COMMENTARY--Wall Street was not reassured by Alan Greenspan's remarks today, and neither was I. But for different reasons.
Market indices went from basically flat to definitely down after the Federal Reserve chairman performed this morning for the U.S. Senate. Market observers were disappointed in the lack of an interest-rate cut this week, although the fact that people bought into that rumor only shows the desperation of some traders these days. They will grasp at any straws, particularly regarding the Federal Open Market Committee.
Stockholders probably didn't see any lifelines at all after this portion of Greenspan's prepared remarks:
"But for now, at least, the weakness in sales of motor vehicles and homes has been modest, suggesting that consumers have retained enough confidence to make longer-term commitments; and, as I pointed out earlier, expected earnings growth over the longer-run continues to be elevated. Obviously, if the forces contributing to long-term productivity growth remain intact, the degree of retrenchment will presumably be limited. In that event, prospects for high productivity growth should, with time, bolster both consumption and investment demand. Before long in this scenario, excess inventories would be run off to desired levels. Higher demand should also facilitate the working-off of a presumed excess capital stock, though, doubtless, at a more modest pace."
In other words (a phrase that always comes in handy when writing about the Fed chairman's sayings), Greenspan doesn't necessarily see a long-term problem with consumer confidence. He left open the possibility ("as the FOMC noted...downside risks predominate") that things could get worse, but he doesn't seem to feel a deeper sense of urgency right now. Which means no pressure for another rate cut yet.
But all things considered, Greenspan's tone ought to encourage traders. This morning's testimony may have been as close as he has ever come to genuflecting before the stock markets:
"Stock market wealth has risen substantially relative to income in recent years--itself a reflection of the extraordinary surge of innovation. As a consequence, changes in stock market wealth have become a more important determinant of shifts in consumer spending relative to changes in current household income than was the case just five to seven years ago."
He has suggested that before, but I can't recall a previous instance in which the Fed head was so explicit in outlining a direct link between the market and consumer behavior. Greenspan might as well draw a chart with overlapping lines for the Nasdaq Composite Index and consumer confidence.
And that's troublesome.
Greenspan's conclusions aren't necessarily wrong. I'm not about to dispute the nation's top banker when he points to the stock market as a stimulant for individuals' purchases.
But it's bothersome that he acknowledges it so openly. The Federal Reserve shouldn't be motivated in the least by Nasdaq declines.
Not that there aren't good reasons to cut interest rates further. Any number of economists will point to falling commodity prices, a possible cash liquidity shortage and other signs that the economy could use a good goose.
But the stock market is not the economy, in and of itself. It might not even be very good barometer of the true economy.
A return of realistic valuations, the demise of bad business models, or simply an extended pause after a multi-year bull run--these are not bad things. It had to happen at some point. And considering that some large stocks such as Yahoo (Nasdaq: YHOO) or Cisco Systems (Nasdaq: CSCO) continue to trade at valuations closer to start-ups rather than the maturing businesses that they are, you have to wonder if more pain isn't required.
The Fed chairman knows all of that, but Americans' increasing obsession with stocks forces him to consider the Nasdaq and the Dow. Greenspan may not be an elected official, but the Federal Reserve remains a government body, and thus subject to the political climate. Politicians react to the stock market, so Greenspan must.
Traders ought to be happy about that, but recognition isn't sufficient for them. It's not enough that Greenspan has started using them as a barometer for consumer confidence. It's not enough for tech stockholders that Greenspan has bought into the alchemy of technology and productivity; Greenspan speeches these days are practically advertisements for enterprise-resource-planning software vendors such as Oracle (Nasdaq: ORCL), SAP (NYSE: SAP), PeopleSoft (Nasdaq: PSFT) and i2 Technologies (Nasdaq: ITWO).
Shareholders, especially tech-saturated ones, want Greenspan's limbs attached to their strings. "Give us our rate cut now!"
Everyone would be better off in the long run if he ignored their cacophony altogether. 22GO >