Monday, June 23, 2003

This should rain on the parade of anyone having lots of faith in the ability of the Fed to manage future expectations and thus wield power to fight deflation through "unorthodox" policies. The Motley Fool reports that "apparently not many listen to [Alan Greenspan] when he talks about stock valuations". Apparently investors listen to what The Maestro says about bond prices, but when it comes to stocks they throw caution to the wind!
According to a study released by the Fed, of the 10 times since 1989 that Mr. Greenspan commented about the level of the markets, only twice was there a significant reaction: In July 1998, the S&P 500 dropped 1.6% when he spoke of "unrealistic forecasts" for corporate earnings, and there was a 2.8% fall in October 1999 when he warned that the market had a history of sharp reversals. Even those drops are relatively minor, and the markets recovered from them rather quickly.
When there are tulip bulbs to be had, aint nobody gonna stand in the way!

If Greenspan & Co. cut rates 50 basis points this week, I think we can all start calling this market the "Greenspan bubble," step aside and wait for the Big Crash.

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