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Posted 6/14/2004
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Greenspan and rates: macho ado about nothing
The Fed will not raise rates very aggressively because the economy is not as strong as people think. If Im right, were going to see a falling dollar, falling stocks and a weak real estate market sooner than most expect.
By Bill Fleckenstein
Last Tuesday, Easy Al gave a speech that basically said: Hey, I'm not gonna let inflation get out of control, and if I think it's gonna happen, I'll tighten aggressively if need be. In other words, he was talking like a combination tough cop/all-seeing swami, convinced he'd know when to say 'when' (and have the nerve) to step on the accelerator of rate hikes.
My thoughts about that are twofold: No.1, it ain't never gonna happen, and, No. 2, I am absolutely speechless that all these markets still have enough respect for what he says to actually trade that information in the manner they did.
In the first place, inflation is already higher than it ought to be, relative to a 1% funds rate. This is an emergency measure that's been allowed to stand, in the face of what is supposed to be strong GDP and strengthening employment growth. In the second place, the inflation that we're all experiencing has not been "officially" reported, owing in part to how the Bureau of Labor Statistics "hedonicizes" away price increases, something I've discussed many times in the past. (Please see: "Where are the inflation vigilantes when we need them?," "Yet another way the government hides inflation" from March 29; and "How the government manufactures low inflation." While on that topic, I note yet another hostage-taking of the Producer Price Index, delayed as once again the BLS can't quite seem to calculate it.)
In my opinion, rampant inflation (however you want to define "rampant") and/or a collapsing dollar will at some point force the Fed's hand to some degree. But there will be no pre-emptive aggressiveness on the part of Easy Al -- none, zero, nada, zippo. Few aspects of the investment world are black and white, but I think that happens to be one of them.
Obviously, this appears to be a controversial thought, as the market seems to have taken Greenspan at his word. That said, markets frequently overreact, so one might argue that perhaps they were ready to correct, anyway. But given the fact that the metals and foreign currencies didn't look to me all that frothy last Tuesday, I read it as the market buying into this aggressive-tightening nonsense.
End game for a gambit gone bad
The Fed won't get there, in my opinion, because the economy is going to slow down. Then, folks will see that Easy Al's gambit of ridiculously low rates and all the government stimulus have only managed to set off a real-estate bubble and 12 months, plus or minus, of decent economic growth. When that realization starts to hit, folks will understand that Greenspan won't raise rates very far (but can't lower them, either). That's when I believe the rout in the dollar, the surge in precious metals and the slide in equity prices will be seriously under way.
Obviously, that moment in time has not been reached quite yet. However, we have now seen a couple data points from what I refer to as the post-stimulus period (that ended in April and May, with the last of the tax refunds), which show signs of some weakness. I don't want to make too much out of nothing, but I notice that initial jobless claims bounced back up to 350,000 last week. Also, the IBD/TIPP economic optimism poll released recently had the lowest reading in the past nine months, something you wouldn't expect, given all the glad tidings tossed about on the economy.
If things slow down as I expect in this post-stimulus period, that's when the fallacy of the idea that the Fed is able to pick the right rate to manage the economy/stock market -- and the fact that the whole post-bubble gambit didn't work -- will be the most important idea in town. That's when we will set ourselves up for many of the problems I've been concerned about for some time. Sometime in the second half of this year or the early part of next year, all of these problems will be clear enough for everyone to see.
Again, the timing is not knowable, but I continue to look for clues to try to get some handle on this. Any way you slice it, the post-election period is liable to be very, very ugly. There is no way that the economy, the housing market, the stock market, or the dollar is getting off the hook this time. Not after all the abuse and financial mismanagement that's been heaped upon this country.
Short of dough vs. shorting the dollar
I note that in his commentary last Wednesday night, Richard Russell -- the editor of Dow Theory Letters -- again talked about how people in debt are running a short position in the dollar. I would continue to respectfully disagree with that analysis. You can renege on debt. People do it all the time. It's called Chapter 11. Our government can renege on debt by basically printing the money and inflating the debt away.
But you can't renege on a short sale. You get bought in, as the transaction must be closed. Since the "transaction" of supposedly being short dollars by being in debt does not have to be closed, this is not a good analogy. It is not a reason to expect the dollar to go higher. The problems that I have described, and the problems that Warren Buffett has described, are the reasons why the dollar will go lower.
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. At the time of publication, he did not own or control any of the equities mentioned in this column. The views and opinions expressed in Bill Fleckenstein's columns are his own and not necessarily those of MSN Money.
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