February 23, 2000

Greenspan keeps yaking and yaking, but why do so many people listen? Don't you know? He's the chairman of the Federal Reserve. Okay, okay, but when I reflect on what he's says, a lot of it doesn't make sense.

In 1996 Greenspan said there was irrational exuberance in regards to the stock market. At that time I was a strong bull because what Greenspan was saying made no sense and was not backed up with any facts or even any rational statements. Obviously, now with the Dow up about 65% and NASDAQ up about 400% since 1996, Greenspan's remarks were stupid. And I say stupid because like I said he had nothing to back up his comments, he was just yaking.

In March, 1997 Greenspan raised interest rates. He raised them because of a fear of wage inflation. At that time I and everyone I knew were not anticipating any above average wage raises and we had not gotten any in the previous years, for this reason, Greenspan's rate hike in March, 1997, made no sense. Now, three years later, there are still no wage inflation pressures causing general economic inflation.

In 1998 Greenspan lowered interest rates, but why did he have to lower them? He had to lower them because as soon as he started yaking at the Humphrey-Hawkins meeting in July, 1998 the stock markets started to all fall (look at the charts for the DOW, S&P, and NASDAQ) and soon after Russia devalued their currency and the dollar started to gain strength in virtually all currency markets. To weaken the dollar, he had to lower interest rates. He also lowered them to create more liquidity to help stock markets recover.

It only took Greenspan a little over a year to take all the rate decreases back, plus one more. I believe that if all the sheep on Wall Street had not listened to Greenspan's testimonial in July, 1998, none of the rate decreases and subsequent increases would have been necessary at all.

Even now as Greenspan yaks some more about his rate increases, he has nothing to back it up. There is no general economic inflation including wage inflation except for Greenspan's buddies, CEO's and the like. I say his buddies because if Greenspan had the middle class as his friends he would know for sure that the middle class is not getting raises much higher than the CPI percent increases.

Greenspan also tries to justify the rate increases by talking about the "wealth effect." Today, Greenspan was specifically asked about the "wealth effect," but, in my opinion, evaded the question. He didn't want to directly answer the question because he knows the wealth effect in regards to the stock market is irrelavant to inflation. The vast majority of wealth created in the stock market in the 90s went to the rich, who already have so much money they couldn't possibly even come close to spending it all or to the point where it would in itself, cause inflation. The wealthy are storing their wealth, not spending it.

I am not saying that a strong stock market is bad because it mainly helps the rich. Some of the money does trickle down to the middle class. And since the middle class doesn't have a ton of money lying around they most likely will spend their share today or sometime in the future. However, just because the middle class spends their share it does not have to cause inflation.

Today, CBS Market Watch stated,

"I'm not raising the issue in this context of there being an irrational surge in stock prices or a speculatvie imbalance which is threatening the economy Greenspan said. The only question for the central bank is whether the growth in assets (and therefore the growth in demand for goods and services) can continue to outstrip growth in the economy's abilility to supply that demand, he said."

Greenspan is still living in the past, at least sixty years ago. We are now in a global economy, Mr. Greenspan, all the goods and services necessary to meet demands in America no longer only come from America. I'm not debating import and export policies, I'm simply saying that Greenspan talks like everything consumed in America is made in America when I know for a fact that just isn't true or even close, the vast majority of goods bought by Americans are now made overseas.

In summary, what I'm talking about in the last four paragraphs is the fact that the results of the wealth effect mostly effects a small number of people, that is, a small number of people are getting the vast majority of wealth created by the stock market, and those individuals are so ridiculously wealthy that the last thing they are doing is spending their new created wealth, they are simply storing it. And our economy is now a global economy, all the goods and services demanded by Americans are no longer mostly made in America, it's just the opposite, most goods are made overseas and just because demand goes up here in America does not mean there has to be inflation. Demand has consistently gone up in the 90's ever since the recession in 1991, but now, nine years later, there is still no general economic inflation present.

When it comes to inflation and inflation fears, one thing that's really in the news lately is oil. This is a very interesting issue. Oil is something that can be found just about anywhere: the Middle East, the Capsian Sea, South America, Mexico, the US, Canada, Russia, even China has natural oil reserves. But, according to the media, OPEC is controlling the price of oil. Mexico is not part of OPEC and Mexico alone has enough oil reserves to supply the US, the largest consumer of oil, for many years just by itself. How is it possibly for OPEC to control the price of oil, a product which is anything but unique? I don't know, but is sure does bring up a lot of questions.

Oil consumption in the US has gone up 14% in the last year, but domestic oil production has declined by 17%? Why, and remember most Americans don't want higher oil prices and if Americans don't want higher oil prices than why aren't domestic oil companies pumping more oil out of the ground?

The price of oil has gone up by 170% in the last year, but a company like Chevron has seen its share price drop by 27% in the last nine months. Why? Aren't large oil companies like Chevron suppose to make money when the price of oil goes up? Your answer may be is that "everyone" doesn't expect the price of oil to stay up. If that's the case then what's the big stink about the price of oil, it's going to start to come down pretty soon, right Wall Street?

Another question about the price of oil. Is gasoline expensive now at $1.41, the current price for a gallon of gasoline per the DOE? When I was a kid in 1965, a gallon of gas was 30 cents which means at $1.41, a gallon of gas has inflated at 4.5% per year since 1965. In 1965 a can of coke in a machine cost a dime, now a coke costs you 70 cents which means at 70 cents, a coke from a machine, has inflated at 5.7% since 1965.

Bottom line, there are a lot of questions to be asked about oil. Something as plentiful as oil and available from so many countries should not increase in price by over 170% in less than a year?

Getting back to Greenspan. Another comment he made that I got a kick out of was when he was asked about the fact that most of the new wealth created by the stock market was going to a select few. Greenspan said that what he was hoping for was that more and more young adults would be able to go to college and therefore enjoy some of the new created wealth. I know four individuals, all with double E's. All four make completely different salaries because one works for the government and has no stock options, one works for a large corporation where the stock has been a so, so performer, one works for a large corporatation where the stock has been a pretty good performer, and one works at a small company where the stock has gone through the roof in the last couple of months. These individuals will make anywhere from $60,000 to over a million this year. It looks like luck is a big part of making it big financially here in America and I'm not sure that's good for the health of the overall economy?

ADDENDUM (March 27, 2000)

Greenspan yaked some more today about Social Security. He said there would be a severe problem with Social Security by 2010 (you could have read this years ago on Inside the Stock Market) if there were not changes made to the system. Some of the changes suggested by Greenspan: increase full benefit age (which has already started, e.g., my full retirement age has already been increased to 66 years, 10 months, and I'm still 22 years away from full retirement age), and decrease benefits. What wisdom? Ask yourselves, your parents, and your grandparents, if a person could live on less than what the government is already paying. The answer would be no.

Greenspan said the reason for the problem with Social Security can be summed up in one word: Demographics. Agian, what wisdom, no wonder the Senate asked Greenspan to talk. The politicians didn't need to have Greenspan tell them that the bady boomers are a large part of the population and will start to retire in 2010. And since the government has spent the babyboomers retirement savings, a.k.a., the Social Security Trust Fund, no doubt there will be a severe problem with Social Security in 2010.

Another issue brought up in the Senate Committee was paying down the debt with the surplus. A Senator(D) from Nevada said that the polls showed the American people wanted to use the surplus to pay down the National Debt and not use the surplus for a tax reduction, but Larry Craig(R) from Idaho came right back and said the surplus of last year was not use to pay down the debt as the polls suggested the American people wanted, but was simply spent by the current Clinton administration, and that it looked like the surplus for this year was on its way to being spent too, that is, not used to pay down the National Debt or to shore up Social Security. This is typical for politicians, that jack their jaws back and forth, but raely accomplish anything.

Since I was a kid, the infrastructure based on the amount of cars now on the roads is worse, the school system is worse, Social Security is in deep financial trouble, the military is less prepared, taxes are as high, crime is up (I don't care what any report says, when I was a kid I didn't lock my bike, the car, or the house, and I was not scared to walk anywhere in the city.), not to mention that welfare is up and going to more and more people who don't deserve it.

ADDENDUM (April 13, 2000)

Here we go again. Greenspan gave testimony on markets in front of a senate committee today. Of course the head senator, Phil Gramm (R) from Texas started right off praising Greenspan and thanking him for showing up. When you went to work today did your boss spend a few minutes praising you and thanking you for coming in today? When you think about it, Gramm praising Greenspan, it makes sense. Gramm figures if he's nice to Greenspan, Greenspan will be nice to him. The more I watch C-Span, the more of this "praising" thing I see, it seems to go on a lot on Capital Hill.

When Greenspan talks about markets he uses the word investors like the financial news media; he does not acknowledge the fact that there are two completely different investors out there and I'm not talking about day traders or long-term investors, or value or growth investors. I'm talking about individual investors and institutional investors. Individual investors care about what makes them the most money whereas institutional investors from the simple fact they are capitalists, care about what makes them the most money which may not be what's best for their customers.

For example, if we have 1,000 individual investors investing in the stock markets. As individuals they can buy any stock, no matter what the market cap is of the stock, i.e, they can buy a small stock if the fundamentals are stronger and don't have to be bothered with liquidity issues. However, if those 1,000 individual investors give their money to one mutual fund, the mutual fund would not be able to buy a smaller stock even if it had the strongest fundamentals. They wouldn't be able to buy it due to liquidity issues.

The fact that institutional investors and individual investors are different has to be acknowledged by the Fed and the SEC. This concerns me very much, the fact that the Greenspan, the Fed, and the SEC will not acknowledge the difference. They will wait until a crisis occurs because of it and by then it will be too late.

One senator I applaud was Jim Bunning (R) from Kentucky (CNBC is not very good about showing names and I hope I got this guy's name right). He is one of only a couple of politicians who I have seen challenge Greenspan. Let me remind you that Greenspan in his own words says this is a new economy, a global economy, a new high-tech economy. There is no way that Greenspan knows what's best for this new economy and the politicians need to realize that, Greenspan is no prophet. Treating Greenspan like some kind of prophet is dangerous. Greenspan should be challenged and made to back up his actions with facts and data and not a bunch of college economic jargon.

When Greenspan was answering a question asked by Bunning he said, "Millions of investors know the companies they are buying." Bunning challeged Greenspan using the word millions. Most of the investors I know, don't know what PE stands for, let alone what the difference is between a trailing PE and a forward PE. Most investors don't know much about the stocks they own and when they own them through a mutual fund, for the most part, they don't even know what companies they own. Again, this concerns me very much that the Fed Chairman is assuming most investors know what they're doing. Doesn't Greenspan realize that most institutional fund managers haven't even seen a recession? Greenspan needs to get off of Capital Hill and get out in the real world for a day or two.

Another senator asked Greenspan if he thought that small investors knew about "payment for order flow" and the fact that they may not be getting the best price when they buy a stock from their broker? Greenspan just gave a general answer, probably not, but he didn't have any exact numbers.

Did the senators or Greenspan talk about what they could do to make sure customers did know? No. Did the senators or Greenspan remark that the fact is, even if the customers did know, there wouldn't be anything they could do about it anyway? No. The vast majority of brokers are more worried about getting "payment for order flow" than getting the best price for their customers.