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Wednesday July 21, 2004 - 23:06:47 GMT
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Taking Stock Post Greenspan

Taking Stock Post Greenspan

I do not know anyone who is enjoying this market. It is the mother of all wood chippers. Views and positions regardless of what side of the market(s), invariably end up in the wood chipper, and usually within a few days of asset markets and exchange rates "breaking out". Markets have a serious dependency on Greenspan and it arguably amplifies volatility. I have images of Pete Townsend windmill strumming his guitar in front of screaming youth some 35 years ago next month in the Catskills...complete adulation there at the Woodstock nation. Well I am older and marginally wiser, and Townsend does it do it for me anymore than Greenspan. Don't get me wrong I still love the Who and admire Greenspan. But I am skeptical that either will lead me to the promised land.

When the Fed hiked rates in late June, the FOMC statement, which according to former Governor Meyer Greenspan always scripts and often does not reflect what is discussed at FOMC meetings, markets were told that the Fed would remove accommodation at a measured pace (inserted in the early May meeting statement in place of patience). And the statement warned that measured pace could become more or less measured depending on the data ahead. If Greenspan is the preacher and the markets are the choir, then is it any wonder that Treasury yields fell in July (and the dollar eventually fell to new multi-month lows) as the June economic releases were uniformly soft (payrolls, retail sales, industrial production and CPI)? If Greenspan established data as the condition for pace of easing, then June stats implied a less than measured pace of tightening.

But Greenspan failed to more explicitly state a key corollary to the data-is-key month is not a trend. And for those who were not as myopic as the masses, few would have been able to withstand the pain of being short bonds, eurodollars and long the buck over the last three weeks until Greenspan could redirect the worshipers in the desired direction as happened Tuesday.

By the way. I have also noticed that Greenspan has turned off his between meeting channeling that markets became accustomed to in recent years. I mean the Berry and Ip channeling of Greenspan thought aimed at keeping asset prices on the desired track.

Perhaps this absence of between-meeting channeling reflects the Chairman's own uncertainty and a desire to see enough data to reach a reasonable conclusion. Regardless, the Treasury market and dollar were clearly far more impressed with the weak June data than Greenspan.

Greenspan in a sentence or two restored confidence in the sustainable economic confidence in consumer spending, the life blood of the US economy. Profits, unprecedented monetary and fiscal stimulus, employment growth and a belief that household balance sheets are healthy (refinanced) will keep the consumer and firm dancing. Keep in mind that Greenspan mainly controls one interest rate directly. Quarter point or even half point moves in Fed Funds in the big scheme of things are pretty insignificant, especially at the start of a lengthy rate cycle. And they come only every 6 weeks. Hence the temptation to target asset can be a weekly exercise with direct public statements and appearances as well as indirect channeling.

Indeed Greenspan was so optimistic on June being little more than a blip, that he implied the Fed would err on the side of restraint...normal posture of a central bank at the start of any tightening cycle. Previously I noted the Fed was engaged in an unusual posturing for the start of a tightening cycle by erring on the side of caution. Greenspan spent far more time with the notion of the Fed underestimating inflation (far fewer references to it as transitory...far more hedging). Sure he also paid lip service to getting inflation wrong on the downside...adopting a less measured pace. But the main focus was getting markets to grasp that despite soft data for June, the upside risks to price stability were now higher than the downside risks, and more so than what was signaled in the June 30 FOMC statement.

Like the Who, Greenspan is still a crowd drawing act, and has a massive fan base. A few sour notes at a Who concert are acceptable. But eventually even the Who will be a tired act.

If Greenspan targets asset prices by manipulating market expectations and markets know Greenspan targets asset prices (its expectations), then it is very rational for markets to zero in on what Greenspan says, eats, breaths, drinks, plays and wears. I would prefer some distance. An inflation target would help and markets would get back to focusing on the data, and less on the man (Greenspan's read on the data). And then too when Greenspan is gone from the scene, markets will know what to do. Believe it or not but most traders and investors in the market today only know Greenspan. Thankfully when one tires of listening to the Who there is always Outkast to drop a beat.

David Gilmore


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