Greenspan: The Man Who Does the Opposite

By: Ram Seshadri | Thu, Sep 30, 2004
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I usually do not like to comment on Greenspan since he seems to take up almost all the space in every newspaper and magazine in America than he deserves to. I can safely bet that virtually no article on finance in a news source anywhere in America will fail to mention his name and what he thinks about the subject of the article. This may sound stunning to those who were born outside America and live here or those who still live elsewhere. But it is wholly descriptive of the situation we find ourselves in with a pliant and celebrity-driven US media these days.

Whether it is home building or stock markets or a plain shopping tip, if the article talks about finance, the writer usually finds a way to weave Greenspan into it. Even if he/she has some backbone enough to buck the trend and not mention him, there is a good chance that his/her editor will write back with a note wondering "what Greenspan has to say about this subject".

This kind of mania for a Central Bank employee is unusual for America. But I guess the press here treats him like a Demi-God whose every utterance is important. It is also a fact that Greenspan tends to talk about every subject under the sun related to finance, so journalists have a wealth of quotes to choose from a man who seems to suffer daily from verbal diarrhea (unlike some of us who have it only once a week!).

But there are times where I think Greenspan pauses to think about what he says and actually says it. Based on what people consider his most important quotes or speeches, I think I have found a pattern in his speeches that can lead us to predict his actions.

Since the Federal Reserve is usually very secretive in terms of what it does (on a daily, monthly basis) and is even more guarded about what its future actions (three or six months out) are likely to be, the clues to Greenspan's actions are very nebulous indeed. Hence the army of Greenspeak readers on Wall Street who claim to know what he says. But after years of reading what these Greenspeak "experts" have to say, I should say that I am very disappointed.

Literally, no one seems to have grasped the big significance of what he has done ever since Greenspan the God was a mere consultant in the firm of Townsend, Greenspan in the 70's and 80's. I am referring to of course, the recurring pattern in Greenspan's life of saying the opposite of what he is thinking/doing.

Many gold bugs today like to tout how Greenspan was a Gold bug as early as the 60's in his obscure but now famous essay, "Gold and Economic Freedom" published in 1966.

But what they forget is that Greenspan has never said a word about this essay afterward in his entire life. The essay to me was one of the earliest examples of Greenspan's habit of floating trial balloons on ideas he never believes in or in fact believes in the opposite. Can you imagine anyone writing a passionate essay on something that they believe in without any follow-up whatsoever in the future? How about putting even a grand sounding title such as "Gold and Economic Freedom" on such an article and never bothering to do a thing when it came time to implement such an idea as a central banker?

Fast Forward to 1987 when Greenspan was appointed as the Chairman of the Federal Reserve a few months before the crash of 1987. Here, he floats a trial balloon in a Fortune interview in August of that year that the dollar was "overvalued and would have to be devalued at the rate of 2% a year for some years until it got where he wanted it to be". Guess what?! The dollar tanks on a similar word from Jim Baker a month later and Baker gets all the blame for the Crash of '87 while Greenspan walks away a budding Demi-God! Greenspan promptly forgets about an overvalued dollar once the crash happens and maintains a tight interest rate policy for the next 4 years (highly supportive of a strong currency) that dooms Bush Senior's Presidency. Talk about doing something the opposite of what you are saying!

Greenspan's habits didn't change much in the sunny 90's. He famously warned of "Irrational Exuberance" in 1996. That much we are sure of. But behind the scenes, he did nothing to damp that exuberance. If somebody was convinced about something, and actually even says it in public and finally has the power to do something about it, do you think that person would actually sit back and watch the event unfold? Not unless you are named Greenspan. So all through 1996 and 1997, Greenspan keeps rates steady while the market routinely leaps 20-30% a year from his speech in 1996. Talk about convictions or the lack thereof!

In a similar vein, Greenspan extolls the virtues of a "New Era" and our stupendous "Productivity" gains in late 1999 and early 2000 even as he diligently kept raising rates and was busy withdrawing the liquidity he had poured forth in abundance in late 1999. By his actions, Greenspan proved that he was no dilettante at this ancient art of saying one thing and doing another.

In fact, the "pundits" in US media should have grasped by now how horribly wrong they were in trying to interpret his every sentence. They could have easily seen his actions over the past three decades (at least 10 years of that as a Central Banker), that this man does the exact opposite of what he is saying at any one moment.

Flashback to 2001 and 2002: Greenspan insists to Congress and the people that the economy is "sound" and is about to accelerate at any moment's notice. Even as the ink dries on the paper, he is busy flooding the system with money and slashing interest rates to the lowest in 45 years! Do these actions bespeak a man who believes the economy is "sound"? The only "sound" I could hear was that of printing presses running in the various US Mints. What a shame that no one picked up on this travesty of the spoken word and the covert action?

Picture this: Entering 2003, after the Iraq War, the economy seems to exhibit signs of a pickup as some pent up business spending actually happens. But even as the stock market rallies and commodities everywhere start to boom (a sure sign of demand), Greenspan insists suddenly that the economy may be weaker than it appears! Guess what, by the end of the year, when both signs of a recovery and a raging inflation are apparent to everyone, Greenspan insists that that price increases are indeed "transient". But in typical Greenspan fashion, he starts a string of rate increases in 2004 even as he sounds the lone cry that inflation is "tame". To paraphrase Ronald Reagan, "There you go again, Mr. Greenspan".

So here we are - now in 2004 and the same old tired and perenially wrong Greenspeak "experts" on Wall Street are telling us what Greenspan will do next based on what "hints" he drops in his regularly scheduled FOMC verbiage. Here is a secret for you: Watch Greenspan the next time he speaks in front of Congress. If he says, the economy is "strong", you can almost be certain that covertly he is flooding the system with money and is itching to cut rates. On the other hand, if he says, the economy is in some mysterious "soft patch", then you can bet he is going to be busy raising rates! Welcome to the world of Greenspan, you are now a certified Greenspeak Expert!


Ram Seshadri

Author: Ram Seshadri

Ramadurai Seshadri
Alyx Funds LLC

Ram Seshadri is investment manager at Alyx Funds LLC

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