Ignore the Cheerleader-in-Chief


My latest Street.com column is up: “Ignore the Cheerleader-in-Chief”. It is a slightly cynical look at the Fed Chief’s rather undistinguished history of financial predictions. For those of you without a subscription, here’s a rather lengthy excerpt:

“In a speech at the National Italian American Foundation in Washington, D.C., Friday, Federal Reserve Chairman Alan Greenspan said he’s not worried by the rise of crude oil prices to a record $55 a barrel. “The impact of the current surge in oil prices, though noticeable, is likely to prove less consequential to economic growth and inflation than in the 1970s,” he said.

Once the cheerleading crossed the tape, equity markets rallied while Treasuries slumped.

Pardon my cynicism, but I am grabbing my hat and leaving before the curtain falls. I know how this will turn out: The cheerleader-in-chief will cost the unwary a healthy chunk of change”

“Forgive me for not being similarly inclined to genuflect toward the chairman’s pronouncements. Despite Greenspan’s sanguine attitude toward oil prices, I remain long-term bullish on the sector.

I find traders’ knee-jerk responses to Greenie’s views on oil endlessly amusing. I guess they already forgot that on July 20, Greenspan testified before Congress that rising energy prices “should prove short-lived”; crude prices have risen nearly 15% since. Then there was Greenspan’s amazingly bad call on natural gas in May 2003, when he warned of potential shortages; natural gas prices tumbled shortly thereafter. And let’s not forget his advice to would-be home owners this summer, praising the virtues of adjustable-rate mortgages when fixed-rate loans were near half-century lows.

If you’re thinking there’s a pattern here, you’re right. Consider the Road Runner routine the Fed chief pulled last year on fixed-income traders, which parallels what he did to equities traders in the ’90s. I guess oil would complete the hat trick.

A quick review of the handiwork of this master bridge salesman: In a now infamous 1996 speech, Greenspan said, “How do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions?”

That was widely perceived as a warning that stocks had gotten too pricey for the Fed chief’s taste. But only a year later, he started waxing eloquent on the majesty of productivity gains. Thereafter, the “productivity miracle” became a fixture in Fed speeches, white papers and FOMC meetings. It culminated in the massive 1999 liquidity infusion by the Fed in (erroneous) anticipation of a Y2K run on the banks. That surge in money supply effectively doubled the Nasdaq Composite from October 1999 to March 2000; I assume you recall how that ended.

Fast forward to summer 2003. The newest Fed concern was deflation. For a while the central bank seemed to have successfully jawboned the Treasury market into believing that rates would stay low for a long, long time. Greenspan even suggested that the Fed stood ready to make open market purchases to ensure rates stayed low.

As bond buyers then discovered to their chagrin, this statement turned out to be false. The fixed-income crowd became Wile E. Coyote to Greenspan’s Road Runner. The Fed chief painted a tunnel entrance on a wall, and the bond boys ran face first into it. Forgive the equity crowd their snickering, as they had already paid their tuition to learn that costly lesson. Hey, it’s the Fed chief’s perogative to change his mind … but in doing so, he caused massive dislocation in one of the world’s largest capital markets.

It now seems to be a regular cycle. Today, we heard the Fed chief’s pearls of wisdom on oil and commodities. One of the phrases that caught my ear was this one: “Obviously, the risk of more serious negative consequences would intensify if oil prices were to move materially higher.”

Interesting observation. Of course, Greenspan could have said the exact same thing when oil was at $40? How about $50? Hmmmm . . . I wonder if he will be saying something similar if and when oil hits $60?

Pardon my cynicism, but I am grabbing my hat and leaving before the curtain falls. I know how this will turn out: The cheerleader-in-chief will cost the unwary a healthy chunk of change.

Quite frankly, anyone who buys or sells anything based on Greenie’s prognostications is very likely to get what he deserves.”

Ignore the Cheerleader-in-Chief
Barry Ritholtz
TheStreet.com, 10/15/2004 3:00 PM EDT

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  1. Jon H commented on Oct 16

    “The fixed-income crowd became Wile E. Coyote to Greenspan’s Road Runner. The Fed chief painted a tunnel entrance on a wall, and the bond boys ran face first into it.”

    Well, technically, in the cartoons what happened was that Wile E. would paint the tunnel entrance. The Road Runner would somehow manage to run through the tunnel, as if it were a real tunnel, but the Coyote, following, would run smack into the wall.

    At least, that’s my recollection.

  2. jen larson commented on Oct 16


    Technically isn’t this what’s happening? As this article and others have pointed out it’s “us” meaning the media, politicians and others who “painted” the illusion of Greenspan. It is the desire for a competent father figure and easy money, thus no politician questions whether real estate in California and a number of other states is at potentially catastrophic prices.

    So now we’ve got potential inflation from a soon to fall dollar, “subprime” arm buyers who would be smashed by the usual response, so potential deflation in real estate and equities with *all* our leaders proclaiming them sound.

    This scares me. If there were conflicting reports and warnings I’d feel we have a system providing information. Instead the counter information comes from the contrarians who are often crackpots, the orthodox thinking is tending to one optimistic stream, you see things like Kissingers saying if you have a kid born put a bunch of money in stocks right now it will double 2 or 3 times before the kid hits college, not even cost averaging, no warning that things might go down or even that return won’t be 8 or 10%.

    The whole system is playing a bubble game. We paint the tunnel, Greenspan goes through it and we try to follow.

  3. oyster commented on Oct 16

    I think the Bugs Bunny/Elmer Fudd dynamic is more instructive. Bugs used words, primarily, to play Fudd for the fool over and over. The wabbit could always charm his way out of a tight spot, while the hunter found a way to shoot himself in the foot…

  4. Different Opinion commented on Oct 17

    Crude Rhetoric

    …But what do you have, beyond the rhetoric …? A crude oil market at $55 a barrel, only slowly getting cheaper to $35 a barrel out in 2010. …Could we now please see any central bank actually using these figures for macroeconomic prognosis work ins…

  5. zgveritas commented on Oct 18

    I always find Greenie and his semantics amusing. The recent oil remarks remind me of the treasury secretary’s remarks on the economy during and on the heels of the recession.

    Both made comments that construed a long term perspective which the speaker hoped would be interpreted in the short term term time frame.

    The argument is that the foundation of the economy remains strong and sound despite the nasty news on our doorstep.

    Personally I disagree with the both the premise that the foundation is strong and the inference they hope others will conclude, that in the short term things are okay.

  6. The Big Picture commented on Oct 25

    Carnival of the Capitalists – October 25 2004

    Hello and welcome to this week’s Carnival of the Capitalists! We have an exciting and wide ranging line up, which I have tried to categorize (a mostly futile exercise, I might add) for your reading pleasure. If I missed anyone’s trackback, please email…

  7. The Big Picture commented on Jun 11

    Blame Greenspan

    A few articles pulled from the weekend linfest tell the story of how Housing ended up in its present slide and ongoing challenging circumstances. What is frightfully revealing in the entire mess is the role former Fed Chair Alan Greenspan played in the…

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