COMMENTARY--Confused by all the conflicting economic data churned out in the past couple weeks suggesting that while the economy is clearly stagnating, consumers remain surprisingly optimistic? Unfortunately, so is Federal Reserve Chief Alan Greenspan.
Not that it matters much to investors who have watched their once considerable fortunes evaporate in the blink of an eye, but the guy dubbed the "most powerful" man in America finally admitted this week that he doesn't have all the answers and--if you can believe this--wants even more information to help him regulate the U.S. economy.
This admission comes just one week after Greenspan delivered the third half-point cut in short-term interest rates in less than three months.
Investors weren't satisfied with the half-point cut, considering most pundits had talked up the possibility of a three-quarter or even a full-point reduction as if it were the only way to pull the struggling economy out of its prolonged tailspin.
Things got much more interesting Tuesday when Greenspan told the National Association for Business Economics that he needs better statistical measures to accurately gauge how technology is affecting the economy.
"Given the rapidly changing economic structure, one could readily argue that more statistical measures need to be applied to understanding the complexities of the new technologies that confront analysts," he said during the speech.
Greenspan cited the medical industry as an example of how current measurements are insufficient to effectively forecast performance. He said applying price measures to new treatment methods that require shorter or no hospital stays indicated prices for medical services have been falling since the mid-1980s.
"This has raised significant questions as to whether our current measures of overall medical service price inflation are capturing the appropriate degree of productivity advance evident in medicine," he said.
Those who follow the Nasdaq composite with any interest could easily substitute software, semiconductors or network equipment for Greenspan's medical analogy and draw similar conclusions.
There's no inflation, stupid
I hate to say I told you so, but last March I took a lot of heat for a column suggesting that Greenspan & Co. were making a huge mistake by aggressively raising interest rates in a thinly veiled attempt to smother the white-hot stock market.
Back in March of 2000, Greenspan was hinting more rate hikes were in store for an economy that had barely started to digest the 1.75 percent increase he'd ordered in the previous 18 months. Despite all his bluster about irrational exuberance, investors were unfazed as the Nasdaq composite rocketed through the 5,000-point threshold.
My argument then was that despite his ominous warning of "inflationary pressure," the data simply didn't support his fears. Productivity was at an all-time high. Unemployment was at 4.1 percent (it's now at 4.2 percent), and while wages were on the rise, there were no definitive signs of inflation to be found.
The only thing that was inflated was the stock market, particularly the valuations of technology issues.
For all Greenspan's lip-service about wanting more information, he obviously wasn't paying attention to the most important statistics that were right under his nose.
One year later--with the notable and unique exception of skyrocketing energy prices--there are virtually no signs of inflation anywhere.
At the time, I argued that Greenspan received far too much credit for the incredible bull market Wall Street enjoyed during his tenure and that he couldn't possibly apply the same economic tenets he studied as an undergrad in the late 1940s--or even the doctorate he earned in the 1970s--to the "New Economy."
New Economy. Old Economy. It doesn't make a difference. The bottom line is the Fed shouldn't use the nation's monetary policy as an emergency brake or a catalyst for the equity markets--no matter how far out of whack they may seem.
The party was winding to a halt regardless of whether or not the Fed raised interest rates. It was just a matter of time.
But Greenspan just had to raise interest rates. He wanted to make his point to Wall Street.
"In hindsight, it's clear the Fed overreacted," said Barry Hyman, chief investment strategist at Weatherly Securities. "The perception that rates had to go up was incorrect. The bubble would have burst anyway. Now those rate hikes are affecting the real companies that weren't being financed exclusively by Wall Street."
Speaking of hindsight, how could Greenspan not have foreseen the current economic slowdown?
Companies were blowing away sales and earnings estimates quarter after quarter, year after year. And those record sales and profits were topping record sales and earnings from the prior year.
It couldn't last forever.
As great as these companies are, it's all but impossible to keep growing sales at 50 percent or more each year when they're already doing $6 billion or $10 billion in sales a year.
Eventually the law of big numbers was going to catch up with the likes of Cisco (Nasdaq: CSCO), Sun Microsystems (Nasdaq: SUNW), Nike (NYSE: NKE), International Paper (NYSE: IP) and hundreds of others.
To raise interest rates in such a dramatic fashion--only to rescind them even faster--at a time when the economy was expanding at an unprecedented and unsustainable pace suggests that perhaps Mr. Greenspan was the one seduced by irrational exuberance.
This lack of commonsense borders on negligence.
Now we're all left to pick up the pieces and wait for these latest rate cuts (and perhaps more in the future) to take hold and somehow awaken the U.S. economy from its deep slumber.
Paralysis from analysis
The problem with that is so many rate hikes and cuts have been injected into the economy in such a short period of time that we don't really know where we are--like a rock star who pops a couple valiums to come down off a cocaine binge only to repeat the pattern before the next gig.
"Trigger-finger" Al is just now realizing how easy he had it last year when his biggest concern was finding a way to tame the tiger. Now he's trying to paint stripes on the kitty-cat and it's just not working.
He says he wants more information but I say we already have too much economic data.
Preliminary Gross Domestic Product numbers. Adjusted GDP numbers. Actual GDP numbers. New housing starts. Consumer confidence reports. Consumer Price Index. Produce Price Index. Durable goods shipments. Inventory of hogs and pigs.
The list goes on and on and on.
Analysts, economists and the media are all guilty of assigning far too much importance to these reports and investors are guilty of listening and reacting to them.
Most of these "key" reports are obsolete by the time they're published. Others are derived from such a ridiculously small sample group that even the folks at Nielsen would call them insignificant.
No better example can be found than Tuesday's vaunted consumer confidence report which was credited for igniting a 260-point rally for the Dow Jones industrial average and a 54-point jump for the Nasdaq.
This report said "consumer attitudes" rose to 117 points (whatever that means), up from 109.2 in February. Analysts were expecting this figure to slip to 104.5 points.
This was the fantastic news that allegedly had investors calling their brokers and logging on to their E*Trade accounts to buy stocks Tuesday.
Something called the Conference Board, a private research group based in New York that claims its mission is "to improve the business enterprise system and to enhance the contribution of business to society," compiles these statistics from 5,000 respondents each month.
Call me cynical, but the Conference Board sounds more like a public relations firm than a "research group." By the way, Greenspan did a five-year stint at the Conference Board before ascending to his current post.
Lynn Franco, director of the Conference Board's Consumer Research Center, said this latest report shows "the recent weakness in the stock market has done little to dampen either consumers' assessment of present economic conditions or future expectations."
Franco said the questionnaire that these 5,000 random individuals--who determine the "consumer confidence" for the entire country--fill out each month consists of a mere five questions.
Those must be five damned good questions.
In fact, they're so good the Conference Board won't let anyone see them.
"We don't release the questions to anyone," Franco said.
"Why not?," I asked.
"Because we don't," she said. "They're copyrighted."
Franco wouldn't elaborate on whether they use the same questions each month, change the questions, change the wording of the questions or any other details that might shed some light on this mysterious process.
If any of you readers ever happen to get a consumer confidence questionnaire from these people, please send me a copy. I'd love to see how these questions are phrased.
The point here is the central bank doesn't need more economic reports and statistics to determine a prudent monetary policy.
It needs a leader who can discern relevant information from garbage and exercise a little commonsense before repeatedly tinkering with something as critical as the nation's monetary policy to prove a point.
Talk about irrational.