The Fall of Greenspan and What

This article was originally published for RC Peck’s Fearless Wealth Newsletter in October 2006.
As world affairs have become increasingly volatile (Iran, Iraq, Afghanistan, inflammatory cartoons, Hamas in charge, huge US deficits, etc) it is curious that the U.S. stock market has continued to rise over the past 36 months.

The market typically does not like uncertainty, and clearly that is all we have had over the past three years. As many of my students have heard me say (and get tired of me saying), “You do not negotiate with the market because the market is always right.”

But I have the feeling there might be some serious things brewing below the surface that we have to be aware of.

There are a few events happening today that will greatly influence the direction of the world, and the markets, for the next ten years. I don’t want to point fingers, but I am going to focus on the fallout of the career of one man: Alan Greenspan (okay, I’m pointing).

Some of you may be surprised to learn that after almost nineteen years of tenure, Greenspan, while doing some great things (I’m sure he did some great things), has also done some very damaging things to the U.S. economy.

I realize he is being lifted onto the shoulders of many Wall Street people as the best Fed Chairman ever, but I think we will look back and see that Greenspan created three situations that took the U.S. in a direction that will create a lot of loss for future generations.

  1. Greenspan’s housing bubble: Greenspan lowered interest rates WAY TOO low and kept them WAY TOO LOW for too long, which allowed people who couldn’t afford homes to buy them.When interest rates move up (short term interest rates have already gone from 1% to 4.5% in 18 months) the buyers who bought their house at those low rates on an adjustable rate mortgage will have to refinance in the next 24 months, at much higher rates.

    They will find themselves having to pay a significantly larger chunk of their monthly salary to cover their mortgage. More money going to mortgages means less money for consuming, which means stock prices will fall and they will foreclose on their homes.

    This in turn, will drive house prices down. This in turn, will drive factories to close. This in turn, will drive unemployment up. This in turn, will drive stock prices down. This in turn, will create more unemployment. This in turn… you get the idea.

  2. Greenspan’s stock market bubble: The U.S. is still in an equity bubble that has not corrected. In 2000 to 2003 we had some correction, but the value that was then “nosebleed high” has only come down to “high.” The U.S. stock market still has a lot of overvaluation in it.This overvaluation will be cleaned up by either lower stock prices or much higher profits. My bet is that the market will settle somewhere in the middle—with more emphasis on lower stock price than increased profits. Remember the stock market can go much lower (or higher) then you could ever imagine.
  3. Greenspan’s devaluing of the U.S. dollar: During Greenspan’s rule the dollar was devalued by 50%. What cost us $1.00 nineteen years ago now costs us over $1.68. Americans have lost money they just don’t know it yet.Americans haven’t noticed this devaluing because most of us have our assets in U.S. dollars. But when we do business in the world markets our dollars are buying less. And when you travel to Europe you notice this very quickly.

So is it all doom and gloom? Never! We just have to look at where we are now, and go from there. And, we do have a new weather man on the job: Ben Bernanke. We will see how good his economic forecasts are. My bet is more of the same. Hurt the dollar to help Wall Street.

Is there sunshine ahead? Well, I think there are quite a few great opportunities lying around in the market right now. Precious Metals (silver and gold) are one of them. For some who think differently, and act differently, the next ten years will be the best investing years ever. As for the masses, it may be a very disappointing and very painful decade.

You might be curious about how to buy those precious metals correctly. When you are I find a phone call is the best way to start.

Here to being glad Greenspan is gone.

With warm regards,
RC’s Signature