 Greenspan's
'NIGHT OF THE LIVING DEAD'
Alex Wallenwein
Jul 23, 2004
Remember the good old days when it seemed like Greenspan thought
his job was to keep the stock markets going - and he succeeded,
for a good long while? Those days are over now.
He talks to the Senate, and the dollar jumps (and gold dives,
of course). So far, so good. But was that a "success?"
Not by far. Stocks, true to their form for the last year or so,
took a nosedive right along with gold.
Back in his heyday, he could talk stocks up right along with
the dollar, and could make gold dive at the same time. What happened
to him? Has he lost his famous touch?
In my mind, he's lost far more than that, but that's beside the
point. The real point is that something has entered the picture,
something he did not foresee. Something that undermines the very
foundation underpinning the US economy - and he has essentially
no control over it. Never had it, never will. To those of you
who have grown accustomed to my almost weekly ravings, you know
exactly what is coming now. To those who are new to these articles,
here is the "secret:"
The euro is sucking the life out of the dollar's phony "safe
haven" status, and in the process is channeling it away
into where true safe-haven buying really belongs: Gold.
How does the euro do that" Very simple: When the dollar
falls against the euro, since it is the currency in which gold
is currently quoted, the price of gold rises. So almost any rise
in the euro causes a rise in gold. There is a little more to
it than that, but that's really the main part.
Does that mean there won't be intermittent dollar-rallies?
No. It doesn't mean that at all, as you can see right now as
this essay is written: July 23, 2004, about 7 am. Yesterday the
dollar stalled a bit after a tremendous two-day, post-Greenspan
testimony rise, and this morning before the New York open, it
literally bucked up like a wild mustang that has just been roped.
But just like a roped wild mustang's, the dollar's heyday is
over. Done for. (However, the dollar was not really roped by
the euro. It has entangled itself in too much "rope"
of its own making. Unfortunately, no amount of 'bucking' will
extricate it from that mess).
So, what happened to Greenspan's soothsaying powers?
In the days of yore, when the US economy had a little more of
a life of its own (it has always been goosed up by below-market
interest rates set via Fed policy to some extent) great US economic
performance was a signal to foreigners that this is where they
needed to park their money. As a result, they bought US assets,
especially stocks, but also treasuries, to safeguard their wealth.
The US was seen as a haven of growth, while the rest of the world
looked shaky - especially during the 1997 Asian Contagion currency
crisis.
Today, after the Nasdaq crash and Dow decline in 2000, and "after"
the recession that supposedly never was (but miraculously continues
despite all official and financial-press announcements to the
contrary) the only reason the US still has an economy is Greenspan's
prolonged, panic-button type interest rate policy.
In these weird and insanely upside-down times, economic growth
is bad for the economy!
What??
Have I gone insane? How can that be? Let's look at it this way:
What happens when the economy grows? "Pricing power"
returns to corporate boardrooms, and that, of course, means higher
prices. Higher prices brings price-inflation, and what is the
Fed's recipe for price-inflation? Interest rate hikes. And what
do interest rate hikes do to the economic expansion? They kill
it.
Just think back to 1999 when Greenie started raising rates. A
few months later came the legendary bust of 2000 ...
... and then came 9-11.
9-11 was, however, not the cause of the mess we are in today.
Many analysts believe (and I am among them) that 9-11 was literally
a "god sent" for an already desperately-ailing US economy.
Despite its devastating effect on the stock markets, 9-11 brought
us zero-interest car loans and "patriotic investing"
by an unsuspecting public that thought it was doing its patriotic
duty by buying stocks like there was no tomorrow, just to show
their support for their country.
Anyway, however that may be, we all know that early in 2002 Greenie
started dropping his interest-rate pants one painful inch after
another, like a macabre, grotesque sort of economic cabaret (the
thought alone makes me shudder! Just picture him strutting around
the world's stage with his pants around his ankles, held up by
extremely long suspenders) he dropped them, and dropped them
(short term interest rates, that is), until they hit 1% - a historical
anomaly by any standard - and then he kept them there for over
a year.
Coincidentally, that is 'the year that was' - the year of the
US stock market's dead-cat bounce. But now he made clear that
rates are going up - no matter how slow or "measured"
the pace may end up being.
Institutional investors aren't stupid. Deluded maybe, but not
stupid. When interest rates are at historical lows and stock
valuations at historical highs, and when those stocks have been
unable to overcome previous highs for over four years now (despite
otherwise performing admirably under the circumstances), the
outlook just isn't that rosy, sorry to say.
And now we have rising rates.
What do you think that bodes for stocks in general?
Maybe Greenie is right. Maybe the economy really is "solid."
Let's grant him that much. But in saying so, he has literally
committed himself to this rising-rates policy, slow though it
may be. As rising rates boost the dollar temporarily, they undermine
any potential long-term continuation of this economic "recovery"
we are supposed to be in. (It's more like an economic version
of "The Night of the Living Dead.")
Where do you think Americans have virtually all of their savings?
In the stock market, of course - in one form or another. Where
do you think stock valuations will go when the rate increases
prick a hole into this second easy money-induced bubble? And
what happens to consumers when they see their life's so-called
"savings" disappear before their eyes? They will stop
all spending, of course, because now they are a whopping 38%
deeper in debt than they were in 2000 - thanks to Greenie's other
spawn, the re-fi boom.
Will another 9-11- type event revive their patriotic fervor and
get them spending again under those - far worse - conditions?
Unlikely. Very unlikely.
So, under the above scenario - which is in no way imaginary -
the dollar's current "bucking bronco" antics do not
have a great likelihood of lasting very long.
Dropping stocks will drag down spending, which will drag down
the economy, which will inevitably drag down the dollar - and
so push up gold. No wonder the plunge protection team was activated
yesterday to bring the Dow back from below the psychologically
important 10,000 water mark. That 'baby' almost drowned yesterday!
Conversely, if Greenie is right, and the economy does keep growing,
and if he somehow manages to get his old magic back and stocks
go up along with it (fat chance!), then long term rates will
climb because stock-booms invariably suck money out of the bond
markets, which depresses bond prices and thus raises long term
rates - and WHAMMO! The consumer takes it on the chin again,
either way.
Which way would you prefer it?
It may be wise for this ubiquitous "consumer" to funnel
some of his assets into gold and other precious metals - as long
as his beloved dollar still manages to command a decent quantity
of same.
Are you still so depressed about "falling" gold prices?
I hope not.
Got gold?
 Jul 23, 2004
Alex Wallenwein
Editor, Publisher
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