Wall Street Drama: Much Ado About Nothing
February 5, 2000 12:15 am EST
By Pierre Belec

NEW YORK (Reuters) - Worried that inflation-phobic Federal Reserve Chairman Alan Greenspan will send your retirement wealth crashing? Don't worry, Bucky. The Fed isn't nutty enough to keep on raising interest rates until the bull market cries "Uncle."

The high-flying stock market will not be sacrificed on the altar of higher interest rates, say the experts. Greenspan will not want to risk destroying the longest economic expansion in history -- an eye-popping 107 months as of February -- that he helped to create. The old record was the expansion that ran from 1961 to 1969.

The central bank again raised interest rates this week, racking up its fourth increase since last summer.

Experts say the stock market held its ground and was able to endure what in the past had often been seen as the unendurable -- rate hikes -- because Wall Street believes the central bankers will not go on a reckless rate-raising spree.

There are lots of reasons. Among them, this is not the 1970s or early 1980s, when inflation was the norm. Inflation is MIA -- missing in action -- and the economy still managed to stay in great shape last year despite three rapid-fire rate rises.

"But there is no doubt that sharply higher rates would kill the American economy and eventually the stock market," said David Ranson, president of H.C. Wainwright & Co., a Boston-based investment research firm.

Ranson said that it's not just a coincidence that the economy boomed in the 1990s amid the most stable interest-rate environment since the early '60s.

"The lack of monetary intervention by the Fed has been a very big plus for the growth of the economy and for eliminating business cycles," he said.

Greenspan has been given credit for letting the economy cruise in overdrive, breaking away from Fed tradition that called for the central bank to step in and raise interest rates whenever growth exceeded 3 percent or the jobless rate slid below 6 percent.

In last year's fourth quarter, the economy grew at a speedy 5.8 percent and inflation held at levels last seen in the 1960s. In January, unemployment dropped to a 30-year low of 4 percent from 4.1 percent in December. The economic numbers have amounted to an unbeatable success story for stocks.

Since last summer, the Fed has been fine-tuning the economy with small increases -- a quarter percentage point at a time.

But a closer look at last year's Fed action shows the central bankers were merely raising interest rates to take back the three rate cuts they made late in 1998 amid panic over the Russian loan default, Asian and Latin American economic woes.

Analysts say the Fed is also worried that some of the strong economic reports for the final quarter of 1999 are now being revised upward.

"This has intensified the fears of inflation among Fed policy makers," Ranson said.

What could worry Wall Streeters?

"A series of interest-rate increases of 100 to 200 basis points (one to two percentage points) over a short period of time would assure a severe slowdown in the economy while an increase of more than 300 basis points would bring on a recession," Ranson said.

Recessions, or economic downturns, happen because fast-rising borrowing costs shift consumers into a worry mode, dampening demand for goods, which in turn, forces companies to cut production and throw workers out on the street.

"But few people think the Fed will raise by that much and create a bear market for stocks," Ranson said.

"History shows that major stock market plunges are preceded and instigated by sharp increases in interest rates by the central bank," he said. "These rate increases are deliberate acts on the part of the Fed, as was the case for Wall Street in 1929 and 1987 and Japan in 1990."

The U.S. central bank raised interest rates 2.5 percentage points in the year before the 1929 crash, including a jolting one-point rise in the month before the market meltdown in October. The Fed also flexed its money muscles in the year before Wall Street's 1987 crash, spiking key rates by 1.5 percentage points.

The shock was just as bad in Japan as the Bank of Japan lifted rates 3.5 percentage points over a one-year period. By December 1989, Japan's Nikkei stock index peaked at a record 39,000 and went into a downspin that lasted for two-and-a-half years, until the bloodletting brought it to 16,000. More than 10 years later, the index hovers at 20,000.

The Fed has no reason to worry about a 1929-like crash -- unless it repeats the same mistakes.

"The big problem back then was the Fed was just a fledgling organization and the U.S. economy had no history of interest-rate management by a central bank," Ranson said.

"When the Fed began using monetary policy, its first target was the stock market boom of the 1920s and it managed to puncture the market very successfully, which helped create the Great Depression," he said.

The huge increases in short-term interest rates were also a killer for Japan.

"The country never really had any experience with high fluctuating interest rates and its stock market was totally unprepared," Ranson said.

The good news: The economy will start to slow as higher interest rates boost the cost of consumer and business loans, which will eventually make Mr. Greenspan a happy camper.

"By the middle of this year, the economy will have slowed down enough to cause a change in Fed policy," Ranson said.

Ranson's bet: The U.S. economy is now seeing the high-water mark of growth, thanks to the stimulus from the three rate cuts in late 1998. This year, economically sensitive stocks will have a difficult time beating cash. But monetary tightening will not end the boom in technology stocks, though it might slow down the sector's rate of growth.

For the week, the Dow Jones industrial average was up 224.93 points at 10,963.80. The Standard & Poor's 500 index rose 64.22 to 1,424.37 and the Nasdaq Composite index surged 357.08 to 4,244.15.

(Questions or comments can be addressed to Pierre.Belec(at)Reuters.Com).

http://www.iwon.com/home/money/money_article/0,2090,1210|business|02-05-2000::08:16|reuters,00.html

-- 7of9 (what@load.ofcrap), February 05, 2000

Answers

Well this is probably right. However, anyone who believes that this is the ONLY factor that affects the market better quit smoking that funny t'baccy. OIL...or lack of...could take the market crashing. If this bond thing and the rumored emergency Federal Reserve meeting and the fact that Goldman Sachs and B of A have been playing games,has any truth to it, it could take the market down. The market is a VERY nebulous thing and currently its dictated on emotions. Turn that euphoric emotion to panic or dread...of even just that niggling in the back to the brain that tells you all is not right in the rabbit hole...and it could turn the markets into a spriraling downfall over night. IF YOU HAVE NOT READ THE THREAD BELOW ON "WHAT GOES UP MUST COME DOWN" DO IT NOW. It is the best and cheapest education you will ever get on the current stock situation, especially bubble.com. Taz

-- Taz (Tassi123@aol.com), February 05, 2000.

This is truly a load of crap. The recent rate hikes are no where near enough to get this bubble punctured. The gross manipulation of the carry trades and the outrageous M3 creation of the Fed have set us up for a real @sskicking. All the sheep that believe the stockmarket is a fair market will get shorn soon. Our economy has been in an inflationary mode for several years and our export of debt is masking the symptoms, so far. This is just another puff piece of lies by the captive financial press. These people should be shot.

-- Lang Price (alprice@worldnet.att.net), February 05, 2000.

--excuse me, very naieve non-investor here, but not so naieve as to believe that "the market" doesn't effect me. Now, if these stories of the PPT and the ability to manipulate stock prices and to stop the markets from trading are true, wouldn't it follow-especially in an election year-that any chance of a "crash" would be immediately stopped by suspending trading, and by keeping on suspending trading until even the most dull of traders got the "point"? Wouldn't this be what would most likely happen? Also, as to oil, it would also seem that the PTB would only allow oil prices to rise to such a level as would make all those rigs out west currently sitting idle economically feasible to run? And, what would be that economic point, in terms of dollars/ barrel? In other words, no crash is going to be "allowed" to happen, no matter what is factored in. These are legitimate questions here, at least I think they are.

-- nontrollcomments (appreciated@please.thankyou), February 05, 2000.

I saw this and laughed. Duh, like now we're so savvy...

-- Mara (MaraWayne@aol.com), February 05, 2000.

nontrollcomments,

Now, if these stories of the PPT and the ability to manipulate stock prices and to stop the markets from trading are true, wouldn't it follow-especially in an election year-that any chance of a "crash" would be immediately stopped by suspending trading, and by keeping on suspending trading until even the most dull of traders got the "point"? Wouldn't this be what would most likely happen?

First, the PPT is not a rumor if the words of Alan Greenspan are to be believed. Second, if trading is suspended indefinitely as youve indicated, that very act would mean the demise of the economy. Its akin to saying that you can stop a bank run by closing the bank. Yeah, you can, but you also destroy the utility of the bank and leave a whole lot of people without access to money. Shut down the market and you deny corporations access to cash, a whole lot of people have their retirement accounts locked up by the government, and all sorts of bad things happen in the currency and bond markets, most of which mean the the US$ wouldnt be worth the paper its written on. Bad idea. Which is worse, the crash or the complete chaos that would occur as a result of financial market shutoff?

Also, as to oil, it would also seem that the PTB would only allow oil prices to rise to such a level as would make all those rigs out west currently sitting idle economically feasible to run? And, what would be that economic point, in terms of dollars/ barrel?

Well, right now the PTB dont control the non-producing oil fields -- the oil companies do. And yes, if OPEC squeezes hard enough the marginal fields will be brought on line. How hard is hard? My guess is that its well north of $40 a bbl. Remember, these are people who can read tea leaves with the best of them. The WSJ made a good point last week: if the world appears to be heading into a recession (and it does) then why would the oil companies have the slightest desire to spend money bringing production on line that will have to be shut down when prices drop? The normal (and textbook) reaction in a downturn is to hold on to what you have until you come out the other side.

In other words, no crash is going to be "allowed" to happen, no matter what is factored in. These are legitimate questions here, at least I think they are?

Ask the British how much it cost them to defend the pound against an attack by George Soros. The net result is that Soros took their money in the long run and the pound still declined. The PPT can delay a crash -- and in delaying it make the ultimate results worse -- but they cant prevent it. The US government doesnt have enough money to buy all the shares of stock outstanding. (Actually, they buy S&P positions.

A crash is a psychological thing.......its called panic, which is fear moved to its fullest extent. If everyone wants out of the market, its hard to stop them.

Just my thoughts.

-- rocky (rknolls@no.spam), February 05, 2000.

The further an economy departs from fundamental economic realities, the less control anyone or anything has on its progression, including Alan Greenspan. This economy has so much fundamental contradiction, non-economic capital creation and allocation, bogus accounting, externalized costs, and assorted moral hazard that economic reality is all but ignored. The chance for a minimal-consequences resolution had disappeared years ago. That leaves only the possibility of delaying consequences, and the ability to delay consequences is now rapidly slipping from Greenspan's hands as well.

Furthermore, many of the excuses not to face the music have dissipated: the Clinton Impeachment, the weakness of Asian economies following the collapse of their debt bubbles, and Y2k uncertainties.

Yes, an election looms, but this country is now so thoroughly controlled by the sham of the two party system and their corporate contributors, that, IMO, whether or not the stock market is up or down won't make much difference, if any.

-- Nathan (nospamwh@tsover.moc), February 05, 2000.

Only Time will tell, how long King Solomon Greedspan will rule...

-- Victim ($$$$@%%%%%.$$$), February 05, 2000.

This is journalism? My 7 year-old thinks more clearly than this "journalist." Central banks don't just raise and lower rates on a whim. If what this article espouses were true, why would a central bank ever raise interest rates?

The answer is to defend the currency. When(not if) inflation gets going, it has to be reigned in, lest the value of the currency completely unravel.

No market crashes ever because the Fed won't ever raise rates. How ludicrous. What happens to the market if it costs $100 to buy a gallon of milk?

-- J (Y2J@home.com), February 05, 2000.

This is nothing I haven't read before 1928 and 1929 all in the newspapers of the time.

-- ET (bneville@zebra.net), February 05, 2000.

Some pros seem not all that certain that the Fed has everything under control:

From The Street.com:

...Back in the day, when the Fed got to hiking rates, the Treasury market would sell off, sending yields higher. And asset allocators, seeing those higher yields, would sell some stock and buy some bonds. Unfortunately for the Fed, these aren't the old days anymore.

"It's just making the Fed's job more difficult," said Tony Crescenzi, bond-market strategist at Miller Tabak. "The markets are easing while they're tightening. They've lost control of financial conditions to the markets. The Fed will perhaps have no choice but raise short-term rates to levels we haven't seen in a long time."

It makes for sort of a Super-Bizarro market dynamic. Let's say, for example, that when January retail sales figures get released next Friday, they come in soft. (Economists forecast they'll come in pretty strong, but never mind that right now.) That would mean the consumer is slowing down, which in turn would mean the Fed wouldn't have to get medieval on the market. Which means the market could go higher, which would boost the consumer, which brings us back to square one. Whenever the stock market sells off, the Fed outlook improves. Whenever it goes higher, the Fed outlook deteriorates.

If you want to make a market forecast, volatility ain't a bad one...

Did everyone catch that faintly heretical comment? "[The Fed have] lost control of financial conditions to the markets."

No! This cannot be! Infidels! Dogs! How dare they question the power and wisdom of Lord Greenspan, Sustainer of the Holy Bull Market, Protector of the Market Indices, and Source of Most Precious Liquidity! Scourge them! Drive them from the Street and Walls!

-- DeeEmBee (macbeth1@pacbell.net), February 06, 2000.

What a difference a year makes. I found a reprint of an article from a year ago by this same Reuters correspondent.

March 20, 1999

Wall Street's Ride May Run Into Oil Slick

By Pierre Belec

NEW YORK (Reuters) - Wall Street is giddy after the Dow Jones industrial average zoomed to the magic 10,000 level for the first time but an oil price explosion could make investors think twice about pushing stocks any higher.

The market is keeping an eagle eye on oil. Prices have shot up some 40 percent to five-month highs after 13 global producers agreed to cut output by two million barrels per day. Their goal is to siphon unwanted oil from the world market.

The producers have so far succeeded in lifting prices from the cheapest levels since 1973. Oil hovers at $15 a barrel, up from a depressed $11 last December.

For the past five years, the stock market has had a near vertical climb, buoyed by low interest rates and even lower inflation, thanks in part to oil prices, which are cheaper than bottled water.

``A jump in oil prices would certainly bring back worries about inflation,'' said Hugh Johnson, chief investment officer at First Albany Corp. ``It's clearly a big concern for the stock market.''

Oil prices have worked miracles for the United States, allowing inflation to stay dormant and igniting the greatest bull market ever.

Indeed, the U.S. economy and Wall Street have been rocking while the rest of the world economies have been roiling in a state of turbulence.

But a sharp rise in energy prices would put the American economy at tremendous risk because it could fuel inflationary pressures, or at least give the perception of rising prices.

The results would be a steady erosion of stock prices once investors grow fearful that nearly everything will cost more...

Ah, but investors have not grown fearful at all. The markets know no fear, as witness Mr. Belec's current article. Nothing to worry about at all. Oil prices are very close to double those from a year ago, but there's no sign of inflation anywhere. None. Just check any news site. Hillary's running for US Senate. Shrimp boats helped with the search for Alaska Flight 261. Little Cuban boy rode his tricycle today.

Erstwhile alarmist Pierre Belec now knows the truth. The Fed's got everything under control and it's all gonna be just fine.

-- DeeEmBee (macbeth1@pacbell.net), February 06, 2000.