When you get REALLY BIG, people have to pay attention when you start to, "throw your weight around." This is literally the way that elephant seals dominate a harem of females and prevent lesser males from invading their territory or their harem. It is the way that very many of the largest species create dominance and leadership in their group. It is the figurative or statutory value we place on certain people and the positions that they occupy that turn them into bellowing buffalo or benevolent bull elephants.
Unfortunately, like the reaction to bellowing buffalo and trumpeting elephants, the rest of the herd has a tendency to stampede. This is too often the case on Wall Street. Panic sets in very, very quickly in the stock market. The bond market reacts to those panicky movements though by sheer size a "huge" influx of cash from a stock selloff is a relatively minor event, a mere "blip" on the radar of bond markets. The debt markets are just so huge they dwarf Wall Street.
There are, too, "whales" of comparatively behemoth sizes that also slow the turning of the equity market. The mutual funds take hedges against any major movement in their portfolios, and it not only takes a cautious hand to protect the value of their assets, it takes a bit of unwinding to untangle the interdependencies to avoid being exposed by selling off assets that form a part of a complicated hedging strategy. In all of these situations economic espionage is a huge advantage because advanced warning of impending news is a potential windfall, but more importantly, a chance to prepare to avoid undesirable consequences.
If all of that is just a dizzying earful of financialspeak, then perhaps I can simplify my point by pointing to a movie. It is a rather good movie, even a favorite of mine. The movie I am referring to is, Trading Places, starring Eddie Murphy and Dan Aykroyd, with delightful contributions from not only Jamie Lee Curtis, but also Don Ameche and Ralph Bellamy (it must be one of my favorite movies, because I didn't even have to look up the names of the stars as I often do, not because I don't remember who they are, just because I can't put the names I know perfectly well onto the faces I remember).
In any case, the movie tells the story of a pair of financial moguls who toy with the lives of the Murphy and Aykroyd characters, but their own financial scheme is to corner the market on orange juice and profit from (illegally obtained) advance information from the official "crop reports" prior to their public release. After being set against each other by the financial powerhouse Duke brothers (Bellamy and Ameche) Murphy and Aykroyd's characters set about to take revenge on them by manipulating the impression of the news prior to it actually being released. The panic in the trading pits quickly sets in, and then reverses, leaving the old fellows broke and their previous victims victorious.
Do you know what the problem with that is? The problem is that the story is all too real. Not the part about manipulating individual lives, although presumably the writers, producers and director of the film felt that big financial institutions and the heartless villains that control them have no care or concern for, "the little guy." The "real" part is that it closely resembles the real life instance of the Hunt brothers (from Texas) who, already being billionaires, decided more or less on a whim to try to corner the market in silver. The good news was that they were not successful and it cost them dearly, but the "movements" of a few certainly sent shockwaves throughout the commodities industry.
The same kind of thing happens when "the Oracle of Omaha" (as they call billionaire Warren Buffet) makes a major move in his portfolio, or some other significant financial force surprises the financial world with either an actual major sell-off, or purchase, or even just a filing of "intent" documents with the Security and Exchange Commission. If an "elephant" is going to lean in the direction of the tree you are sleeping in, you had better wake up and be prepared to shaken up a bit.
But sometimes, and this is one of them, when the elephant has given up its leadership role, it is time for the "herd" to stop twitching nervously with every flap of his ears. Or in this case, the flap of his gums. Alan Greenspan became such a heavyweight in financial markets that he even swayed the debt market's course when he spoke, because as chairman of the Federal Reserve Board, he controlled the money supply and financial policy (which indirectly, and in effect directly, controlled interest rates). Alan Greenspan, when he was Chairman, spoke usually cautiously, but when he was too overt, the shockwaves were a financial tsunami.
Greenspan's pronouncement that the fantastic growth of wealth that corresponded with expansion of the economy at a tremendous rate was due to overly enthusiastic "irrational exuberance" over the internet, tech stocks and "dot com" boom. That comment was essentially by itself the principal cause of the, "tech crash," the loss of value of so many technology stocks and the absolute destruction of others in 1999 through 2001.
Greenspan recently admitted that the low interest rates implemented by "The Fed" (as the Federal Reserve Board is commonly known) "might" be partly responsible for the rapid expansion of home equity that has led to the "mortgage crisis" that is the current financial headache in America. But now that he is retired, I do wish he would just shut up and enjoy his retirement. But NOOooooo, he has to publicize the book he has written.
Do you think it is because he "needs the money" from book sales? I am pretty sure he and his wife, news reporter Andrea Mitchell, could live fairly comfortably on her salary alone. Yet, Greenspan keeps talking and the market keeps reacting even though he is no longer Chairman.
Greenspan commented last weekend in an interview that we were in danger of "stagflation" in the American economy in the near future. What he actually said was that the danger of stagflation was looming and what we needed was for the housing surplus to be absorbed quickly so that this kind of slowdown in the home building industry did not trigger a recessionary period. The oracle had spoken, and the doomsayers were quick to quote him.
Newscasts on at least two major networks on Monday used Greenspan's predictions to drum up interest in their broadcasts that night. Even prior to the widespread reporting on Greenspan's doom and gloom prediction the markets reacted with a triple digit decline in the Dow Jones Industrial Average. But too much like the Duke brothers from Trading Places, I suspect, Greenspan already knew that housing starts were down significantly in November. In fact, "down significantly" is putting it too mildly (not that I want to be known as a doomsayer myself). MarketWatch, a Dow Jones web site, reports that housing permits reached a 14 year low in November of this year, and housing starts a 16 year low, down by 5.4%. I somehow doubt that Mr. Greenspan was unaware of this, and thus, his criterion for avoiding recession was already inevitable. His "prediction" is more or less guaranteed by a reduced supply in the housing market because fewer homes are being built. The three month and six month supply of newly completed homes will be significantly lower, and Mr. Greenspan looks like a genius, again.
And the result of this was ... Greenspan's name is again in front of the public, his books sell better, and meanwhile, the little guy, investing in the stock market gets clobbered with a triple digit point drop in the Dow.
It is not like Mr. Greenspan has the kind of influence he had when he was Chairman of the Fed. Nor do I think he is malevolent in his intent. But "the markets" (including the debt market) can't seem to stop listening to him like he had some magical window into the future. I know I can't stop people from listening and making irrational decisions, so I am going to appeal directly to Mr. Greenspan.
My investment portfolio in my IRAs got KILLED in the tech stock decline thanks to Mr. Greenspan. In 2000, my wife and I calculated we would have plenty of money to be able to retire (not that we actually planned on changing anything) by 2008. Then came the "tech crash". We know you are a genius, Alan, and we owe you a great deal for your steering the financial ship for so many years, but can you please avoid any “loose lips” that might sink other people’s financial “ships”, please.
In other words, Mr. Greenspan, would you please just keep your big mouth shut?
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