Alan Greenspan, one of the biggest contrary indicators in the history of finance says Stocks Are ‘Relatively Low’ and Headed Upward

“In a sense, we are actually at relatively low stock prices,” Greenspan, who guided the central bank for more than 18 years, said in an interview with Sara Eisen on Bloomberg Television today. “So-called equity premiums are still at a very high level, and that means that the momentum of the market is still ultimately up.”

Greenspan said the stock market is “just barely above 2007” and the average annual increase in stock prices “throughout the postwar period” is 7 percent, which leaves room for a rise.

“Price-earnings ratios are not hugely up,” he said. The market has “gone up a huge amount, but it’s not bubbly,” according to Greenspan.

Clueless Magoo

Bloomberg writer Daniel Akst discusses Greenspan’s credibility in Greenspan’s ‘Map’ Is Clueless Trip Through Bubble Land

If Alan Greenspan were Santa Claus, what’s the last thing you’d want for Christmas?

Given his track record, a guide to economic forecasting would have to be the worst present he could bring.

Yet that’s exactly what the former Federal Reserve Board chief delivers in his clueless new book, “The Map and the Territory.” A guide to economic forecasting by Greenspan is about as credible as art history by Mr. Magoo.

Let’s review. As Fed chairman until 2006, practically the eve of the financial crisis, Greenspan couldn’t see the storm on the horizon.

Despite his mastery of the techniques described at somewhat numbing length in his book, he failed to draw any useful conclusions from a host of indicators that were pointing to trouble.

Historic Failure

The Map and the Territory” pretends to tackle the subject of forecasting while saying next to nothing about the author’s historic failure to reduce the risks leading to the crisis, which he calls “almost universally unanticipated.”

Resorting all too freely to the first person plural, Greenspan describes the book as “an effort to understand how we all got it so wrong, and what we can learn from the fact that we did.”

The remarkable thing is that Greenspan continues to get it wrong.

He acknowledges that banks ought to hold more capital but argues in effect that the real problem is too much government — and too many entitlements, especially “social benefits” like Social Security and Medicare.

Federal Deficits

For someone so exercised about federal deficits, Greenspan is strangely silent on his own role in the Bush tax cuts, which might not have been adopted in 2001 (further cuts came in 2003) without his blessing for the general concept.

And there’s the Great Recession, which might not have occurred had he recommended, while he was Fed chief, higher capital requirements for banks, better regulation of derivatives and a crackdown on subprime lending.

Clearly the author is worried about moral hazard, which occurs when firms or people are encouraged to take excessive risks because they know others will bear the consequences.

But this is an odd concern from the man whose actions as Fed chief gave rise to faith in the “Greenspan put,” the notion that, while he was in office, the central bank would rush to float sinking markets with lower interest rates whenever they faltered.

The Map and the Territory” is an infuriating book, one that will leave readers wondering how its author could have come all this way and yet remain so hopelessly lost.

Is Greenspan Sealing the Market’s Fate?

Pater Tenebrarum was a tad bit early by not waiting for Greenspan’s sequel, adequately described above as “clueless”.

Had he known “The Map and the Territory” was in the works, I suspect he would have waited until now to ask the question he asked on March 16: Is Greenspan Sealing the Market’s Fate?

The Third-Biggest Living Contrary Indicator of All Time Speaks Up

There once was a time when it was fair to say that Alan Greenspan was the biggest living contrary indicator of all time. Long before he became known to a wider audience, in early January of 1973, he famously pronounced (paraphrasing) that ‘there is no reason to be anything but bullish now’. The stock market topped out two days later and subsequently suffered what was then its biggest collapse since the 1929-1932 bear market. That was a first hint that stock market traders should pay heed to the mutterings of the later Fed chairman when they concerned market forecasts: whatever he says, make sure you do the exact opposite.

More proof was delivered in 1996, when Greenspan bemoaned the ‘irrational exuberance’ in the stock market, just as it embarked on one of its biggest rallies ever. Then in 2000, Greenspan finally agreed that a ‘new era’ had indeed arrived; that investors according billions in market capitalization to companies that would never make a dime were acting perfectly rationally, and that there was surely no end in sight to the productivity miracle. It was the biggest sell signal he had yet produced.

The reason why we feel he must be relegated to third place is that since then, arguably two even bigger living contrary indicators have entered the scene: Ben ‘the sub-prime crisis is well contained’ Bernanke, and Olli ‘the euro crisis is over’ Rehn. Admittedly it is not yet certain who will be judged the most reliable of them by history, but in any case, when Greenspan speaks, we should definitely still pay heed.

As CNBC reports: No ‘Irrational Exuberance’ in Stocks Now

“Although blue-chip stocks are hitting all-time high after all-time high, former Fed Chairman Alan Greenspan told CNBC Friday that “irrational exuberance” is the last term he’d use to describe today’s market. Greenspan said in a “Squawk Box” interview that stocks by historical standards are “significantly undervalued” even considering the recent moves higher. He added that the payroll tax increase didn’t dent spending because of rising asset prices.”

Is a crash imminent? After all, the ‘Dow 36.000’ guys are back as well, believe it or not. Here is James Glassman, shamelessly piping up again after leading countless investors down the garden path with his 1999 book:

“The Dow Jones Industrial Average set a record this week, but it’s still far from the mark that economist Kevin Hassett and I forecast in our 1999 book, “Dow 36,000.” We wrote in the introduction that “it is impossible to predict how long it will take” to get to 36,000. Then, in the same paragraph, we rashly made a guess anyway: “between three and five years.” Today, the far edge of that time frame is clearly in reach. From its low of 6,547 on March 9, 2009, the Dow has risen 117 percent. Another 117 percent in four years would put it at 31,022, just 16 percentage points shy of the magic number.”

Glassman offers a raft of excuses for why the forecast didn’t pan out, but that is just telling us that he was never qualified to write this book. Anyone who didn’t understand the dynamics of the credit and asset bubble that led to the historic market peak should have refrained from getting his unqualified opinions in print, if only for the sake of saving gullible investors from making the costly mistake of believing in this overly rosy outlook.

Incidentally, Glassman is correct when he says that it would be a good idea to enact economic policies conducive to economic growth, but he seems not to realize that this means that his renewed optimistic forecast is plainly contradicted by the economic policies that are actually pursued at present.

Stroll Down Memory Lane

Flashback September 11, 2007: I wrote No Greenspan, Conditions are NOT Like 1998

The Fed’s Role in the DOTCOM Bubble

Acting in misguided fear of a Y2K calamity, the Fed stepped on the gas with unnecessary liquidity, having previously stepped on the gas to bail out Long Term Capital Management in 1998.

And after warning about irrational exuberance in 1996, Greenspan embraced the “productivity miracle” and “dotcom revolution” in 1999. Mid-summer of 2000 Greenspan believed his own nonsense, and right as the dotcom bubble started to burst, he started to worry about inflation risks.

The May 16 2000 FOMC minutes prove this.

The members saw substantial risks of rising pressures on labor and other resources and of higher inflation, and they agreed that the tightening action would help bring the growth of aggregate demand into better alignment with the sustainable expansion of aggregate supply. They also noted that even with this additional firming the risks were still weighted mainly in the direction of rising inflation pressures and that more tightening might be needed.

Looking ahead, further rapid growth was expected in spending for business equipment and software. … Even after today’s tightening action the members believed the risks would remain tilted toward rising inflation.

How could Greenspan have possibly been more wrong? Over the next 18 months CPI dropped from 3.1% to 1.1%, the US went into a recession and capex spending fell off the cliff.

The Fed’s Role in the Housing Bubble

In 2001 Greenspan went overboard the other direction embarking on a campaign that eventually slashed interest rates to 1%, while embracing the miracle of derivatives, and encouraging consumers to get into ARMs along the way.

And right as the bubble was busting Greenspan dismissed the idea of a national housing bubble.

No National Housing Bubble

Flashback May 21, 2006
Greenspan says “Housing Prices Won’t Fall Nationally“.

History suggests that betting against Greenspan is the correct thing to do. Thus I mockingly talked about his call on May 27, 2006 in Greenspan Predicts Housing Bust.

Confronting Bubbles

As for “confronting bubbles”, the Fed foolishly only watches (takes action on) consumer prices. Thus the Fed ignores expansion of credit when that credit fuels asset bubbles as opposed to prices of consumer goods.

The Fed could easily target credit with higher interest rates if it cared to, but it does not care to.

This is not a matter of attempting to identify bubbles in advance, this is a matter of attempting to identify credit conditions that create bubbles. And the fact is, runaway expansion of credit fuels one of two things (or both) in some combination: asset bubbles and/or consumer prices increases.

Fools Never Learn

Read that last paragraph again and again until it sinks in.

History rhymes. Instead of a runaway expansion of consumer credit, we now have a runaway expansion of fiscal stimulus from Congress, and a runaway expansion of money supply by central banks globally.

Succinct Historical Synopsis

  • In 1973 Greenspan said “There is no reason to be anything but bullish now” – The market topped that month, then crashed
  • In 1996 Greenspan warned of “Irrational exuberance” – The market, fueled by Greenspan’s incompetent actions roared for four years
  • In 1999 Greenspan was extremely worried about Y2K – The programming rollout on January 1, 2000 was exceptionally smooth
  • In 2000 Greenspan fully embraced the internet productivity miracle – The dotcom bust soon began
  • In 2001 Fed minutes show Greenspan was worried about inflation – A month later the Fed was fighting deflation
  • In 2006 Greenspan said “Housing Prices Won’t Fall Nationally” – Prices peaked summer of 2005, then crashed over the next seven years

Today Greenspan Says 

  • “In a sense, we are actually at relatively low stock prices”
  • “The momentum of the market is still ultimately up.”
  • “The market has gone up a huge amount, but it’s not bubbly.”

No Guarantees

There are no guarantees in life, but that pronouncement is about as close as it gets from a contrarian point of view.

Facts show that Greenspan has been consistently wrong at every major economic turn in his entire career at the Fed and after.

The only thing he has been correct on is his unwavering support for free trade. And on that issue ironically enough, hardly anyone listens to him.

Mike “Mish” Shedlock