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Posted 9/13/2004
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The 'recovery' is living on borrowed time
The Fed thinks the economy is growing on its own. I think people are using their homes as ATMs. What I don't know is when the bubble will burst.
By Bill Fleckenstein
When he offered his economic forecast to the House Budget Committee last Wednesday, Alan Greenspan had the complete attention of the financial markets. But for anyone unschooled in Greenspan's predictive powers, if you read his speeches and comments over the last 10 or 15 years, as I have, you will see that he has made a major habit of being wrong at inflection points.
One of my favorite and oldest examples dates to early January 1973 -- just before the nasty 1973-74 recession -- when Greenspan was running his less-than-stellar economic consulting firm, Townsend Greenspan. Greenspan told the New York Times, "It is rare that you can be as unqualifiedly bullish as you can be now."
Yet on Wednesday, we witnessed an example of continued maestro worship. Shortly before the man who would be economic king began his congressional testimony, the following headline passed on Bloomberg News: "Dollar Rallies on Speculation Greenspan Will Signal Faster Growth" (my emphasis).
Misallocation of deification
That pretty much sums up where we are today. Contrary to my expectations thus far (for reasons I'll explain in a moment), folks still appear to regard Greenspan as though he were a deity. That someone could write a headline saying the dollar was rallying because Greenspan might signal faster growth -- as though "the king" could just wish something to happen or expect something to happen and it would, in fact, happen -- tells you what you need to know about the present-day environment.
To give you a flavor of what he decreed last Wednesday, let me share a couple of his quotes from Bloomberg headlines: "Economic Expansion Has Regained Some Traction." "Payroll Gains Picked Back Up in August." He also claimed that the soft patch was largely due to energy prices, though his crystal ball on energy has suddenly gone cloudy, as he says that the outlook for oil prices "remains uncertain."
Editor's note: Read the complete text of Greenspans remarks.
Hardcore advocacy of the soft patch
My favorite edict from his Wednesday remarks was: "Despite a rise in oil prices through mid-August, inflation and inflation expectations have eased." He means inflation ex the cost of goods that have risen. So, he's basically sticking to his story that the blip/soft patch/whatever-you-want-to-call-it is now behind us, and it's onward and upward.
He does enjoy one huge advantage to help make himself right on his economic (and stock market) pronouncements: The ability to print money, which he has done ad nauseam for a very long time. Of course, he has sown the seeds for lots of economic turmoil that lies ahead. But since I've discussed that often enough in the past, there's no need to go into it again this week. For review, please see my June columns "The housing bubble doesn't add up;" "Talk is cheap, the Fed's action won't be;" and "Greenspan and rates: macho ado about nothing."
Housing: a reprieve from reality
Folks who've been paying attention know the economic data have been slipping since last spring. Considering this fact, I would have expected (and did expect) that the dollar would be under more pressure than it has been -- and stocks might be, too. Therefore, it has taken longer for the "next time down/post-stimulus" trade to start working. I've been wondering why, and in particular why the dollar has hung in there as it has.
My conclusion is related to why I think President Bush has been able to hold his position in the polls, despite what's happened on the economic front. (This is an economic comment, not a political one, as I am not a fan of either Bush or Kerry.) The housing market has been holding up. Thats made people feel good, and the byproduct of the housing-as-ATM-funding vehicle has continued to help them live beyond their means.
I may be totally wrong about this, but I think that housing has enabled people to feel better about the economy and where we're headed than my reading of the data suggests would be possible.
That said, given the early signs of trouble building, I still believe that the economy, the stock market and the Fed's credibility are on borrowed time. The problems that I have outlined in the past about the next time down/post-stimulus trade await us in the future. However, this scenario appears to have taken longer to unfold than I would have guessed, based on the data.
Of course, I've been around long enough to know that this happens all the time. (I also know that trying to get the timing right on changes in psychology is extremely difficult.) The old saw on Wall Street is: Things that should happen usually do happen, but never when you think they should happen, or some variation on that theme.
To update my roadmap, I continue to think that the outcome for the stock market, the currencies and the economy is rather binary. One of these days, "the market" will agree that the view I am espousing is correct (assuming it is). If so, markets will change quickly. Of course, if I turn out to be wrong, my investment positions will turn out to be losers.
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.
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