The Steve Puetz Letter

Mother of All Ironies

April 13, 1997

During the 1960s Economist Alan Greenspan made several very eloquent public declarations regarding his position on gold and the stock market. Today as Chairman of the U.S. Federal Reserve Bank, Alan Greenspan has reversed his opinion 180 degrees on this same subject. Consequently, the world's financial scenario may become a stage, where the chief villain's and victim's roles are both played by Alan Greenspan. And the appropriate title for this play will be: "MOTHER OF ALL IRONIES."

Nationally recognized Analyst, Steve Puetz, has consented to share excerpts from his newsletter "THE STEVE PUETZ LETTER." The essay deals with the irony of Alan Greenspan's 1960s writings versus the Fed Chairman's present position on gold and the stock market. Following are the insightful views of Analyst and Author, Steve Puetz.

Greenspan -

Federal Reserve Chairman, Alan Greenspan, is at it again. In Humphry-Hawkins testimony before the senate, Greenspan's utterances about "excessive optimism" in the stock market sent equity prices tumbling.

Perhaps, it is easier to understand Greenspan's concern by examining his analysis of the 1929 stock market crash, written 30 years ago. After a mild business contraction in 1927, the Federal Reserve flooded the banking system with reserves. The Fed intended to push US interest rates down to the same level as Great Britain's -- in hopes of stopping Britain's gold loss. The Fed succeeded.

Nonetheless, Greenspan noted in the July 1966 issue of The Objectivist: "The excess credit which the Fed pumped into the economy spilled over into the stock market -- triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed... The world economies plunged into the Great Depression of the 1930s."

As his 1966 writings indicate, Greenspan understands very well that Federal Reserve credit can flow into the stock market rather than the real economy, and in the process, it can create a speculative bubble. With this background in mind, it makes sense that Greenspan's worry on December 5, 1996 was that the Fed once again was creating an uncontrollable speculative bubble. Because of that worry, Greenspan rhetorically asked in his December speech: "But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade? And how do we factor that assessment into monetary policy?"

Judging from the above statement, Greenspan is unsure of the point at which the stock market becomes speculative and over-valued. However, he had enough concern that he asked the question in public. But Greenspan's December warning only had a short-term effect. Stocks began to soar again by late-December and continued doing so during January and February.

Statements by any Federal Reserve Chairman about the value of the stock market are indeed rare -- virtually non-existent. Hence, it surprised most people that Greenspan persisted in warning that stock investors may be influenced by "excessive exuberance" during his Senate testimony on February 26, 1997.

As the stock market crash gains
intensity, expect worried
investors to run to the
financial safety of the
precious metals in a
flight to quality.

Greenspan's February warning irritated the public more intensely than in December. On March 5th, one week after his Senate testimony, Greenspan reappeared on Capitol Hill -- this time before the House of Representatives. Jim Bunning (a Kentucky Republican) blasted Greenspan for interfering with the free markets. Of course, that statement itself is a joke. The essence of the Federal Reserve is market interference. The Fed has intervened in the marketplace from the first day of its existence in 1913. More recently, massive Federal Reserve interference in the money markets during the early 1990s drove investors out of bank CDs and into stocks and mutual funds. So the stock market mania engulfing the nation reeks of Fed interference. Where was Jim Bunning when we really needed him? More strong voices objecting to the Fed's money-market intervention between 1982 and 1997 could have prevented the ensuing stock market mania.

After facing repeated verbal attacks from Representative Bunning, Greenspan amazingly made an about-face during his House testimony on March 5, 1997, when he said:"If profit margins continue to rise as analysts on Wall Street expect them to, then the market is properly priced."

In reaction to Greenspan's one-week flip-flop, Alan Abelson wrote in the March 10th issue of Barron's: "Commentators immediately leaped on the seemingly contradictory testimony as evidence of (a) failing memory; (b) change of heart; or (c) lack of backbone. Suspicion of the last was roused by some rude interruptions of the generally groveling reception accorded the Chairman's remarks by a couple of Congressman who had gotten up on the wrong side of their cage."

More and more, it looks like Grreenspan wants to talk the stock market down without having to raise interest rates. He may have succeeded. The break that started on March 11th has been more severe that any downward correction since July 1996. Unfortunately, just like the 1929 Fed, Greenspan is too late. The speculative bubble has already formed. Once a bubble has formed, and then the market declines enough, say more than 10% (about 700 DOW points), the decline triggers an irreversible avalanche of "margin calls." Once started, nothing -- not even the Fed -- will be able to stop the forced selling these "margin calls" generate.

Mania -

Any mania has three basic elements:

1. Widespread participation
2. Extreme valuation levels
3. Extreme leverage and speculation

Participation is demonstrated by the percent of the US population who are shareholders. Interestingly, participation has tracked valuation levels fairly well since 1900. And Per World Almanac, NYSE, OTC and Sindlinger surveys, shareholder participation has jumped to an all-time record high of 43% -- almost twice as high as the previous peaks in 1929 and 1987. This basic measurement of market participation meets the first condition of a mania.

The extreme valuation level is demonstrated by price-to-book ratio on the S&P 500 --which presently is nearly double the 1987 peak and one-and-a-half times greater than the 1929 extreme. Therefore, the second condition for a mania is met.

The final condition of a mania has also been met. Speculation reigns supreme. Margin debt and listed derivative open-interest are more than double 1987 levels. Most ominous, the trade publication Swaps Monitor estimates the huge, unregulated, and dangerous market of unlisted derivatives now stands at $55 trillion. As recently as 1992, unlisted derivatives had only $21 trillion in open-interest. And the present open-interest is more than 10 times greater than it was in 1987. To put the $55 trillion into perspective, it's 7 times greater than the annual GDP in the US, and it's 5.5 times greater than the value of all stocks in the US.

Alan Greenspan has presided over the creation of the greatest market mania of all time. When the inevitable market turn comes, as it now appears to have done, Greenspan will then sit and watch helplessly as the mania transforms itself into the most ferocious crash of all time.

Gold and Silver -

Acting in their contrary contra-cyclic fashion, gold and silver have staged rallies from their extremely over-sold levels of two months ago. As the stock market crash gains intensity, expect worried investors to run to the financial safety of the precious metals in a flight to quality.


The stock market appears to be in the early stages of its long-anticipated crash. The crash will only be the beginning of a much deeper financial crisis. I expect this crisis to intensify within a few years -- ending in Total Collapse. I describe this scenario in my book.

Month after month, increasing credit difficulties signal that the financial underpinnings of our monetary system are breaking down. This condition is particularly dangerous when it's considered in conjunction with the 3 elements of a market mania:

1. Widespread stock market participation
2. Extreme stock market valuations
3. Extreme leverage and speculations in stocks

Comments by Alan Greenspan intended to "talk down" the stock market may have worked too well. I'm sure Greenspan only intended to take a little bit of the frothiness out of the market. Unfortunately, once a market bubble has been created, the first significant market decline bursts the bubble, and starts a daisy-chain of "margin call" selling. The resulting sales-avalanche triggers a crash. In the present case, the crash will be so powerful that Greenspan will be helpless in stopping it.

The precious metals are the only
monetary assets external to our
collapsing credit system. Buy gold
and silver for safety reasons.

Steve Puetz

Analyst Steve Puetz is also a writer - he authored the recently published book: "TOTAL COLLAPSE, THE FINAL CRASH OF THE MILLENNIUM." TOTAL COLLAPSE is a most appropriate title because it is where the world economy is heading. The book starts by covering the history of money. It explains the development of monetary receipts, and receipt over-issuance. The next chapters explain the importance of confidence in credit markets, the role of the Federal Reserve and central banks in our present monetary system, and the use of credit in the US economy. The middle chapters review the stock market, the bond market and mutual funds. Next, he describes the process that propels the boom-bust cycle, reviews infamous market bubbles from the past, and shows how those bubbles compare to the present one.

The book concludes by showing why a violent deflation and economic collapse is likely, and it shows why GOLD AND SILVER will fill in the void with a magnificent monetary resurrection.

To contact Analyst-Author, Steve Puetz, about the above essay or details regarding his book, use email or call (765) 463-3705

The Federal Reserve Bank of New York holds the world's largest accumulation of monetary gold.

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