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April 26, 2005

Greenspan Fading Away
by T. Stein / S. McIntyre

It has been a long journey for Federal Reserve Chairman Alan Greenspan. Say what you want about the man, but the impact of his upcoming departure should not be underestimated. Watching Greenspan mutter his doublespeak in front of Congress has become an institution as American as baseball over the last 18 years. And no matter what the current state of the market is, we have always had Alan Greenspan to soothe our fears and renew our faith in the American capital markets. But now he will be leaving us, and investors will have to get used to someone else. Or will they?

A new pope was elected recently. The media coverage was mixed, but the one unquestioned fact coming out of Vatican City has been that it will be difficult for Benedict XVI to replicate the remarkable legacy of Pope John Paul II. Of course that's the same thing pundits said when Alan Greenspan took over for the great Paul Volcker. Some 18 years and a once in a lifetime equity bull market and epic credit bubble later, Greenspan has become a supernatural being to those on Wall Street and a cult hero to millions around the world. We can only wonder what it will take for the next Federal Reserve Chairman to earn such a reputation.

Whether it is Ben "Printing Press" Bernanke, Martin Feldstein, Glenn Hubbard or anyone else, you can bet that the next Fed Chairman will have a difficult time soothing the financial markets during the next crisis. Just picture a crew of airline pilots vanishing into thin air with a group of flight attendants trying to take over and fly the plane.

Subscribers to our newsletter know that we consider Alan Greenspan to be one of the worst Fed Chairs of all-time. But the general public doesn't share this view and maintains its blind confidence in Greenspan. So when Greenspan leaves office at the end of the year, investor confidence in both stocks and the U.S. Dollar may do the same.

Greenspan's departure can be added to the list of investor worries which include soaring trade deficits (soon to push 7% of GDP), growing budget deficits, Americans' lack of savings, nosebleed valuations for both stocks and bonds, unleashed inflation, and a looming housing bubble. While it is true that stocks climb a wall of worry, we fear that this is no ordinary wall. Poor returns for virtually every asset class of stock, bond, and real estate appear destined to plague the tenure of Greenspan's successor - prices are high and fundamentals are poor.

The Fed and whoever materializes as its new Chairman next year will be caught in a painful box. Raise rates and suffer a slowing economy, a bursting real estate bubble, job losses and unhappy citizens. Don't raise rates and inflation may spiral out of control taking the dollar with it. What a nice little box to jump into as the new Fed Chairman in 2006! Who would want to tackle such a Catch 22? Most likely, someone who is too naive to grasp the problems or someone who is too arrogant to think that disaster can be averted with a quick fix. The best men for the job will likely have no interest in taking the political beating the new Chairman is sure to endure.

So when Bernanke or whoever takes office, unless he is cut from the same cloth as Paul Volcker or Warren Buffett, we surmise that the selection will only help the dollar fall (and gold rise) further.

Todd Stein & Steven McIntyre
Texas Hedge Report

Todd Stein & Steven McIntyre are internationally known analysts and editors of The Texas Hedge Report, a market newsletter that highlights under and overvalued securities in the equity, bond, currency, and commodity markets. For more information, go to http://www.texashedge.com

Copyright © 2004-2008 Todd Stein and Steven McIntyre

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