GREENSPAN (GI?) says high stock prices a RISK! : LUSENET : TimeBomb 2000 (Y2000) : One Thread, October 14, 1999


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Greenspan Says High Stock Prices Are a Risk; U.S. Stock Index Futures Drop By Bill Arthur

Greenspan Says Stock Gains Put Investors at Risk

Washington, Oct. 14 (Bloomberg) -- Federal Reserve Chairman Alan Greenspan said surging stock prices have increased risks for investors and lenders, and financial institutions should boost their reserves to weather market panics.

Losses will ``inevitably emerge from time to time when investors suffer a loss of confidence,'' as they did a year ago after Russia defaulted on its bank debt, Greenspan said in an evening speech to a conference sponsored by the Office of the Comptroller of the Currency.

While Greenspan didn't directly address the level of U.S. stocks, Standard and Poor's 500 stock index futures slumped after the Fed chairman's text was released at 7 p.m. in Washington. The index fell more than 10 points in trading on the Chicago Mercantile Exchange. In Tokyo after Greenspan spoke, the dollar fell to 106.68 yen from 107.36 yen at the prior New York close. ``He's not trying to kill the economy. He's just trying to take a little bit of the froth out of the markets,'' said Karl Mills, chief strategist, Jurika & Voyles Inc., an investment firm in Oakland, California.

This isn't the first time Greenspan raised questions about stocks. On Dec. 5, 1996, he said central bankers must guard against ``irrational exuberance'' in markets. That comment, also in an evening speech, sent the Dow Jones Industrial Average skidding as much as 2.3 percent at the start of trading the next morning. By the end of the day, the index recovered about two- thirds of the decline.

The Dow index is also more than 60 percent higher today than it was when Greenspan issued that 1996 warning.

Another Warning

Now, Greenspan has issued what sounds like another warning, said Mark Vitner, an economist with First Union Capital Markets Group in Charlotte. ``The Fed has pushed interest rates up twice'' since June without effect on spending, Vitner said. Greenspan could be trying to ``tighten credit through moral suasion'' on banks, saying, ``Hey, watch your lending, and that will cool the economy off quicker than anything else.'' ``A lot of what the Fed has been trying to convey is that we don't know the extent of the risk to the economy posed by the stock market,'' Vitner said. ``We don't know what the risk is that portfolios could take a shock, and we don't know how that would ripple through the economy.''

Like Fire Insurance

Greenspan said he said ``the key question'' is whether the recent decline in so-called equity premiums -- a measure of the return investors are willing to accept for common stocks compared to holding risk-free assets like Treasury securities -- is permanent or temporary. ``If it proves temporary, portfolio risk managers could find that they are underestimating the credit risk of individual loans based on the market value of assets and overestimating the benefits of portfolio diversification,'' he said.

As a consequence, Greenspan said banks and other financial institutions must ``set aside somewhat higher contingency resources -- reserves or capital'' to cover potential losses.

Maintaining such funds may seem like a less than optimal use of money, but ``so do fire insurance premiums,'' Greenspan said.

The Standard & Poor's index of 500 stocks is also 263 percent higher than it was on the last trading day of 1989. That's even after a decline of almost 10 percent in the index since it set a record in July, shortly after the first of the Fed's two quarter-point increases in the overnight bank loan rate. The Fed policy-makers meet again Nov. 16.

The yield on the 30-year Treasury bond has also risen more than a full percentage point since early February on concerns that the Fed will need to continually raise interest rates to slow the economy as a way of keeping inflation in check.

Inflation Fears

A government report tomorrow could intensify investor concerns about inflation. It is expected to show that prices paid to U.S. producers rose in September for a third straight month, pushed up by higher oil and tobacco costs.

Those numbers `could have a dampening or compounding influence'' after Greenspan's comments, which will obviously produce a market reaction, said Barry Hyman, chief market strategist at Ehrenkrantz King Nussbaum Inc. ``This comment does indicate that interest rates are probably heading higher at the November meeting, and that's troublesome for equities.'' ``I expect the Dow to fall below 10,000 today (Friday),'' said Takashi Okura, head of foreign exchange at Banc One Corp. in Tokyo. ``I don't want to hold dollars today as the dollar could fall below 106 yen'' during New York trading.

Even after the recent decline in stocks, investors still must pay the equivalent of 30 times the earnings of the average S&P 500 stock today. While that's down from this decade's high p/e of 35 in April, it's well above the average of 21.6 for all of the 1990s. ``Cash and bonds are a far more attractive place to be than equities and Greenspan is quite right to question markets accordingly,'' said Michael Wood, who helps manage A$9 billion (US$5.9 million) in Australian investments at Salomon Smith Barney Asset Management Australia Ltd. ``The equity risk premium is way too narrow and does not reward investors for the risk in equities above and beyond the bond markets.''

Logical Reasons

Greenspan suggested there are logical reasons investors are willing to pay so much for stocks. For one thing, the growing wealth of information and the speed in which information is gathered and distributed have ``reduced uncertainties'' and risk of relying on equities. ``That equity premiums have generally declined during the past decade is not in dispute,'' Greenspan said. ``What is at issue is how much of the decline reflects new, irreversible technologies, and what part is a consequence of a prolonged business expansion without a significant period of adjustment.''

Greenspan said ``panic reactions in the market are characterized by dramatic shifts in behavior that are intended to minimize short-term losses.''

This happens time and time again throughout history, he said. ``Whether Dutch tulip bulbs or Russian equities, the market price patterns remain much the same,'' he said.

Central bankers are no more adept than investors at predicting when panics set in, Greenspan said. ``Collapsing confidence is generally described as a bursting bubble, an event incontrovertibly evident only in retrospect,'' he said. ``To anticipate a bubble about to burst requires the forecast of a plunge in the prices of assets previously set by the judgments of millions of investors, many of whom are highly knowledgeable about the prospects for the specific investments that make up our broad price indexes of stocks and other assets.''

-- G (, October 14, 1999.


Bloomberg on Greenspan LINK


-- G (, October 14, 1999.

Text of Greenspan speech

-- Jerry B (, October 14, 1999.

Other thread on this topic

-- Jerry B (, October 14, 1999.

Simply put, Greenspan sees a storm coming and this is not the first time he has said it. A week or two ago he made a similiar, but watered down speech.

I dont know if and when the time will come, but I expect Greenspan to eventually say, "Hey idiots, the market looks like its about to crash, get ready !".

-- hamster (, October 15, 1999.

Mr. Greenspan needs to retire. He has his lost sense of reality. He doesn't see himself as one of 6 billion people, he seems to perceive "the economy" is in a shoebox on display in a museum, and he is failing to grasp one generations' economical preferences closes and a new generations' begins.

I know he dreads the Day Before The Storm people. We all do. It appears to be consuming him though and it ought not to. His only and appropriate reponse is toss some t.v. dinners in his freezer for that day and vow not to go out. Unfortunately, we all face seeing those Day Before The Storm folk having their fights in the gas station lines on the news. That minority in Florida with such behavior and choices has begun to paralyze the nation. Policies no less are being drafted due to a small minority of people in this nation who make no preparations, wait for "signs" and upon seeing a "sign" react without a valid thought between their ears. I think every word he has uttered this year has been all about going to bed with the Home Building store line fights in his thoughts and the same being his first waking thoughts.

-- Paula (, October 15, 1999.

Alan Greenspan is a financial genius, most of the time.

However, this time he is on rocky shores, and the tide is coming in with a tidal wave beyond his control.

Watch for a sudden hike in the interest rates!

-- Randolph (, October 16, 1999.

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