Greenspan Vs. The Dow

Once Again, The Chairman Could Tip The President

March 06, 2000|By John McCarron.

Alan Greenspan has declared war on your IRA.

The chairman of the Federal Reserve is also out to zap your 401(k) retirement plan.

And your stock options, if you're one of a growing number of white-collar technicians whose pay is tied to the price of your company's common stock.

Greenspan, you see, has been mightily annoyed by the bull market in stocks. That's because, unlike the chairman's admirers in the White House and in Congress, the stock market has a mind of its own.

It has had the nerve to ignore the chairman. And the chairman does not like to be ignored.

Greenspan warned investors back in December of '96 that he was losing patience. He declared then, back when the Dow Jones Industrial Average was around 6400, that we investors were guilty of "irrational exuberance," that we had bid the price of equities too high.

But we kept pouring our retirement savings into stock mutual funds, where total returns were running triple that paid by Treasury bonds or bank CDs. There was some "irrational exuberance," to be sure.

But a lot of experts, including Mr. Greenspan on occasion, had assured us that a "new economy" was being born in which the old yardsticks need not apply.

Computer-driven increases in worker productivity, we were told, had weakened the causal link between full employment and wage inflation. With corporate profits rising fast and inflation in check, stock prices could be pegged to future expectations rather than present performance. The traditional 15-1 price-to-earnings benchmark of reasonable value became as outdated as your Betamax.

Besides, for many wage-slaves, tax-deferred retirement accounts have become the primary vehicle of economic advancement.

It sure isn't the pay envelope.

Decades of union-bashing and quasi-legal "temporary" hiring have paid off handsomely for corporate America, all but wiping out labor's bargaining power.

Pay raises exceeding the cost-of-living are out. Outsourcing and downsizing are in. In an economy where maximizing shareholder value is all that matters, the only way to get ahead is to be a shareholder.

So we loaded our retirement plans with stocks. And before you could say millennium momentum, the Dow shot past 11000.

This was more than Mr. Greeenspan could bear.

He has this new theory, the chairman does, that overly high stock prices cause unacceptable levels of inflation. And his job is to stop inflation. So a couple of weeks ago, having already raised interest rates four times in the last eight months to slow things down, Alan Greenspan went to Congress and told everyone how it's going to be.

It didn't get the media attention it deserved, but what Greenspan told Congress is that on-paper gains in the stock market have been encouraging consumers to spend more than they ordinarily would. This "wealth effect" is causing an imbalance between consumer demand and the supply of goods and services available for purchase. Left unchecked, Greenspan said, this will lead to unacceptable levels of inflation.

His solution: Create an investment environment in which stock prices will rise by no more than personal income, which he figures to be 5 to 6 percent a year.

That's right. Alan Greenspan said, in so many words, that it is the intention of the Federal Reserve to keep increasing interest rates until the stock market--the great, rip-roarin' bull stock market of the 1990s--produces returns no greater than what investors could get from a government-insured bond.

So far his strategy appears to be working.

Even after Friday's rally, the Dow is down 10 percent this year and the S&P 500 has lost 5 percent. And if it weren't for a handful of high-tech-high-flyers, companies like Intel and Microsoft in the Dow and AOL and in the S&P 500, today's market would be in a full bear slump.

Not that Greenspan has done all this damage by himself. Many technology stocks had, indeed, become obscenely overvalued (though ironically, this is the one group that, for now, continues to soar.) And the bond market has been sending signals for months that, like Greenspan, it does not trust the benign numbers of the Consumer Price Index.

But the fact is, if Alan Greenspan says he doesn't want the market to go up by more than 6 percent, and backs his words with stock-chilling hikes in interest rates, savvy investors will be going to the sidelines. Many already have.

This is an unusual strategy--the use of federal monetary policy to depress stock market prices.