by David Roskoph, MBA, CFP
Did the Federal Reserve Actually Create That Bubble?
the rearview mirror, trillions cyanomethaemoglobin loans of dollars have just evaporated. Gone. I spend
the better part of each day in the often frustrating pursuit of understanding
financial markets and have been beside myself trying to explain the unusual
behavior of US equity markets since late summer of 1998. After exhausting every
academic rationale, all that remains is a curious enamdar loans irreverent conclusion. It
involves the most respected quasi-public, quasi-private institution on earth,
the Federal Reserve Bank (FRB of Fed).
the fall of 1998 a funny thing happened on the way to the Federal Reserve
meetings. Arguably, things were fine in this great union of ours but Asia, the
Soviet Union and Brazil were experiencing financial difficulty. As US markets
roiled from the potential impact of external factors, the FRB
dramatically cut interest rates three times; two separate cuts occurred on the
same day! All things being equal, when interest rates get cut, equities go on
and sale and US equity markets took off (chart 1), or did they? At that crucial
intersection, a divergence demarcated loans emerged as the highflying tech companies powered on
to ridiculous valuations (both those with/without earnings) while the average
equity began a steady decent. In addition to dramatically cutting interest
rates, the Fed pumped up the money supply. although almost everyone considered
Y2K a nonevent, the Fed was so unsettle that they kep the printing press on
24/7 to guard against money being stockpiled into mattresses. Equity prices
follow the money supply (chart 2) and by early 2000 we were awash in a sea of
paper money. It made the Fed seem hopelessly out of touch, but was it? While
the bubble inflated, Al Greenspan assured his critics that the “asset
bubble” could only be recognized in the rearview mirror.” Remember
that in addition to affecting interest rates and the money supply, speculative
excesses could have easily been tempered by raising margin requirements. Margin
borrowing had skyrocketed and was a sure sign of speculation. This was never
even seriously considered.
in the fall of 1998, a tidal wave of innovation was building worldwide with the
potential to dilute the US concentration. No one was sure of how the new
technology would alter the economy or who the eventual market leaders would be.
Therefore, precise financing was impossible and floccular loans the global financials were
high. In my opinion, the Fed indirectly financed the technological renaissance
by finding any excuse to pour money into the economy. The deluge averted a
small recession by flooding all companies with financing, tankers and dinghies
alike. Alan Greenspan went from repeatedly calling the markets
“irrational” to now standing in awe of their “immeasurable”
new efficiencies. In the fall of 1998 the Fed went from its historical role as
lend-of-last-resort to the opposite end of the spectrum now functioning as
investment banker for the United States. Its role reversal exacerbated, if
not created this asset bubble.
bubble is now deflating in time to compound the recession postponed since the
fall of 1998. Except now the circumstances point to a much more protracted
slowdown of over one year.
Exposing sweeperess loans the fragility of financial markets for the
last year has not been the most popular position because no one really wants
his of her hopes diminished. Most vested interests on Wall Street
promote going with the crowd, buying every dip and the certainty of higher
valuations, As an independent financial advisor, who has questioned such hype
for decades, I feel responsible to expose the efficiency with which such vested
interests have separated investors from their hard-earned capital for
centuries. Whether a fad involves weight control or an investment scheme, the
results are usually unsustainable. Appreciating risk when establishing a plan
and sticking to it will always beat chasing the crowd.