BEA 4th Quarter GDP 1st Estimate 0.7% Q&A: Why Did GDPNow Rise...

BEA 4th Quarter GDP 1st Estimate 0.7% Q&A: Why Did GDPNow Rise After Durable Goods? When are Construction Revisions Coming? Former Federal Reserve Chairman Alan Greenspan said the current market turmoil is in many ways 'identical' to that which occurred in 1987 and 1998, when the giant hedge fund Long-Term Capital Management nearly collapsed. 'The behavior in what we are observing in the last seven weeks is identical in many respects to what we saw in 1998, what we saw in the stock-market crash of 1987, I suspect what we saw in the land-boom collapse of 1837 and certainly [the bank panic of] 1907,' Mr. Greenspan told a group of academic economists in Washington, D. C., last night at an event organized by the Brookings Papers on Economic Activity, an academic journal. Bubbles can't be defused through incremental adjustments in interest rates, Mr. Greenspan suggested. The Fed doubled interest rates in 1994-95 and 'stopped the nascent stock-market boom,' but when stopped, stocks took off again. 'We tried to do it again in 1997,' when the Fed raised rates a quarter of a percentage point, and 'the same phenomenon occurred.' The truth of the matter is the Fed (and in particular Greenspan) has embraced every bubble in history, adding fuel to every one of them. Let's consider the last two bubbles. 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 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. 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. History suggests that betting against Greenspan is the correct thing to do. Thus I mockingly talked about his call on May 27 2006 in 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. 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. In 1987 we had the internet revolution to look forward to. Yes that was a productivity miracle but it also allowed the Greenspan Fed to open the credit spigots wide open because rapidly increasing productivity is highly disinflationary. In 1998 as the internet boom was starting to peak there was still one more bubble up the bubble meister's sleeve: The Housing bubble. In both years there were numerous new credit products to exploit coming up on the horizon: CDS, CDO, SIV, ABS, LBO, conduits, MBS, 'Swaptions', etc, etc. etc. See for more on swaptions and off balance sheet conduits at Citygroup (C), as well as leveraged buyout turmoil at Citigroup (C), JPMorgan Chase (JPM), Lehman (LEH), and Bear Stearns (BSC). Massive junk bond financed share buybacks, LBOs, and speculation in mergers, and swaps, etc were on the horizon in 1998. Those are now history. Credit standards were both poised to fall to insanely low levels but are now swinging back the other direction. In fact, loose credit standards made a secular low that will not be seen again for decades, if ever. Various carry trades fueled all sorts of speculative investments. Those carry trades have yet to be unwound, but they will be. And they are orders of magnitude bigger than anything we saw in either 1987 or 1998. The China factor is vastly different today than it was even as late as 1998. The resultant deflation in wages as a result of outsourcing and manufacturing moving to china and service jobs to India is still being felt. There is now $300-$500 trillion (yes trillion with a T) in derivatives floating around, depending on who you believe. But even the smaller number is many orders of magnitude greater that either 1987 or 1998. Whatever it is, Greenspan is above all.... wrong. Furthermore, Greenspan has been consistently wrong at every major turn in his entire history as Fed chair. 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. as an advisor. All I can figure out is: a) Pimco is hoping somehow to cash in on Greenspan's list of contacts, or b) Pimco is asking for Greenspan's advice and betting the other way. The content on this site is provided as general information only and should not be taken as investment advice. All site content, including advertisements, shall not be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of sponsors or firms affiliated with the author(s). The author may or may not have a position in any company or advertiser referenced above. Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. 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