If you haven't already, all you ERs and ER wannabees should spend a little time with Sir Alan Greenspan's testimony to Congress last week and the accompanying Monetary Policy Report To Congress. You can find it on WWW.federalreserve.gov.
Very, very interesting.
Apart from all the soothing, purring sounds about the economy and the upbeat assessment going forward, Sir Alan has left a lot of read-between-the-lines meat on the table for the Fed watchers to digest and interpret.
As one approaching retirement himself, I think Sir Alan may be kibbitzing on our little retirement Board. He, too, is flustered by the current state of Long Term interest rates. He doesn't really know why Long Term rates haven't moved up. A sample of his thinking:
"In this environment, long-term interest rates have trended lower in recent months even as the Federal Reserve has raised the level of the target federal funds rate by 150 basis points. This development contrasts with most experience, which suggest, that, other things being equal, increasing short-term interest rates are normally accompanied by a rise in longer-term yields....For the moment, the broadly unanticipated behavior of world bond markets remains a conundrum. Bond price movements may be a short-term aberration, but it will be some time before we are able to better judge the forces underlying recent experience."
Translation from Greenspan-speak: I don't know what's going on but this ain't friggin' right. No way this is friggin' right.
Like the rest of us, Sir Alan may be thinking of the paltry returns going forward that he is going to be earning on his retirement portfolio. He would like to see those LT rates moving up along with the rest of us retirees and soon-to-be retirees. It would confirm that his expectations (fears) for the economy are being borne out. In fact, the premise of his higher ST interest rate policy is to cool off an overheating economy facing inevitably higher interest rates. But he can't find any (official) inflation to point to. Maybe he knows the CPI is a crock and that "real" inflation is eating real people alive. Be that as it may, the only rates moving higher are his. His presentation to Congress forecasts the most Goldilocks outlook I can recall for a long time. So is he implementing the exact wrong policy at the exact wrong time? Economy over heating? Show me. This is the real conundrum if you ask me. And the markets hiccupped last week at the prospect of higher rates down the line virtually guaranteed by Sir Alan. Can anyone say : unstated Fed policy is to raise interest rates until the economy slows down whether it needs to or not? How about: managed soft landing? How about: slowing growth in profits? How about: higher capitalization rates? How about: P/E compression? So, it appears we are to get a slow motion car wreck engineered by the Fed tap-tap-tapping on the brakes to bring us gently into the ditch beside the road instead of a pedal- to-the- metal screaming tires type crash. At least that appears to be the plan.
Donner
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The echo in this empty thread is just a wee bit eerie. Can it be that ERs are completely uninterested in what Greenspan has to say? Well, I am interested in what Sir Alan has to say because for the next 8 or 9 months he is the captain of the economy and I do have an interest in where he is steering the boat. For the few masochists interested I offer the following additional take on the Feds current state of play:
In the past, Sir Alan has been nothing if not coyly disingenuous about economic facts and he hasn't changed his stripes. Back in the 1990s Fed policy aided, abetted and fomented one of the greatest stock market bubbles in modern history with predictable consequences. The most Sir Alan could muster, late in the game, was that investors were manifesting a little too much irrational exuberance. Today, with oceans and oceans of Fed induced liquidity sloshing all around the central banks, stock exchanges, bond markets and mortgage markets of the world, Sir Alan is explaining away low real equity and debt returns as a two-fold phenomena :
1. "Capital spending and corporate borrowing have firmed noticeably, but some of the latter may have been directed to finance the recent backup in inventories. Mergers and acquisitions, though have clearly perked up....Even in the current much-improved environment, however, some caution among business executives remains. Although capital investment has been advancing at a reasonably good pace, it has nonetheless lagged the exceptional rise in profits and internal cash flow. This is most unusual; it took a deep recession to produce the last such configuration in 1975. The lingering caution evident in capital spending decision has also been manifest in less aggressive hiring by business. In contrast to the typical pattern early in previous business-cycle recoveries, firms have appeared reluctant to take on new workers and have remained focused on cost containment."
Translation from Greenspan-speak:[ No corporate demand for cap expenditures? CEO's haven't figured out a way to grow their businesses in the face of excess worldwide capacity. Too many factory floors grinding away in jungles all over the world. So, they are eating each other alive instead. I pumped the liquidity into those jungles to build those factories. But, if you lose your job, don't blame me. Blame caution among business executives.
2."As opposed to the lingering hesitancy among business executives, participants in financial markets seem very confident about the future and, judging by the exceptionally low level of risk spreads in credit markets, quite willing to bear risk. This apparent disparity in sentiment between business people and market participants could reflect the heightened additional concerns of business executives about potential legal liabilities rather than a fundamentally different assessment of macroeconomic risks."
Translation from Greenspan-speak: Businessmen have gone fishin' while the Bernie Ebbers thing plays itself out. Layin' low so to speak. Don't worry, as soon as the heat's off things will pick up. BTW, have you noticed how well the sheep have taken to swallowing low real returns? Bearing a lot of risk. Lots and lots of risk. For next to nothing. Real quiet like. That's a good sign don't ya think?
LT rates a conundrum? Caution among businessmen combined with market participants willing to bear risk? Market participants willing to bear risk -- isn't this Sir Alan's way of saying the words "irrational exuberance" 6 years on in a kinder, gentler manner? People should have listened to him last time. Frankly, I'm in a conundrum over this testimony. Try to put all the pieces together and the Fed policy does not make any sense in light of its own economic outlook. You got to read between the lines. I have to say that the current situation is strangely reminiscent of the early 1970's. We have a Fed that is fighting inflation with a policy of rising ST rates while employment remains anemic. We have about 13 million unemployed, underemployed and marginally connected to the economy at present who would argue that the economy is manifestly not over heating. Those of you over 50 can remember the early 70s -- and tremble. The funny little word is STAGFLATION. A topic worthy of a thread of its own. Those of you under 50 haven't a clue. The handwriting on the wall is pretty clear though. The economy is going to slow from its overheated 3.5 % real GDP growth rate with all that implies -- courtesy of our pals at the Fed. Best guess: sometime between now and 6 to 9 months from now. (4 or 5 quarters from when the Fed started applying the screws last June) Won't be long before the equity markets start discounting that slowdown. Hope I'm wrong. Hope Sir Alan is right and that higher short term rates are just the ticket needed to keep this runaway, overheating economy in Goldilocks growth trajectory. Nice rocket science if you can calibrate economic activity that close and know when to stop. Hope those LT rates start drifting skyward pretty soon or everybody's going to get pretty nervous about all this.
I am real curious to hear what all you FIRE'd market participants willing to bear risk think about this remarkable testimony. Are you paying attention?
Donner
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"Remember, if you come this way, don't take no shortcuts and hurry along as fast as you can." (Virginia Reed, Age 12, Donner Party Survivor, 1847)
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Join Date: Dec 2003
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An intelligent and important guy. But I stopped listening to him when he told everyone last year that they should go get adjustable rate mortgages, while he had his hand on the interest rate button with full intention to push it many more times.
A nice favor to his banker friends, but gimme a break...
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Many an optimist has become rich by buying out a pessimist
Well, I can't stand the mo' fo', but be that as it may, is any of this of any real importance except to really really old people, with the low interest rate bullshot? The ER types are long-termers and should be seeing this stuff as just "one of those spells". And is a slow, "managed" crash really worse than a system wide wipe out? I can see opportunity to be taken advnatage of in a REAL crash but a slow crash wouldn't be the end of the world
We are about to engage in a historic economic debate in this country. The debate will be between the Supply Siders lead by the Reaganite economists associated with the Bush Administration vs. the Keynesian Monetarists led primarily by Greenspan's Fed.
What will the debate be about? inflation
Supply Siders: The definition of inflation is too much money chasing too few goods. Solution: cut taxes, stimulate investment and produce more goods. End of Inflation. This is how RR licked Jimmy Carter's inflation.
Keynesians: The definition of inflation is too much money chasing too few goods. Solution: cut demand by raising interest rates and shrinking the money supply. End of Inflation. This is how Paul Volcker licked Jimmy Carter's inflation.
Managing the fundamental economic problem of stable prices and full employment from the supply side vs the demand side.
The supply siders have had their way for nearly 25 years
But Supply Side economics is now under the gun. Demand side management through monetary policy is going to make a comeback in the next few months.
Here's the problem:
Newsflash for the Supply Siders: More investment is not the problem. Investment capital is sloshing all around the world. More tax cuts, more inducements to invest, is just pushing on a string. Won't provide the theoretical effects. Might just push us into a deflationary recession as a result of massive over capacity. Are we at the theoretical limit of Supply Side?
Newsflash for the Keynesian Monetarists: Arranging for less demand in the US and the world is not the problem.
Problem is not enough demand. Raising interest rates and contracting the money supply could push us into a recession.
My question: Why are both the Supply Siders and the Monetarists pursuing anti-inflationary policies? They can't point to any official inflation. The bond markets are not reflecting future inflation. 13 million unemployed and underemployed. Anemic wage gains. What gives here?
The outcome of this debate is going to impact all of us for a long time to come. Stay tuned.
Donner
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"Remember, if you come this way, don't take no shortcuts and hurry along as fast as you can." (Virginia Reed, Age 12, Donner Party Survivor, 1847)
Good (lone) discussion Donner. I found it very interesting but had nothing to add really. You speak much better greenSpanish than I!
Only question I see is; what should one do now with ones nest egg then? Moving all to cash might be most prudent - but with the indications of an invisible inflation happening - even THAT does not seem prudent.
Good (lone) discussion Donner. I found it very interesting but had nothing to add really. You speak much better greenSpanish than I!
Only question I see is; what should one do now with ones nest egg then? Moving all to cash might be most prudent - but with the indications of an invisible inflation happening - even THAT does not seem prudent.
Cheers!
Ben
I'll tell you what you should've done 10 years from now
\I'll tell you what you should've done 10 years from now
Hey if either of you pays me enough then I'll tell you what will happen in 10 years. Of course there are no guarantees of correctness.
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For me set your stock/bond balanced index to 'your' defensive postion(if you are in the distribution phase).
Suck up your guts and soldier on - The duration of Vanguards TBM is 4.2 years so I expect a chewy period for both stocks and bonds - Press on regardless ala Bogle.
I did my hard time - gold, real estate, timberland, copper stocks, etc.,etc. in the 70's and 80's with mixed results. And my multi - asset class(up to 8?) days including international fixed income and stock are behind me.
Still have my 15% putz money - largely in search of value/dividend stocks.
History never repeats exactly - but there is no free lunch either. I have no crystal ball as to what will happen when or how fast - but the current high value situation will change.
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jul 2003
Location: north of Kansas City
Posts: 6,380
BTY -nothing is off the table with my 15% putz money - if I find value - not commodities funds, closed end, international funds or individual companies.
I will ask first and formost - "Show me the money". Real money not flakey Mr Market cap gain stuff.
Greenspan estimates Social Security problems start 2008.
Good article which notes that cash is the problem and that by 2008, our government is gonna start borrowing bigtime.
One quote: "It becomes $7 billion of red ink in 2010. If you are reading about this in a daily newspaper in 2005, you can be sure global bond markets will start to take notice before 2010. Try 2008."
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Resist much. Obey Little. . . . Ed Abbey
I guess I am in a decided minority. I always thought that Camilla was quite attractive and would not have touched Diana with a 10 foot pole. This is not because
I am an old codger. I have always felt this way. I also thought Charles and Camilla were a great match and am happy for them now that they will be together.
It's a nice story IMHO.
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