BizAnalyst Network: Greenspan's comments keep sending markets spinning

Thursday, May 24, 2007

Greenspan's comments keep sending markets spinning

Greenspan's comments keep sending markets spinning

For 16 years as the Federal Reserve Board chief, Alan Greenspan issued only reserved comments about the financial industry, the economy and other weighty issues, writes David Callaway for MarketWatch. Now that he's no longer the Fed chairman, however, he seems to be constantly making comments that briefly send the markets into a tailspin, and he's been at it again this week.

Greenspan unavoidable for comment
Commentary: Free of Fed collar, former chief can't stop blabbing

By David Callaway, MarketWatch
Last Update: 3:26 AM ET May 24, 2007
Anyone else grown tired yet of Alan Greenspan's Cassandra act?

The former Federal Reserve Board chief, for 16 years the epitome of economic discretion, offering only mumbled (and sometimes jumbled) assurances to weighty questions about market bubbles and global financial risk, is suddenly shouting from the rooftops.

It seems that a week can't go by without Greenspan issuing some dire warning about the markets or global economy, typically sending stocks into a brief tailspin until investors remember that he's not the Fed chief anymore. Unlike the mythical Cassandra, doomed to have nobody believe her predictions, people actually believe Greenspan.

Wednesday he was at it again, telling a conference in Madrid via teleconference that the China market is due for a "dramatic contraction."

As wire services reported the comments, what had been a nice gain for the Dow Jones Industrial Average, above 13,600, suddenly evaporated and turned into a 30-point loss. The Dow ($INDU) managed to recoup some of the losses by the end of the day, closing down 14.30 points at 13,525.65. See Market Snapshot.

Perhaps Fed Chief Ben Bernanke should give old Greenspan a call and let him know that while it's fine to go make a bundle on the chicken dinner-speech circuit after one's retirement, it's not a great idea to be going around using terms like recession and dramatic contraction to people who aren't used to hearing you say those words.

As a journalist over the past 20 years, I've heard Greenspan give many speeches. All were given in his trademark plodding style. Then I had the opportunity two years ago to hear him give a speech off the record. Suddenly he was Bill Maher, providing succinct thoughts and theories, laced with hilarious commentary. No wonder he is in such demand, now that he can speak freely.
At this off-the-record speech, he warned about an impending housing crisis in the U.S., well before even the first hint of a slowdown had occurred. He also warned that the Chinese government would have to get more transparent with its financial machinations, something we're still waiting for. Let's face it, he knows what he's talking about.

So when Greenspan warns about China's stock market, it makes sense to listen. But then again, who isn't warning about China these days? Even Chinese experts are warning about China. See Todd Harrison's latest column.

That China is going to blow and blow big is a given. The question is how will that spread to the rest of the world's markets? Everyone seems pretty confident that it won't spread to the established markets, largely because Western investors have been locked out of investing in Shanghai's local market during the boom of the past year. Most economists don't even think a big fall in Chinese stocks will hurt the Chinese economy, as it speeds merrily along.

That's probably right. But while the raging bull market in China may not be tied to the rest of the world, the psychology behind it has definitely caught on. With markets in the U.S. at record highs and markets in Europe and elsewhere in Asia soaring as well, we're heading into the summer with a pretty confident feeling. Summer rally anyone?

When that type of collective mindset seeps in, and you've got people talking about the stock market going straight up for another year - or two -- it's a recipe for a surprise rout one day, or week, or month.

Greenspan hasn't warned us about that yet. But he's probably got at least two or three more speeches coming before the end of the month, so anything can happen.

The only thing we shouldn't be when a big rout does come one day is surprised.

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Labels: alan greenspan, economic impact, global markets