimony, Greenspan is not so sure at the moment. Rather, he is simply prepared to keep hiking interest rates by quarter points until something happens, and hopes that nothing happens soon. If lurking dangers come to the surface before the Fed acquires some breathing room Greenspan’s legacy will come under intense scrutiny, and the question of whether or not reckless Fed interventions perpetuates unsustainable bubbles could be more seriously asked. The jobs report is due out on August 6. Easy Al will be watching. |