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LA times on Greenspan

Написано Bell | Sun, Jan 16 at 7:34pm:

LA times on Greenspan
<<Greenspan Chides Wall St. Bulls, but They Can Do Math


The second-most powerful man in America threatened the stock market Thursday, and the response Friday was the equivalent of a taunt: The Dow Jones industrials surged 140.55 points to a record 11,722.98.
Wall Street's bulls can only hope that President Clinton also will decide to order share prices lower soon. That ought to be good for at least 300 Dow points--higher, of course.
Federal Reserve Chairman Alan Greenspan's speech Thursday was expected to give a strong indication of how he viewed the U.S. economy's general health, and Greenspan didn't disappoint in that regard.
The economy, as he sees it, now is suffering "imbalances" that will raise the risk of recession if they aren't corrected. The stock market's nine-year-long advance is one of those imbalances, he asserted, because of the "wealth-induced excess of demand" it has created for goods and services. (Read: That new house/ car/talking refrigerator you just bought.)
What to do? "In the end," Greenspan said, "balance is achieved through higher borrowing rates."
If only he felt that he could truly speak plainly to us, this is what the Fed chief might have said: "I'm going to raise interest rates again, because I think the economy is growing too fast and because people are making so much money in the stock market that they're overspending, which could boost inflation.
"How much will I raise rates? I don't know for sure. It depends on whether the economy starts to slow any time soon, and/or whether the stock market stops surging. If one or the other occurs, or both, maybe I won't raise the Fed's main short-term rate, now 5.5%, more than a quarter-point when the board meets Feb. 1."

* * *
Greenspan, of course, could never be that specific in his remarks. What he did make quite clear, however, is that the ever-rising major stock market indexes are a problem for him.
To which the market replied on Friday: Nuts!
Why would Wall Street mock the Fed chief? Well, why not?
Consider: In the same speech, Greenspan declared that the process of containing the "wealth effect" of a rising stock market is "already well advanced."
That is not because investors are lowering their expectations for future corporate earnings or stock gains, he added. Nonetheless, rising market interest rates--specifically, the higher cost of borrowing via corporate bonds, and the general competition that rising yields on all bonds present for the stock market--are having the desired effect, Greenspan suggested.
He didn't say so, but perhaps he was thinking about the cold reality of this bull market: Despite the continuing surge in the major stock indexes, 68% of all New York Stock Exchange stocks declined in 1999.
What has kept the market indexes aloft is largely the technology sector--which also has some of the best growth prospects going forward.
Now, what investors may logically conclude from Greenspan's speech is that he doesn't expect to raise interest rates all that much more. Not if the process is already "well advanced," anyway.
What's more, if something were to go terribly wrong in the global economy--like the Russian debt default of late-1998--investors can feel quite confident that the Fed would quickly respond with lower interest rates, as it did in 1998.

* * *
In effect, says Scott Grannis, economist at Western Asset Management in Pasadena, "Greenspan is saying, 'If the market goes down, I'll take care of it.' "
Hmm. Rates won't rise that much more, and there's no risk of recession. With that kind of outlook, it shouldn't surprise Greenspan that many investors will decide that the path of least resistance for the stock market (or at least enough of the market) is higher.
"I think Greenspan is digging himself into a hole," says Grannis, who is no fan of the Fed chairman, and who doesn't believe that the alleged stock market wealth effect poses a problem for the economy.
But back up for a minute to Greenspan's comments about the bond market. Again, if he could speak plainly this is what he might say to bond traders and investors:
"Look, I think you're doing the right thing to demand higher yields on bonds, because inflation risks are rising, and that's the worst thing for someone who owns a fixed-rate bond.
"I control short-term rates, but the key to the economy is what happens with long-term rates, which you control. As the economy has boomed, you've pushed the yield on the 10-year Treasury note from 4.66% a year ago to 6.69% now, even though I've only raised my short-term rate from 4.75% to 5.5%. Good job!
"In fact, if you feel the need to demand even higher yields, be my guest!"
But have bond yields risen because investors fear higher inflation? Not if we're to believe the inflation expectations built into the Treasury's special inflation-indexed 10-year notes.
The current return on those notes suggests investors expect a mere 2.3% annualized rate of inflation over the next decade.
If they're right, then a conventional 10-year note now yielding 6.69% will generate a real (after-inflation) rate of return of about 4.4% a year this decade--quite a handsome payoff, at least when judged historically.
And yet, that's nothing compared with recent stock returns.
Indeed, an interesting point of discussion in the bond market in recent months has been the idea that what's pushing yields higher isn't inflation fear, but that bond investors are simply tired of suffering such low returns relative to stocks.
In four of the last five years--and particularly last year--the return on the average stock mutual fund has exceeded the return on the average government bond fund by a minimum of 15 percentage points. If you're a poor bond investor, why wouldn't you demand higher yields to justify keeping your money locked up in bonds, when stocks keep shooting the lights out?
As Tad Rivelle, a bond fund manager at Metropolitan West Asset Management in Los Angeles, puts it: One way to read Greenspan's speech is that "a prudent bond investor here should demand higher rates."
There are, of course, all sorts of academic and risk-related reasons why bond investors can't or shouldn't demand better real returns--and certainly nothing close to what equity investors get.
There also are many bond market pros out there today who believe that, at current levels, long-term bond yields already reflect as many more short-term rate increases as the Fed is likely to order up.
But if long-term yields are in fact closer to peaking, and the next major move is down, most investors need only recall the '80s and '90s market math: When bonds do well, stocks do even better. >>


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LA times on Greenspan - Bell on Sun, Jan 16 at 7:34pm
  Re: LA times on Greenspan - M on Sun, Jan 16 at 9:02pm


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