Greenspan Era: Lessons From The Past
August 25, 2005: Today's Events:
The market meandered in tight ranges today. Comments last night from Chicago Fed President Moskow tended to reinforce Lacker's previous remarks in terms of being curiously hawkish in the face of dangerous growth brakes and no appreciable sign of an acceleration in core inflation: the Fed "must keep raising rates to curb inflation," for example. I can't imagine the Fed is really that obtuse that, with oil at record highs (and rising, $67.49 basis Oct today, up 17 cents), they are seriously considering accelerating the tightening campaign. I suspect this is just an attempt to scare the bond market.
It didn't work: the smart (and exceedingly handsome) denizens of the bond market today rallied the 10y note another 1.7bps to 4.159%. Breakevens widened 1-2bps for the first four years of the curve and were basically unchanged further out. The dollar oozed lower as investors start to wonder why they would want to be in a currency where the controlling central banker is actively trying to cause recession; equities had no idea what to do and rallied ¼% in a very tight range on excruciatingly-light volume.
Part of the reason the market was fairly quiet today is because the annual Fed-sponsored colloquy at Jackson Hole kicks off tomorrow, with Greenspan delivering a 10:00ET keynote address. The topic of this year's conference is "The Greenspan Era: Lessons for the Future" (clearly, whoever thought up the topic was currying favor).
Because I doubt very much that anyone at Jackson Hole will take a serious look at the problems caused by the Greenspan regime and instead will focus on the mythology of the Maestro, I figure it is my duty to take that role. Here is a quick history of the financial world and Greenspan's role in shaping it:1
IN the beginning, there was shapeless void, called malaise. And into this malaise a word was spoken. And the word was Volcker, and he was a great big man, six-foot-seven if he was an inch. And Volcker was the Chair, and the Chair was Volcker. And it was good.
Volcker saw that the demon Inflation had wreaked much havoc upon the land, and he determined to banish him for all time, or at least for a while. So he summoned the demon before him. And the demon was afraid as the Chair took out his Saturday Night Special. "This," said the Chair, "will hurt you more than it will hurt me." And he slew the demon, although it took a passing long time since demons bleed slowly.
Volcker saw that it was good, and that the world was made safer and more predictable as the demon's power waned. But he looked about him, and he saw only Bonds, and Stocks, and Commodities. And he said "I will make new creatures to walk upon this earth and give my children something to do." So he said, "Let there be Financial Engineers. Let there be brought forth LYONs and TIGRs upon the earth, and all such manner of derivative beasts, for a bond is nothing but a bundle of cash flows, and what was bound can be broken asunder." And so it was, and he saw that it was good, or at least a bit more interesting.
And there was a Tree in the garden. The Tree bore fruit. And the Chair took the Financial Engineers and showed them the Tree and said, "I'd be careful of that one if I were you." But the Financial Engineers said "What is it? Looks tasty." And the Chair said "That is the Tree of the Knowledge of Leverage, and while not forbidden per se let me just tell you that if someone eateth from that tree, they usually can't stoppeth until they get sicketh." And the Financial Engineers said, "Hmmmm."
But all was not well in the garden. Another Chair arose, and his name was Greenspan, but he was a good deal shorter than the True Chair, plus he played the saxophone. And Greenspan took the Financial Engineers to the mountain and he showed them the Land of Spread, and the Land of Carry. And they said "Ooh, aah." And Greenspan took them to the Tree of the Knowledge of Leverage, and he bade them eat. But the Financial Engineers demurred, remembering the words of the True Chair. But Greenspan said "Behold you will not get sick, probably, because I will bring forth bountiful Liquidity to stanch your thirst when you start feeling poorly."
Then the Financial Engineers relented, being weak and having lavish lifestyles to maintain, and they partook of the fruits of the Tree of the Knowledge of Leverage, at first timidly, but then more and more aggressively. And Greenspan said "Want fries with that?" And he brought forth fries, and Liquidity, and tax cuts, and other such wonders that are bad for the waistline or the practice of prudent central banking.
And the True Chair heard the sounds and knew that the Financial Engineers had eaten of the Tree, and had possessed the land of Carry, where they lived in splendor and forgot the True Chair and worshipped the False Chair. And he observed how they eschewed the healthier fruits of the land, such as the TIPS which would protect them in the event that the demon Inflation ever returned, favoring instead the sweet gluttony promised by Greenspan. He grew disturbed, and probably angry (wouldn't you be? Dang kids). But he could do nothing, as the Financial Engineers enjoyed free will along with the free money. And he wept.
The warnings having been given, and the admonitions not heeded, all came to pass as had been foreseen. As the Financial Engineers needed more and more of the Land of Carry they ate more and more of the Tree of the Knowledge of Leverage. And they would become upset in their tummies, as had been written; but Greenspan provided the Liquidity which he had promised and they recovered. But the more they were able to eat, and recover from, the more they still wanted, kinda like Ben and Jerry's. And the more they wanted, the more Liquidity they needed; and the more still they wanted.
And it came to pass that, as the False Chair was not omnipotent, Greenspan eventually was unable to provide enough Liquidity. And the Financial Engineers cried out an anguished cry. And the dentists who had bought into the Funds lamented. And the taxpayers who had to bail out the mortgage companies wailed and gnashed their teeth. And they allbecame sick, and their splendid houses were thrown down, and their Jaguars were repossessed, and they were driven out from the Land of Carry.
And they came to the land of Thrift and of Compound Interest, and they had to work for a living. And they were not as happy, but at least they were not sick.
And Greenspan took a victory lap.
Aside from any snippets we hear from Jackson Hole, the only news due out is the University of Michigan Confidence revision (Consensus: 92.5 from 92.7). Next week is a busy week, shortened by a half-day on Friday but containing Consumer Confidence, FOMC minutes, the first GDP revision, a couple of manufacturing reports, Personal Income and Spending data, Employment, and car sales. I expect that, as a result, Friday's trading will likely be quite thin as the last August weekend beckons.
Question of the Day: What chess conclusion follows from 1. P-KB3/P-K4 2. P-KN4 with black to move?
Answer to Prior Question: The question was, "What modern convenience is Don Wetzel credited with inventing in 1968?" Answer: the Automated Teller Machine (ATM).
1 N.B. This is what happens when you run in the Texas sun in the summer.