Market Turbulence

Alan Greenspan was appointed Fed chairman by Ronald Reagan in August 1987, he was reappointed by Bush and Clinton, at successive four-year intervals until retiring after a record-setting tenure on January 31, 2006.

During that time period he was one of the most powerful men in the world. The stock markets literally hung on his every word.  People made it their full time job to try and decipher what cryptic meaning might be obtained from his press releases.

At times his words boosted the market as he dealt with issues like the Black Monday stock market crash that occurred shortly after he first became chairman. At other times he tried to talk the market down and he referred to the  “dot-com” economic boom of the 1990s as “irrational exuberance”.

During his tenure as FED chairman Greenspan was famous for purposely giving technical and confusing speeches. U.S. News & World Report reported that, “Few can confuse Wall Street as thoroughly as Federal Reserve Board Chairman Alan Greenspan can.”

Greenspan even mocked his own speaking style in 1988 when he said,

I guess I should warn you, if I turn out to be particularly clear, you’ve probably misunderstood what I said.

Greenspan felt that being unclear is often an advantage to a central banker since it yields him more flexibility.

If a central banker is too predictable, markets are more willing to speculate on his future actions, and potentially any move he makes will already be priced into the markets.

During his period at the Fed, Alan Greenspan never publicly commented on what algorithms or inflation and unemployment targets the Fed uses in setting the interest rate.

Yet, over the years he built credibility with the financial markets because he was willing to fight inflation. His flexibility permitted him to affect the economy by, say, lowering interest rates in order to fight a recession while his reputation as an inflation fighter made it possible to do this without shocking the bond market.

So the opportunity to gain some insight into the thinking of this powerful man in his new book The Age of Turbulence is a welcome addition to anyone interested in the stock market.

His insight will not only be seen as valuable to past market moves but also into understanding the present and future moves the market will make.

The Age of Turbulence seems especially appropriate at this time of the Sub-prime market meltdown. And Greenspan’s insights would be extremely helpful at this juncture in navigating the turbulent financial waters ahead.

In the wake of the current sub-prime mortgage and credit crisis, Greenspan warned of “large double digit declines” in home values “larger than most people expect.”

However, Greenspan’s policies of adjusting interest rates to historic lows to fend off a market crash following the attack of September 11, 2001 actually contributed to the housing bubble in the US years later.

On February 26, 2007, Greenspan forecast a possible recession in the U.S. before or in early 2008.

The following day, the Dow Jones Industrial Average closed at 12,216.24 dropping by 416 points and losing 3.3% of its value.

This was the worst one day loss since September 17, 2001, when the Dow Jones lost 684 points (7.1%) after reopening in the wake of the 9/11 terrorist attacks.

Although, this drop is not entirely due to Greenspan’s comment, his opinion is nonetheless substantially influential and investor’s should ignore his writings at their own peril.