Greenspan's Real Concerns
Market Views of Comstock Partners, Inc.
Thursday, July 21, 2005
Greenspan’s Congressional testimony devoted a page and a half to how well the economy was growing and how inflation remained under control. He then proceeded to five pages of concerns. While his reassurances were obligatory on the part of a Fed chairman, we believe that the concerns about what he termed “significant uncertainties” are the things that he’s really worried about. Of course the media headlines stressed the optimistic portion of the testimony rather than the warnings.
First, the Chairman mentioned that unit labor costs, which were fairly well-behaved until recently, have lately turned up, raising the issue of whether these costs would be passed through. Next, he stated that productivity, which had accelerated markedly, had slowed down and that the previous rapid advances were unlikely to be maintained. He then put his focus on high energy prices, saying that “market participants now see little prospect of appreciable relief from elevated energy prices for years to come”.
Greenspan than went on to discuss the unusual drop in long rates in the face of the increase in fed funds, a pattern he called “without precedent in our recent experience”. This, he said in an understatement, contributed to the boom in home prices and associated risks. He then discussed the “froth” in home prices and essentially repeated his previously stated views that there were signs of froth in local housing markets. What he didn’t emphasize was that these “local” housing markets included virtually the entire Northeast seaboard, Florida and California as well as numerous places in between, covering a substantial portion of the U.S. population, housing values and the GDP. He mentioned interest-only loans and exotic forms of adjustably-rate mortgages as “developments of particular concern”.
He concluded his list of concerns with the observation that “we collectively confront many risks beyond those I have just mentioned.” Among these were terrorism and “evidence of anti-globalization sentiment and protectionist initiatives”. To all of these concerns we could add the record trade imbalance, the ultra-low consumer savings rate and record consumer debt, none of which the Chairman mentioned. All in all, however, we believe that the large section of the testimony taken up with Greenspan’s concerns is the things he really worries about, but cannot emphasize with adversely affecting the financial markets.
We also thought we should mention today’s Chinese revaluation that has taken up so much media time. Our first impression is that the move of only 2% is more political than economic. A 2% revaluation won’t make much difference to any national economy or to trade and inflation. We think that China has merely made the smallest move possible in to get the White house and Congress off their backs, and that the action will work in the political sense for at least the next 6-to 12 months.
© 2005 Comstock Partners, Inc.
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