Print-friendly version
Send this to a friend
Posted 4/18/2005
Contrarian Chronicles
About Contrarian Chronicles
Learn the Contrarian Chronicles lingo
Subscribe to Market Rap on Fleckenstein Capital
Contrarian Chronicles
Recent articles:
• Gold: The only currency that can't be printed, 4/11/2005
• Dear CEOs: Stop fudging your numbers, 4/4/2005
• Caught in the Fed's inflation trap, 3/28/2005
More...
| | Contrarian Chronicles
If only Greenspan could be Volcker
If the great Paul Volcker were Fed boss again, he'd attack our economic challenges forcefully, no matter the pain. Sadly, Alan Greenspan is no Volcker.
By Bill Fleckenstein
Our newest reality show: Ford Factor.
After everyone had gone home on April 8, Ford Motor (F, news, msgs) announced that it would take earnings estimates down for the year. The auto maker cited the damaging effects of higher costs and a weaker dollar. I think Ford's news underscores the stagflation problem confronting the economy in general.
We have higher costs, creating more inflation, which the Federal Reserve is theoretically supposed to fight. Though it has timidly tightened, it is behind the curve on inflation. Even if the dropping-money-from-helicopter pilots at the Fed feared inflation, they'd be in a box -- as far as doing a lot about it -- because the economy is weakening. (That's where folks should put their attention, rather than sweating bullets trying to figure out what the Fed is going to say next.)
Of course, given those same inflation pressures, it will be very difficult for the Fed to ease any time soon, even if we get a stock-market dislocation. One of these days, the masses will finally connect the dots and realize the economy's in trouble, but inflation is too high for the Fed to ride to the rescue with a rate cut. In any case, what I took away from Ford's predicament was just another example of the box the Fed is in.
Prosperity built on quicksand
Speaking of our macro problems, in last Sunday's Washington Post, former Fed Chairman Paul Volcker penned "An Economy on Thin Ice," a column that obviously shouldn't have made anyone get all warm and fuzzy. I'd like to take a moment to reprise his article, because he makes some worthwhile points.
He starts off by saying that although everything looks OK superficially (from an economic standpoint), "under the placid surface, there are disturbing trends: huge imbalances, disequilibria, risks -- call them what you will. Altogether the circumstances seem to me as dangerous and intractable as any I can remember, and I can remember quite a lot. What really concerns me is that there seems to be so little willingness or capacity to do much about it."
Next, he complains that we're bogged down discussing Social Security. And we've been relying on foreigners to finance our savings shortfall. In passing, he takes a swipe at the present-day bubble: "Homeownership has become a vehicle for borrowing." In other words, he, too, notes the housing ATM.
Related news and commentary
After describing how we've been bailed out by foreigners, he says: " I don't know whether change will come with a bang or a whimper, whether sooner or later. But as things stand, it is more likely than not that it will be financial crises rather than policy foresight that will force the change."
My response to that: If a crisis is what we get, then change will come with a bang, not a whimper.
Continuing, Volcker suggests that "Japan and Europe should work promptly and aggressively toward domestic stimulus and deal more effectively and speedily with structural obstacles to growth."
He recommends that America, "by some combination of measures, should forcibly increase its rate of internal saving, thereby reducing its import demand. But can we, with any degree of confidence today, look forward to any one of these policies being put in place any time soon, much less a combination of all? The answer is no. So I think we are skating on increasingly thin ice."
Now, I am a very big fan of Volcker and his courageous efforts as Fed chairman from the summer of 1979 to spring 1987. That said, I am somewhat disappointed that he almost completely ignores the incompetent stewardship of our domestic monetary policy and, additionally, fails to suggest any "combination of measures" that should be implemented to help boost our savings rate and trim our consumption.
A potent pill to induce real prosperity
One of the most obvious would be to raise short rates to a level higher than the underlying rate of inflation (i.e., 5% to 6%) and take back some of the absurd stimulus that Alan Greenspan has foisted on the economy repeatedly over the last decade. This would simultaneously increase savings, reduce consumption and hurl us into recession. But we are headed there anyway. So let's get on with it before even more damage is done.
Back to the former Fed boss' column: Volcker gives passing notice to the fact that our budget surpluses have turned to deficits, but there were never any permanent surpluses. They were simply a function of the tax receipts from the mania, which should never have been construed as sustainable. It was the belief in the "new era" and "new economy" and prosperity forever -- fostered by the monetary bubble -- that deluded people into thinking that the country doesn't have to get its financial house in order.
Similarly, it's been the bailout of the stock-mania bust, via the housing ATM, that makes everyone so complacent. When problems start to hit and you have General Motors (GM, news, msgs) and Ford in trouble (on top of American International Group (AIG, news, msgs), MBIA (MBI, news, msgs) and Fannie Mae (FNM, news, msgs) ), folks' response is to buy stocks, or second and third homes to "flip."
Link the woe to the 'maestro'
The mentality that rules this country from a financial standpoint is a direct consequence of reckless monetary policy under Greenspan. Therefore, I would like to have seen Volcker point the finger of guilt where it should be pointed -- at his successor.
But I do agree with his summation: "A wise observer of the economic scene once commented that 'what can be left to later, usually is -- and then, alas, it's too late.'" He is so right. It's already too late. The only question is when all hell breaks loose.
Bill Fleckenstein is president of Fleckenstein Capital, which manages a hedge fund based in Seattle. He also writes a daily Market Rap column on his Fleckensteincapital.com site. His investment positions can change at any time. Under no circumstances does the information in this column represent a recommendation to buy, sell or hold any security. The views and opinions expressed in Bill Fleckenstein's columns are his own and not necessarily those of MSN Money. At the time of publication, Bill Fleckenstein was short Fannie Mae and long Fannie Mae puts and MBIA puts.
|
