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Greenspan and Goldilocks

December 8, 2000

Yesterday, Alan Greenspan gave a speech and everyone rejoiced. It seems the Fed Chairman said that he may be through with interest rate increases because the economy may have slowed down enough, though he also said inflation is still something to watch out for, since energy prices are troubling.(!?)

Wall Street took this ball and ran with it. All indices were up strongly. Today, Wall Street must feel a little hung over because reality has jumped up and bit them in their backsides! It seems that the statistic that was thought responsible for keeping inflation in check, productivity, was revised downward this morning and labor costs are a more serious factor than anyone though. Then Apple Computer issued a profit warning. Oh well, Greenspan doesn't control EVERYTHING. In case you were thinking that all the stock market needed to start the bulls again was a few kind words from Greenspan, here's a list of some of factors that Greenspan has absolutely no control over:

1. The price of oil. If OPEC wants to keep the price high, that's going to have an effect on the U.S. economy whether Greenspan or anyone else over here wants it to or not. And if Iraq gets cute, or if the Arab-Israeli conflict boils over, $50/bbl oil is a real possibility.

2. 4th Quarter Earnings. Earnings are one factor that play a huge role in the direction of the stock market. Earnings, or lack thereof, are largely responsible for the NASDAQ slide this year. Nothing Greenspan can do will make Amazon profitable. And nothing Greenspan can do will bring back or dot-coms that went the full belly-up. Fed policy can impact earnings, but not in the very short term. Greenspan's speech is not going to help 4th quarter 2000 earnings of ANY company--it's too late. If those earnings turn out poorly, that will add to the negative momentum on Wall Street, despite Fed policy.

3. Presidential Politics. When President Bush enters office, he will have had the shortest, most disfunctional transition process in history. He will also be the first President elected in 125 years who had an opponent get more of the popular vote than he did. (Bush still got a lot higher percentage of the popular vote than Bill Clinton ever did. Clinton was elected twice with just 42%-43% of the popular vote. Bush got 48%+). And there will be a large portion of the population who believe that he should not have been inaugurated. Both of these factors will seriously diminish his ability to respond to economic, political or international crisis. All Greenspan can do is say, "Good luck, Mr. President."

4. Consumer Debt. Consumer debt, including credit card debt and margin debt, stands at an all-time high. Bankruptcies are setting new records. Something is wrong out there. If raising interest rates didn't control consumer debt, and especially margin debt, which shot up early in 2000 despite Fed rate hikes, lowering interest rates isn't going to bring debt under control either. Margin debt will come back down to earth when the stock market finishes falling. Not until then. With skyrocketing debt levels and negative savings rates, sooner or later Americans are going to pull back on stock market investments and purchases of goods from those companies that have to report earnings every quarter.

5. The Trade Deficit. Alan Greenspan cannot make exports rise and imports fall. He cannot get Americans to buy Lincolns and Cadillacs instead of Mercedes and Jaguars or Chevys and Fords instead of VWs and Mazdas. The trade deficit is hanging over the dollar like an anvil suspended by dental floss. When the dollar starts to feel the weight of the trade deficit, U.S. stocks and bonds, including Treasuries, are going to look pretty unattractive. One of the asset classes that will look good will be gold.

6. International Crisis. Greenspan can't get the Israelis and Palestinians to stop shooting at each other and, should this conflict escalate, which is a real possibility, hello 1973. Greenspan can't keep Saddam Hussein from re-asserting himself and causing trouble. Greenspan cannot get U.S. troops out of Bosnia and Kosovo. Greenspan cannot do anything about Libya and Iran's ballistic missile programs. Greenspan cannot make peace between India and Pakistan. Speaking of ballistic missiles, North Korea's Kim Jong Il probably never even heard of Alan Greenspan. And last but not least, American Fed Chairman Greenspan has no ability to convince China's Communist Party Chairman Jiang Zemin that Democratic Taiwan is not just a renegade Chinese province.

Rising oil prices, the threat of inflation, disappointing earnings, political uncertainty, a debt crisis in the making, a negative outlook for the U.S. dollar, and several international hot spots set to boil over--all of these are the things that bear markets in stocks are made of. They are also the things that rising gold prices are made of. A thousand eloquent speeches by Alan Greenspan won't make a bit of difference to any of them.

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